A welcome cap on fund manager fees ... let's see more of this

The following article written by James Gerrard, appeared in The Australian on 10 November, 2018. James speaks to our CEO Ron Hodge on the launch of InvestSMARTs capped fee model.

As investors, we know beyond doubt that high fees eat away at the long-term returns — but fund managers must be paid and the issue remains a vexed one at every level of the market.

With low-cost exchange-traded funds (ETF) at one end and active fund managers charging high fees at the other, any new innovation is welcome. Funds management firm InvestSMART this week threw down the gauntlet to the rest of the industry with a novel “capped fee mode”, which they claim will produce Australia’s lowest-cost investment platform.

InvestSMART branched out into funds administration and management with the goal to allow all Australians to invest in a low-cost, low-hassle way. They built a simple platform that allows investors to set financial goals and be guided through a process to select appropriate investments to meet their goals. It also provides a system to keep track of what people are invested in and how it’s performing.

Admittedly the system is not as comprehensive as the market leaders like Macquarie Wrap and BT Panorama, but it is a useful facility especially with this concept of a “capped fee” for the products.

Under their capped-fee model, it is $99 per year below $18,000 and $451 per year above $82,000 worth of funds invested.

Ron Hodge, chief executive of InvestSMART, suggests “the fee structure is simple, low and capped and includes portfolio management, administration, tax reporting and a 24/7 online portfolio manager to view and manage your investments”.

InvestSMART also provides a service to cater for those with the confidence to choose and mix their investments. For $330 a year, people can access ETF research reports that cover the whole market on a quarterly basis and provides star ratings on each ETF.

Hodge says “people who want us to help them invest and manage can use the capped-fee model, and for those who want to do it themselves, they can pay for our research reports and trade using whatever account they want”.

Another differentiator with the InvestSMART platform is that all shares are held in each investor’s name. Hodge says: “Shares are held in your own HIN so it’s completely transparent. There is no custodian involved, which cuts down another layer of costs. And if you get sick of us, you can give us a call and take over management yourself. Hopefully by that stage you would have built yourself up to be a good investor, learning from our research and education we provided along the way.”

I see the InvestSMART move as part of a broader shift across the funds industry where players have to distinguish themselves through performance and value. Those fund managers that rank somewhere in the middle have a very limited future.

In considering whether to go direct and buy an ETF or use a company like InvestSMART to take care of it for you, Ilan Israelstam, co-founder and head of strategy at one of the local market’s biggest ETF houses, BetaShares, says: “Ultimately, it all comes down to investor preference.

“For investors without much experience, using a service like InvestSMART will still be a great deal more effective than choosing a handful of Australian stocks — achieving more diversity and a more balanced portfolio”.

Similarly, entering the market through a basket of well-chosen ETFs could also be a sensible first step. Israelstam says: “We see a continued emergence of two distinct types of investment leading to a ‘death of the middle’. On one side of the spectrum we expect to see continued strong growth in index funds and passive ETFs, providing low-cost beta solutions for investors. On the other side of the spectrum entirely will be high-alpha generating active managers, who are able to use a variety of techniques to generate this alpha (whether long-short/alternatives, other less liquid asset classes that cannot be used in ASX-traded solutions such as private equity and debt).”

Value for money seems to be the key ingredient for success in the wealth industry, whether it’s with a digital wealth platform like InvestSmart or with an ETF provider like BetaShares. It’s putting pressure on the whole industry with the ultimate winner being the investor.

It was well publicised a few months ago that BT dramatically dropped the pricing on their flagship portfolio administration product — Panorama. However, there hasn’t been much activity outside of this from the other players. But large banks and funds management firms that have enjoyed healthy margins in the past will come under increasing pressure from innovators like InvestSMART and BetaShares.