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Pressure on advice fees emerging

Nicki Bourlioufas  |  18 Jul 2016Text size  Decrease  Increase  |  

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With low- to mid-single-digit investment returns expected for a long time to come, and robo-advisers fast emerging on the investment landscape, some financial advisers are introducing performance fees, especially those actively managing client assets.

Andrew Lord of HLB Mann Judd Wealth Management expects performance fees to become more common in a low investment return environment, alongside the advance of low fee robo-advisers.

"What we have been seeing recently is investors are becoming more aware that their retirement is under threat due to the lower investment returns and from the high fees they pay to achieve those returns," says Lord.

"Some are self-directed investors, uncomfortable with paying a standard fee based on a percentage-of-assets fee or a fee for service, and others are moving away from financial planners that have been charging high fees for below-average returns.

"Our own clients pay a small base fee and we are paid a performance fee for outperforming a predetermined benchmark … Clients have been really engaging as they see that you are aligning yourself with their outcome and still paid to do the best job possible.

"We have always put ourselves out there as investment specialists that actively manage and look for new opportunities, so the next step was to be compensated for the additional performance generated, or alternatively paid less for not achieving a set benchmark.

"Those advisers that actively seek to add value beyond beta, through management of a client's portfolio, might be the next evolution in financial advice and encourage clients back from robo-advice.

"The more we can align every aspect to the client's interest, the better we think the outcome for the client will be--moving to a performance fee is part of doing that."

Ben Marshan, the Financial Planning Association's professional standards and advocacy manager, says performance fees may make sense for high net wealth advisers but most financial planners charge a fee for service or receive commissions, which are still allowed under the Future of Financial Advice reforms.

"I think performance fees do make sense for clients and that would be attractive where the adviser thinks they can add value," he says.

"So for those advisers who focus on investment performance, often those advising high net wealth individuals, I can see the attraction of a performance-based fee where they believe they can outperform fund managers.

"That's fine as long as it's made clear to the client how they are being charged."

However, Marshan doesn't expect performance-based fees to be widely adopted among financial advisers giving more strategic advice, where a fee for service makes more sense where investment performance isn't the focus.

And given the advent of robo-advisers, Marshan expects more financial planners to move towards the giving of such advice rather than focusing on product recommendations.

Financial planner Joshua Stega says he likes performance fees because this system provides the best alignment of interest between a client looking for investment performance and an adviser who believes they can deliver it.

"The best advice will be the advice you pay for directly, aligned to the outcome you desire as a client," says Stega.

"Unfortunately, this model will not be widely adopted because most financial advisers do not actually add much value to investment returns."

He says a good financial adviser will be open to having a robust discussion around their fees and should have the flexibility to develop a fee offering that provides the greatest alignment of interests between the client and the adviser.

"If you desire a specific outcome, make sure your adviser knows what that outcome is and ensure you align your adviser's interests with your own using the pricing model that is most appropriate," says Stega, who believes that fees based on assets under management can result in average outcomes as there is no incentive for the adviser to work harder for you.

"If a financial adviser isn't flexible when it comes to fees, walk out immediately as more often than not it means they are pretending to offer you individually tailored advice, when in fact their business is simply a one-size-fits-all client model."

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Nicki Bourlioufas is a Morningstar contributor.

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