Our big institutions charge too much for too little but change is on the way following the banking royal commission
I have been running education courses on how to pick stocks. It is, after all, where the rubber hits the road in this industry: helping people create money.
There is a lot of fluff in the advice industry, a lot of lengthy commentary, a lot of grandstanding and a lot of time-wasting fortune telling being peddled by people trying to build their brands and be relevant. But it is wasted breath.
As will become ever more apparent over time, the truth is that unless you, as a financial adviser, can tell a client what to buy and when, you are of little value.
The rest is just “fugazi”, fairy dust, in the words of The Wolf of Wall Street. It doesn’t exist, it’s not on the elemental chart, it is not real.
A lot of people in this industry don’t create anything, they don’t build anything. They could but, like water that takes the easiest course, they don’t.
“Fee for no service” … what a fantastic business. I wish I had thought of it. And the industry has allowed it. The banks could have genuinely focused on trying to make their clients money but they haven’t.
They allowed their frontline salespeople, under pressure to generate sales, to detach from the brand in pursuit of the dollar. In the wake of the royal commission, the days of collecting fees while doing next to nothing are, thankfully, now numbered.
For years, elements of the industry have presented themselves as a commodity product being charged out at a premium price. It has opened the door to disruption and when the disruption comes the only people who will survive are those who can add value, which doesn’t mean delivering the average; its means delivering better than average.
The average is now the baseline, the commodity return, because these days, thanks to things like listed investment companies and exchange traded funds, as well as managed funds and large super funds, the average is fairly easy to achieve, less fees.
Some funds play on the idea that they charge lower fees. Some even claim to be not for profit. But I can tell you that even the low-fee-charging or not-for-profit fund managers are still driving around in BMWs paid for by their members. They may not make a profit but they certainly have expenses.
And any large fund, running billions of dollars in an illiquid Australian sharemarket, has no choice but to hug its benchmark, which means buying almost every stock in its benchmark at index weighting.
You may have seen in Money last month a list of the best-performing balanced super funds and their returns. They are all very similar.
Over the past five years the top 20 balanced super funds have returned between 9.1% and 10.7%, a gap of just 1.6%. They are almost identical, a commodity, because they all hold everything.
They may differentiate themselves with their marketing, they may highlight their returns, but they are all offering pretty much the same thing, every stock and every asset class.
Many of the large funds are also now providing their members with a website that allows you to choose what sort of investor you are. They may call it balanced, conservative, aggressive or cash, but depending on where you click all they do is re-weight your investments across the same four or five funds in different percentages.
Amazingly, amusingly, through this mechanism the big funds are now leaving the one function that used to add value, asset allocation, in the hands of their amateur customers. You.
In the end it is no wonder the banks are struggling with and selling these businesses. The writing is on the wall. The value add has been allowed to decay and beyond administration it’s hard to charge a lot for that, especially not when technology has allowed the individual investor to access this sort of average performance with just a few clicks, alone.
The good news is that, despite the hysterical headlines pursuant to the royal commission, not all advisers are underqualified lazy charlatans selling product.
On the contrary, the bulk of the financial advice industry is in the hands of individuals running small companies, who pride themselves on their brand integrity and are relying on their own experience, intellect, personality and hard work, rather than the client’s ignorance, to deliver value and maintain their hard-won and, in many cases, long-held customer relationships. These are the disruptors. Not robo advice but the old-fashioned principles of integrity, engagement and value.
The royal commission may appear to be the death knell for financial advice. But it isn’t; it is the catalyst for the rebirth of an industry that had spent too long allowing its biggest and most trusted institutions to charge too much for too little. Culture change is on the way. Add value or die.
No wonder the banks are getting out. That’s not their mantra. So best they do.