Financial Planners "Lamblasted"
“Financial Keys welcomes critical
report highlighting deficiencies within the Financial Planning
industry.”
The Australian Securities Investments Com-mission
(ASIC) and the Australian Consumers Association (ACA) recently
joined forces to
assess the standard of advice provided by Financial Planners. Fifty
three investors took part in a secret survey in which each participant
approached three financial planners seeking a comprehensive financial
plan. The plans were assessed by a panel of experts.
The report
says that many financial planners give poor advice to clients and
much of the advice is influenced by ownership connections
and commission structures. Many of the plans were ranked as borderline
or below, with only half being considered acceptable.
Many financial
plans were cluttered with irrelevant, general information and the
recommendations were often not relevant to the client’s
needs. At least 67% of planners associated with big financial institutions
recommended products with those institutions.
In addition to the
above, we regard the level of planner education as one of the
main failings of the industry. We believe this is
a key factor contributing to the identified shortcomings. The
minimum education requirement for a Financial Planner was recently
raised
to the first four modules of the Diploma of Financial Planning.
While
this is an improvement from past practices, when no education
was required, it is still hopelessly inadequate.
Financial Planning is complex, requiring knowledge
of taxation laws, superannuation laws, Social Security laws, life
insurances, investment markets and economics. It is also necessary
to have good analytical skills to understand the many different
types of investments available in the market place. Poor education
leads to product pushing.
We believe a degree minimum
should be required
followed by a professional program run by an association such
as the Financial Planning Association.
We believe the FPA needs to substantially lift its game.
There are
many different levels of advisors in this industry from bank
employees selling bank products and life insurance
advisors
to the more holistic Financial Planners. We believe there
is a role for the government to set minimum standards and
recognise
the recent
Financial Services Reform Act as a very positive step in
raising current standards.
Yet, for the professional Financial
Planner where clients go for comprehensive advice we believe
it is the role of
the industry
association, the Financial Planning Association, to set
high educational
and
ethical standards for its members and to enforce those
standards. To date, we believe they have failed to do
this and we hope
this recent survey will be a catalyst for change going
forward.
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Life gets easier with Investment Platforms
Investors these days are looking
for easier solutions. They want to enjoy
the benefits that technology brings
and they want their lives to be less
complicated. Technology and the allocation of some large resources
by certain investment houses have combined to bring about a dramatic
change in the way investors now
invest and manage their money.
Not long ago, the consolidation benefits and convenience
of Master Trusts were too expensive and as such many advisers avoided
recommending them. In addition, teething problems with administration
systems left many wary.
Now things are very different. Master Trusts
and WRAP accounts are now the preferred investment vehicles for
a majority of new investors.
The amount of funds flowing to these vehicles is staggering. These
platforms now account for over $158 billion of investment funds
in Australia. Macquarie Portfolio Service commenced just over two
years
ago and now has over $6 billion of funds within the service. Colonial
FirstChoice Master Fund is not yet a year old and has nearly $2.5
billion in funds. Similarly with Perpetual, BT, Navigator, Flexiplan,
Asgard and many more these vehicles are now one of the most important
sources of funds flow in the investment market place.
What are Investment
Platforms?
The two main types currently on offer are Master Trusts and WRAP
accounts. These are administration services that allow you to
consolidate your investments cost effectively. You can construct
your own portfolio
and have it administered through one easy point. Your adviser
will recommend a portfolio of suitable investments for you. Available
investments include direct shares and wholesale managed funds.
Different services have more limited or widespread offerings.
With
some services
you can also include your property holdings and personal assets
in the reporting.
“ No more tax time nightmares with countless dividend
statements and complex managed fund tax statements. One easy,
consolidated report
for all your investments. “
What are the advantages?
| • |
Choose
your own investments, with your adviser. The Platform
provider is the administrator only and does not choose
or manage your investments.
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Move investments
into or out of the service without incurring CGT. (WRAP
accounts only) |
| |
Switch
between different investments quickly and cheaply. Allows
for more active management of the portfolio at little
cost. |
| • |
Access wholesale
investments, shares and all other ASX listed investments
through one easy administration vehicle. |
| • |
View the value
of your portfolio daily via security Internet access. |
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|
Easy
administration allows more time for you and your advisor
to concentrate on important things like the composition
and structure of your portfolio. |
| • |
Reports on your
portfolio with advice.eceive regular consolidated |
| • |
Single consolidated
year end tax statements with ongoing accumulated CGT reports.
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Transparent
fees. With many WRAP services there is a clear breakdown
of the fees paid to your advisor and the service provider,
with each cost item detailed in the transaction report. |
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What are the
disadvantages?
| • |
These
services have been expensive in the past and this is still
the case for some providers, particularly with some of
the older Master Trusts. Stiff competition and technological
enhancements have changed this.
|
• |
Limited universe
of investments. Still the case with some options. |
| • |
All the investments
in one place. Underlying investments are diversified.
Service provider performs primarily an administrative
role. |
|
There are some important issues to consider when moving to a Platform
service. These include:
| • |
Potential
Capital Gains Tax on any disposals. In some cases, particularly
with shares, this can be avoided.
|
• |
For
allocated pension clients key issues include: 1. Recalculation
of the deductible amount. 2. Effect on Reasonable Benefits
Limits. 3. Centrelink implications. |
| • |
Exit fees on existing
investments. This should be checked. |
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Market
Review
Clearly, market sentiment
has been captivated by the progress of the war in Iraq. Rises
and falls have been directly linked to expectations about the
war’s
duration and outcome. As an end appears in sight, attention has focused on
the post war commitment from Coalition members, the cost of rebuilding Iraq
and also on more fundamental economic factors affecting the US and the wider
globe.
The economic data over the March 2003 quarter
was largely centred around the geopolitical unrest and uncertainty
coming from the Middle East to North Korea. Reflecting global
tension and unrest, oil prices have almost doubled to US$37
per barrel since the beginning of 2002. Importantly, the effects
of war and the increase in oil prices have not translated to
an inflationary spike in the US.
The Japanese economy remains comatose while Europe’s
economic activity lay dormant. With the reality of war sinking
in, however, the markets rose
significantly yet fell again with the threat andpossibility of a lengthy war
ahead. This threat has dissipated.
Back home, economic data gave mixed signals with
employment increasing by 94,000 in January only to pull back
by 12,000 in February. The slow march to war dragged on the
economy, causing businesses to put off new investment until
the outlook becomes clearer. Consumer confidence has also slowed
during the quarter.
In addition, the fragile global economy and the
drought led to a bigger than anticipated $1.9 billion trade
deficit in February. Building approvals also dropped 4% for
February, lead by a sharp fall in medium-density developments.
Looking forward, some economists are predicting
a significant period of growth following the war, pointing
to sound fundamentals and the strong fiscal and monetary stimulus
that has been put in place within the US economy. There are
others who see a subdued year ahead for the US and other economies.
No-one seems too positive about Europe as considerable structural
constraints continue to dampen the future outlook. Australia
is expected to show slower growth this year as a result of
the recent drought, falls in tourism due to the war and the
SARS virus, and a slowdown in the heated property sector.
With the war close to an end a lot of bad news
is behind us and the potential for the negatives of a drawn
out war seem much less likely. It would
certainly be a welcome relief if markets rebound strongly after the war. A
short term rise is quite likely however it is not certain how long it will
be before we see a sustained turnaround in world economies and consequently
world markets. |
Back to Top Boutique Managers
Recent falls in investment markets have left many investors
disillusioned with their portfolios and many are looking for alternatives
to the larger fund managers that have dominated in the past
So what is a boutique manager and how can they add
to the performance of your portfolio?
Boutiques are small, usually with less than $1 billion under management.
They are usually formed by an experienced individual or team that
was
formerly managing funds for the larger well-known banks and investment
houses. Some have left through choice and others have found they
were without a place after the many takeovers and mergers that have
occurred in recent years.
Larger managers are often limited by the
size of their funds. As the Australian market is comparatively
small in size compared to
the US and other markets, it is often difficult for larger funds
to get the diversity they need. Some funds are just too big to
allow them to take positions in any stock below the top 100 and
as a consequence
they can miss some good growth opportunities.
It is also difficult
for larger funds to change their positions quickly and easily.
As a result, investment performance can tend
to the average.
Smaller boutique managers have much smaller sums
to manage and consequently they can invest in a much wider range
of stocks within
the top 300
or even below. They have a bigger menu of options to choose from
and can therefore often find gems that the larger funds cannot
utilise. They can move much more nimbly around the market place.
It is normal
for boutique managers to have small investment teams which do not
have to deal with large beaurocracies. It is also common for the
owners of the business to be invested in the funds. This is a positive
aspect as it aligns the manager’s interest with that of the
investors.
In addition, the larger fund managers tend to place
rather strict risk management controls over the decisions of the
investment
teams.
While this can protect against losses, it can also inhibit growth
and performance opportunities.
Boutique funds such as Perennial,
Paradice Cooper, PM Capital, Alpha and Investors Mutual are examples
of some of the successful
groups
that have emerged in recent years. Such managers tend to get back
to basics in the management of their portfolios as their very survival
depends on their performance.
The problem for investors is how to
identify the good boutiques from the poor ones as the risk factor
is significantly high. This
is because
most of them don’t have a track record when they start and
it’s only when they become successful and bigger that they
become noticed by the wider market; at which time their appeal
as a boutique is diminished.
It is also often difficult for advisors
to recommend boutiques to clients as there is usually very little
performance history
to go
by and very little
commentary or research available to identify whether the boutique
is one of the rising stars or a struggler that will never get
off the ground.
For this reason, they are more risky and should
only be used as part of a wider portfolio with exposure to the
larger, more
established
managers. It is also important to ensure that the investment
style of the Boutique is known and that there is a diversity
of investment
styles in the portfolio.
Boutiques have a place in a well diversified
portfolio. Just how big a role they should play in your portfolio
depends on a number
of factors, not least of which is your
risk profile. We can show whether these managers are suitable
for
you and if so,
how they should be blended with your other investments.
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