Advisers are going to have to learn to embrace and use technology if they want to customise portfolios for clients and provide service at the lowest price.
Ausmaq general manager business services Toby Potter says two trends advisers need to be aware of are that clients, particularly those at the high net-worth end of the market, are starting to hold a greater range of investments.
A survey of affluent investors in Australia shows that they hold many assets (see table) as opposed to just a group of managed funds.
|
Affluent clients hold many assets |
|
|
Shares |
53% |
|
Debentures |
29 |
|
Managed funds |
22 |
|
Rollover/super |
34 |
This spread of investments means that advisers will need to use technology tools that can monitor and report on a broad range of products.
Secondly, many transactions are becoming free, most notably those for shares, and the Internet is becoming a more important transaction tool. One just has to look to the United States, and to a lesser extent, the Australian market to see what is happening.
In the US brokerage house Schwab does 58 per cent of its business, worth $2 billion a week, on the Internet, while in Australia Commonwealth Securities, which has been operating less than four years, has 220,000 clients.
Potter says in the US there is a 4500 per cent variance in fees from more than $300 for a full-service broker down to $7 for one of the online services. While there is a wide range of fee levels, the bulk of the pricing is at the discount end, and the trend is for fees to reduce and in many cases they will become non-existent.
"The transaction game is over," he says and this is going to impact on the fee structure clients pay advisers.
Potter says with these shifts wrap accounts and the Internet are becoming the way of the future as they allow advisers to customise portfolios and use more sophisticated analysis tools. The move is also been accentuated by the trend to place a greater emphasis on equities in an investment portfolio
Potter says technology and wrap accounts are going to help change the face of fee structures within the investment advice industry. As transactional fees diminish the overall costs of funds management and administration will decrease (see Table 2).
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Table 2: THE CHANGING FACE OF FEES |
|||
|
|
Master |
Ausmaq |
Wraps |
|
Adviser |
80bp |
80bp |
80bp |
|
Admin |
120 |
40 |
20 |
|
MER |
100 |
100 |
40-60 |
|
TOTAL |
300 |
220 |
140-160 |
While he predicts the level of fees an adviser takes will remain static at 80 basis points administration fees and management expense ratios (MER) wrap accounts charge will halve in the next two years.
The roles various players in the investment advice business fulfil are also changing. In the old model the split was between adviser and manager with the former giving advice, doing product selection and handling relationship management. The latter besides doing the fund manufacturing also had a role in product looing after a number of service elements.
Now though administrators are taking over some of the functions, such as transactions, which were previously handled by either the manager or the adviser.
Potter says administrators, such as Ausmaq, are looking after administration for the whole value chain as opposed to the adviser looking after one end of the chain and the fund manager the other. This change, together with technology, helps to drive down the cost structure.
In this evolving model advisers will need to select the administration system first, then find a front-end system which integrates with the administrator. This, he says, will allow them to offer clients increasingly customised portfolios and will enable effective rebalancing, modelling and give increased product discretion and administrators will look after transaction execution.
Wrap accounts will allow advisers to integrate elements of their business and will enable low-cost transaction services.
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