There is no doubt that the past decade has been buoyant times for retail financial services industry participants, many of whom have filled their own coffers to the brim. But while things are looking rosy for the industry, Tom Collins argues that consumers are getting a rough deal from us.
I thought that it was timely, at the start of a new year, to consider that one stakeholder in our industry that rarely is considered or thought about – the client, the consumer, the one who ultimately pays all the bills. The compliant contributor to the industry’s riches may not be so compliant when investment returns fall to single digits or (dare we contemplate) go negative. Will they be willing to pay the 3 – 5 per cent per annum for ongoing advice and management of their money?
In the past year, the prime concern of advisers seems to have been how to enhance and lock in the value of their businesses. Dealers have been positioning their businesses either for a float or for sale to an institution or consolidator. Fund managers have focused on distribution. The Financial Planning Association (FPA) has been distracted with internal issues. The Australian Securities and Investments Commission (ASIC) has been emasculated financially by the government, but now has the role of both regulator and consumer protector.
In recent times the industry has been improving its efficiency. It has spent up big on technology and embraced the Internet. With MIA (Managed Investments Act), we now have the SRE (Single Responsible Entity) and ASIC has been streamlining prospectus (profile) requirements. Meanwhile master trusts and wraps have been delivering efficiencies to fund managers, dealers and advisers. And who have been the beneficiaries of the dividends from these efficiencies. The fund mangers – yes! The master trust and wrap administrators – yes! The dealers – yes! The advisers – yes! The client, the consumer – NO!!!!
In many cases the client is now paying more than they were a few years ago. How can this be? The initial fees of many retail managed products have gone down, advisers have lowered their initial fee and stockbrokers are charging lower transaction fees. Some of the new wraps have substantially lower ongoing fees. But in many cases, the client is paying more in ongoing fees.
For example, in the recent past, it was not unusual for an adviser to receive a 4 per cent initial fee and nothing ongoing. But this was not a sustainable pricing regime if the adviser was going to provide ongoing service. So then some switched to nil initial and 1 per cent ongoing. In this case, after four years the client is worse off. But many advisers now charge an initial 2 per cent and a 1 per cent on-going – which means after two years, the client is worse off.
Putting clients into wraps – is that for the benefit of the client? Is it less expensive for the client? Today I would argue no and no. At Look Research, we are just completing a survey of wraps and (retail super) master trusts with some of the results being published in Money Management in about a month. We estimate that there is about $20 billion in wraps – the non-super IDPS’s (Investor Directed Portfolio Services). In the past year, about $5 billion has flowed in to these products. Why are they so successful? Have clients been demanding to be put into them? I don’t think so.
A good example of this is MLC’s (sorry NAB’s) Your Prosperity. This is one of the very few wraps that is not only sold directly to consumers but is directly accessible by consumers. It is moderately priced and offers a wide range of listed and managed investments and provides full Internet functionality. Yet there are few dollars in it. Another wrap, that is dealer/adviser driven and about three times as expensive, has attracted nearly a billion dollars over the past twelve months.
We all know why they are so successful, but where and when is their going to be a pay-off for the client? Some advisers may argue that because they now are more efficient, they can spend more time on the client. But is this so, or are advisers just seeing more clients? I wonder how long it is going to take clients to wake up to the fact that wraps are really for the benefit of the industry and not them.
One could ask when is the client (consumer) going to get better value, and better performance, better service and better protection? Will the industry lead the way or will the consumers have to force the issue? Or will it be new players who see an opportunity to deliver a better service at a keener price?
In too many ways we tell the consumer what they need. You need an ASG, you need a full plan, you need a diversified portfolio, you need ongoing advice and you need to be in a wrap. How condescending, how patronising, how supercilious can we get? Also, we tell them that people who take commissions are bad, but people who charge fees are good. Don’t talk to real estate agents, nor accountants as, because they are not authorised, they will give you bad advice, we tell them. How egotistical, how arrogant, how over-confident are we? With these views and attitudes, are we really concerned about the client, or are we really more concerned about protecting and expanding our own interests.
We express our fees as percentages, not in dollar terms. We express volatility in percentage terms, rather than in dollar terms. We explain different types of risks, but confuse capital volatility with investment risk. And nowhere do we explain the risk of choosing the wrong adviser – the greatest risk of all. We try and measure risk tolerance of our clients with eight to ten trite questions, rather than doing proper risk profiling. In reality, most clients end up with a portfolio that reflects their adviser’s profile and risk tolerances.
The industry does not provide a consumer focused and friendly service. Most consumers are ‘compulsory’ users of industry products and services. This is because of our Byzantine regulatory environment. We would have to have the world’s most complex tax, social security and superannuation regulatory environment. And the recent government tax simplification measures have just compounded it even further. This means that most Australians now have to seek advice about their financial situation. Even more, government, regulators and employers actively encourage it.
Currently demand exceeds supply, so the industry can afford to be supercilious and over-confident. As I have commented once or twice before in my articles –life is beautiful, unless you are a consumer. But things will change.
Supply will catch up to demand. New players will find ways to deliver a better service at a keener price. And, maybe, one day, possibly the government will really simplify the regulatory regime. (It happened in the USA when Regan was President – and adviser numbers were decimated overnight.)
Consumers will become more demanding and probably sooner if returns do drop to single figures or less. Consumers aren’t fools and, like everything else, they will be soon demanding real value. Also, they will want the service they want, when they want it and how they want it. Those in the industry that don’t recognise this will find that they will lose business because consumers will leave them and other players will provide what the consumer wants. Why should this industry be any different to any other industry?
