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Poacher turned gamekeeper changes his wealth model

(Editor’s introduction: Rob Garnsworthy readily admits he ‘fed from the trough’ during his business career 'in his previous life’. Rob was Chief Executive Officer of Norwich Union from 2000 to 2003 after five years as Managing Director of Colonial Group’s UK operation and then heading CBA’s International Financial Services. In 2000, Norwich managed funds valued at $11 billion and administered an additional $6 billion through the Navigator Master Trust.

Rob is now long and happily retired, and he says, “Those writing about retirees are never actually retired - the thoughts and fears are different and they change over time.”

So in what ways has he changed over time since experiencing retirement from the other side?).

 

The articles in Firstlinks on Listed Investment Companies (LICs) and ASIC's disquiet over selling fees flirts at the edges of a much more fundamental challenge for advice and wealth businesses. The fees model right across the industry, from advisers to platforms to fund managers to retail and industry funds, is unfair and unsustainable.

Let's start with a very simple fact. The ASX200 Price Index climbed from 6,802 on 31 December 2019 to 7,042 on 10 January 2020, a rise of 3.5% in 10 days.

Not a single soul across the industry has done anything to achieve that result, their costs have not gone up by a single cent and yet most of their fee income has gone up by circa 3.5% (acknowledging that some business models use a flat annual fee).

Is that fair? No. Is it reasonable? No. Is it under attack? Yes.

The reality of percentage fees

Most investors do not even see the rising dollar amount of fees as the payment is hidden, and no doubt they welcome the market move of 3.5%. If they do think about it, then it’s "... little bit off the top in fees, so what?"

Here is the reality. The rush into financial services was about jumping aboard this gravy train - revenue went up (and down) with markets, whereas costs per client remained largely fixed (with the exception of ever-increasing spends on IT and compliance). There is a lucrative disconnect between costs and revenue tied to markets that trend higher over time, even with some hiccups in between like the GFC.

Revenue and charges are not ‘matched’. Businesses receive, say, a 7% increase in fees each year due to market movements, with say, an increase of 2% in your costs. It’s a cracker of a business model!

SMSFs were first to spot the flaw. They figured out that their accounting and audit fees really did not change whether their fund was $1 million or $10 million. It’s the reason nearly 30% of superannuation has moved into SMSFs, and larger the fund, the bigger the saving, and not only on administration.

The new kids – well, relatively - on the block, Exchange Traded Funds (ETFs) still charge percentage- based fees but as they bulk up, their fees generally go lower. There is an ever-widening gap in fees between ETFs from the big guys and LICs/managed funds, and it shows in the flows as ETF volumes have surged past LICs in the last year.

It’s asset allocation that matters

The obvious and compelling question is: "Why would I invest in a LIC or managed fund when the costs are higher and performance is often inferior?"

Not only is the industry ‘logic’ under attack, the competition just gets hotter and hotter. Throw in an ever-increasing overlay of regulations and compliance, and the industry is getting tougher! A fee model that is unfair, performance differentials opaque and the cost of doing business rising. Not surprising that some are heading for the exits.

However, it gets worse. In this new world, asset allocation rises above the noise. It is. and arguably always has been, the most critical decision for any investor. Never before has it been so simple to get advice on asset allocation. Just look it up, copy whoever you like – the Future Fund, an industry fund, a diversified retail fund, whoever. Copy their allocation, buy ETFs to match and go back to sleep! That is now a genuine option.

And okay, if you have confidence in an active manager, throw them into the mix if you are prepared to pay active fees.

It really surprises me how few people actually understand the problem. If the retail investors of the world realised that the ‘only’ skills you need are asset allocation, supported by some good tax advice, then stock picking becomes largely irrelevant. Portfolios can be dominated by passive exposure with some active piece. It’s a lot easier for ordinary folk to get their heads around.

I am about to turn 71, with about 20% of my portfolio allocated to passive exposure – the balance is all direct. By the time I get to 75, it will probably be 40% passive and by 80, reckon that might be 80%!

My view of the future

Looking forward, the old world will defend the traditional business model, in some cases to the death. The new world will build a model, including critically, financial and tax advice, based on dollar fees for service, rather than percentages, and portfolios will be dominated by low cost index allocations.

At the edges will be genuine super star managers who consistently outperform and can charge accordingly but one suspects there will be fewer of them!

 

Rob Garnsworthy is retired after a senior wealth management career, and is currently a Trustee Director for the Colonial Foundation, a charity which has donated over $115 million in a range of philanthropic grants.

 

11 Comments
Chris Disney
January 20, 2020

What you are all saying, and I heartily agree, is that Investment advice and investment management simply ain't worth what the industry has lead us to believe. 

Steve
January 19, 2020

Yes, if you invest $1.6 million in most industry super funds (and retail funds), you will be paying $13,200 pa in ongoing fees (not including any advice fees). Makes most SMSFs look very attractive.

SMSF Trustee
January 19, 2020

Why? That's 0.83% for active management. A decently invested SMSF will need to pay that sort of fee for funds management or:

- invest only directly in shares. Well, that's a very undiversified portfolio with almost no decent research backing the investments, just a broker's recommendations. Not for me, thanks.

- invests in LICS etc. But if you really think that the fact that there's no overt fees means that no one is making money out of your money then you''re naive. At least with managed funds in the SMSF you're being honestly told what the fee is!

Look, I've got an SMSF (hence my username), but it's not because of fee savings. It's about control and being accountable to myself for the outcomes of my choices. Anyone who uses an SMSF simply thinking they're saving money is going to cost themselves heaps in the long run. Cheap is cheap after all.

RobG
January 20, 2020

Investment management has many parts - costs are but one but, CRITICALLY, costs are one over which you have some control and worth your attention - clearly if you can save 20-50bp, it is identical to additional performance of 20-50bp and therefore worth having.

Beyond that, every investor has choices - Direct investment, no ongoing fees, no leakage, Managed Funds of your choice, LIC's/passive ETF's, Industry, Retail, etc...For most investors, a mixture and the only thing that really matters is performance after fees and whether that performance meets your objectives.

For SMSF's, another test - "does your "management" actually add value"? For many, that is a tougher question!

SMSF Trustee
January 21, 2020

Yes, RobG, the costs of your investment - SMSF or other - can be controlled. That has many dimensions, not just the total level, but how that total is made up. I use a mix of very low cost index funds and only pay higher fees for managers where I've got some confidence that they can deliver either added value over the index or exposure to an asset class that inherently needs people looking after the underlying investment (eg property).
My point was simply to challenge the flippant remark made by "Steve" about what I consider to be a modest cost for managing $1.6 million. It at least needed some context.

Steve
February 06, 2020

If another major industry fund can do the same job with $1.6 million for only $10,000 pa, and you can invest the same money in a SMSF for $6,000 pa, someone is killing the pig. Or paying out too much in sponsorship money to related parties.

Mart
January 17, 2020

Hi Rob - thanks for a refreshingly honest article! Question for you ... as you note, you state an 'ordinary investor' could passively 'mirror' the asset allocation of professionals they admire via low cost index / tracker / LICs etc. This seems to echo what Warren Buffet recommends for the 'ordinary investor' ... no over exposure to single stock, low fees, steady as she goes etc. So .... why is this only 20% of your allocation ?! I accept that given your background you're probably smarter than the average bear in this area but just curious ...

RobG
January 18, 2020

Mart - I am still a hands-on active manager, is the answer, BUT I do measure my own performance against the Index AND against Passive Funds AND against the big Super Funds. As long as I can hold my own or outperform, that is ok. Try hard not to delude myself...

The passive exposure I do have is an ETF on the US market - just easier, very cheap, unhedged and ticks along just fine. No names but one of the big guys!

Paul
January 16, 2020

As a 25 year planner and seeing the pressure on every part of the advice chain in terms of platform and advice fees, I welcome the same pressure being applied on Fund Manager. They should have tiers of ICR based on funds invested with a cap per investor, much like platform fees. Would be difficult but not impossible to implement.

Tony Belcher
January 16, 2020

Can we always rely on asset allocation data that is publicly available? My understanding has always been that many institutional investors don't keep their asset allocation data up-to-the-minute up to date precisely to avoid influencing the market via feedback loops.

RobG
January 16, 2020

Nothing more than an option Tony - the institutions rarely make significant changes to asset allocation for the simple reason it is very difficult. They have mandates to adhere to and while you personally can easily move say $100k, it is much tougher for them to move $500m. What they do is tinker at the edges with the base allocations and within that allocation, vary individual holdings seeking alpha - some do, some don't!

 

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