By Steve Baker, AFA 10 June 2020
The subject of fees can be a distraction when it comes to deciding whether or not to seek financial advice. After all, who likes paying fees, right? No question, fees are an important consideration, but like most things in life its more about getting value for money.
The timing of this article may seem odd in the midst of the Covid-19 crisis, but its times like this when we are feeling stressed and emotions are running high that our financial decisions (both good and bad) can define our financial futures. This is precisely when good financial advice can help. In January we wrote an article which is available on our website about the Value of Financial Advice well before the world understood the impact of Covid-19. It’s worth reading as it reminds us of the mistakes investors can make including chasing past performance and having the wrong investment strategy for their objectives and time horizons. Getting it wrong can really hurt in times of financial stress and good financial advice can help clients avoid mistakes and stay the course when their hearts tell them they need to do something else!
The value of financial advice
There are many ways a good financial adviser can add value. These include:
- Education on financial matters
- Helping articulate life and financial goals
- Creating a financial plan to get there
- Putting together an investment strategy aligned with financial goals, time horizons and clients’ willingness and capacity to take investment risk
- Recommending an appropriate selection of investments
- Implementing, managing and monitoring of the investment strategy
- Investment administration and reporting, and as mentioned above
- Helping clients to stay the course when markets turn sour
According to a 2019 report published by Russell Investments, the value of a New Zealand Financial Adviser could exceed 5% pa.
Value of fund managers
Value for money also applies to fund managers. Saturn Advice primarily utilises fund managers in its recommended investment strategies because of their specialist expertise in their chosen markets. Like financial advisers, fund managers charge fees and the value they add can be more important than the fees they charge. Consider the following hypothetical example.
Fund manager A generates consistently good returns averaging 8% pa before fees, and charges a fee of 1.5% pa for doing so.
Fund manager B charges half as much (0.75% pa) for a similar type of fund which on the face of it looks excellent value. The problem is, they consistently under-perform Manager A returning only 5%pa before fees.
In this example Manager A returns 6.5%pa after fees while Manager B returns just 4.25%pa. If you were to invest $100,000 for twenty years (not an unreasonable timeframe in retirement) with Manager A, their after-fee return would be $352,364*. Compare this with the cheaper Manager B who returns after fees an amount of $229,890*. The above example illustrates how low cost doesn’t always equate to better value. Fees are still important and this is not to say there aren’t fund managers out there who offer both competitive fees and excellent returns. Part of the role of a good financial advisor is to seek out such managers for inclusion in client portfolios.
So in the middle of this Covid-19 crisis, how have Saturn Advice’s model investment strategies performed? For the 12 months to March 2020, two thirds have outperformed their respective benchmarks after fund manager fees. More importantly, 85% have outperformed their benchmarks over the last 5 years.
How Fee Based Advice Helps To Avoid Conflicts Of Interest
One of Saturn Advice’s founding principles is impartiality. Clients deserve to receive financial advice that is suited to their financial circumstances and needs. They should be able to receive advice in the knowledge the motivation of their financial adviser is to do the right thing by them and without any ulterior motives or conflicts of interest. They deserve to receive impartial advice. Anything else comes at the risk of a sub-optimal outcome.
We believe the value of financial advice goes hand in hand with impartiality. To us, this means having a fee based model where the only people paying us are our clients. It also means no obligation to place business with any fund manager and not receiving remuneration for doing so. All of our advisers are paid by salary only and do not receive commissions or bonuses. Unusually in our profession, our financial advisers don’t have specific sale targets nor any form of remuneration based on volume of business written.
When you think about other professional services, you expect to pay for the services you receive. For example, when you visit your doctor or medical specialist you expect to pay for the consultation, and you’d expect them to act in your best interests. You’d probably be suspicious if your doctor said the consultation was discounted or free because they were paid by the pharmaceutical company supplying the medication they’d prescribed you. We think the same way when it comes to financial services.
So in summary, yes fees are important but it’s the value you get that really counts.
The views expressed in this article are the views of the author. The information provided is of a general nature and is not intended to be personalised financial advice. You may seek appropriate personalised financial advice from a qualified Authorised Financial Adviser to suit your individual circumstances.