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Roboadvice may be a solution to fee pressure

Roboadvice and other software solutions are being suggested as an answer to increasing pressure on investment advisers' fees.

Monday, May 16th 2016, 6:00AM 3 Comments

by Susan Edmunds

There have been claims that adviser fees of 1% per year of funds under management are unsustainable in a low interest rate environment.

Adviser Chris Lee said those charging that level of fee were on borrowed time. "The model might have worked when interest rates were 8%, but how does it work when bank rates are so low?"

Robert Oddy, SiFA's chairman, agreed it was a problem.

He said it was likely to become even more challenging for advisers as low returns became the new normal.

"If you have bonds returning between -0.5% and 2% and equities 2% to 6%, that doesn't leave much of a margin when you take into account taxes and fees. Fund managers are also charging fees. There needs to be more discussion about how this can be fixed."

One way could be roboadvice, he said. "Unless advisers start to adopt roboadvice to reduce their costs, it will be difficult."

They needed to keep up, or risked big institutions developing solutions that would leave smaller firms behind, he said.

Another adviser, Stephen O'Connor, said some fees did not seem viable.

"If you are charging 1% to 1.5% as an advice fee and then you add a wrap fee, you are getting close to 2%. I don't know how you can justify that."

But Simon Hassan, of Hassan and Associates, said part of the solution was for advisers to offer a service that was structured properly. "Fees should relate to what the adviser does, not how much they can get."

He did not favour a move to an hourly rate because he said it could make clients reluctant to get in touch. A fixed fee did not take into account the extra work involved in investing large amounts, he said.

Oddy said it was also worth questioning the fees of other players, such as custodian, which added to the total charged to clients.

There is significant variation in the market.

Craigs Investment Partners charges 1.25% up to $250,000 FUM, which drops to 0.75% for those with bigger balances.

Spicers has an ongoing portfolio service fee up to 1.3%, as well as initial fees and charges for the preparation of a financial plan.

Rutherford Rede advisers charge ongoing commission of up to 0.8% of FUM.

Tags: fees investment

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Comments from our readers

On 17 May 2016 at 9:53 am John Milner said:
Pretty light weight survey, if any, conducted on fees here. Apart from the Robert and Murray club plus a couple of others doesn't really make a convincing argument.

I guess if I was investing on a high performance expectation only, I would be concerned. However, I'm not. As most of us know, the biggest risk facing clients are themselves. I'm the buffer between the clients money and their short term concerns and fears, overlaid with their long term plan.

Low rates, high rates, I'm by my clients side seeing them through 20-30 years with ongoing education, support and sometimes counselling. I work hard for my clients and running my business. Yes I run a business and it has expenses. Just like a solicitor, accountant, plumber, etc.

On 17 May 2016 at 1:05 pm Brent Sheather said:
Interesting comment “as most of us know, the biggest risk facing clients are themselves”. I’m not so sure. Recent research from the US in the 401k market over a long period that showed investors without advice outperformed those with advice. Similarly look at today’s article “Autopilot mode helps KiwiSaver members” which concludes that KiwiSavers investors are apparently suffering less of a behaviour gap in returns than investors in other managed funds. Presumably KiwiSaver investors have less involvement from financial advisors than other investors in NZ managed funds so this data is consistent with the US findings. The bar is being raised – Roboadvisors potentially offer unbiased advice and low fees via index funds.
On 17 May 2016 at 6:48 pm Pragmatic said:
Tend to agree with Brent. The reality is that no advice often beats bad advice.... just ask those sms funds who abandoned the Australian industry to go solo over the past decade

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ANZ 5.19 4.15 ▼4.04 4.49
ANZ Special - 3.65 ▼3.54 3.99
ASB Bank 5.20 4.15 4.09 4.39
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BNZ - Classic - 3.65 ▼3.49 3.99
BNZ - Mortgage One 5.90 - - -
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BNZ - Std, FlyBuys 5.30 4.45 4.35 4.55
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Credit Union Auckland 5.95 - - -
Credit Union Baywide 6.15 4.95 4.95 -
Credit Union North 6.45 - - -
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Finance Direct - - - -
First Credit Union 5.85 - - -
Heartland 6.70 7.00 7.25 7.85
Heartland Bank - Online - - - -
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Housing NZ Corp 5.19 ▼4.15 ▼4.09 ▼4.39
HSBC Premier 5.24 3.35 3.35 3.35
Lender Flt 1yr 2yr 3yr
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 5.65 3.85 3.95 3.89
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Kiwibank - Offset 5.15 - - -
Kiwibank Special - 3.55 3.59 3.99
Liberty 5.69 - - -
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SBS Bank Special - 3.69 3.69 ▼3.89
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