Setting the Standard - Financial Advice in 2020
At the risk of oversimplifying: it looks like being another year of geopolitics (ie Donald Trump) versus central banks (ie Jerome Powell) - the former causing volatility and dragging them down, the latter propping them up.
To jump ahead, I think the Fed wins again, with a few differences, so markets will have a decent year, but not a spectacular one like 2019.
Which means I’m with the consensus… uncomfortably so (when has the consensus ever been right?). I don’t think there will be a recession, either in the US or here, growth will continue to muddle along neither too hot nor too cold, inflation will remain low and so will interest rates. In other words, Goldilocks lives on!
Markets aside, 2020 should prove to be an interesting year for the financial advice space. The slow-motion train-wreck of the Australian financial advice industry is now reaching its finale.
In response to thousands of people losing their savings, as disclosed in the royal commission and story after story in the media, the Government created the Financial Adviser Standards and Ethics Authority (FASEA) which is now basically running the industry.
On January 1, a new code of ethics, enforceable by FASEA, came into effect. It has a series of “Standards”, covering Ethical Behaviour, Client Care, Quality Process, and Professional Commitment.
For example, Standard 2 says: “You must act with integrity and in the best interests of each of your clients”, and Standard 3 says: “You must not advise refer or act in any other manner where you have a conflict of interest”.
The guidance note for Standard 3 says: "You will breach Standard 3 if a disinterested person, in possession of all the facts, might reasonably conclude that the form of variable income (e.g. brokerage fees, asset based fees or commissions) could induce an adviser to act in a manner inconsistent with the best interests of the client or the other provisions of the Code."
Not would, mind you, but could. That is a low hurdle indeed. And note also that the guidance note specifically mentions “asset-based fees”.
I think it may be the beginning of the end of asset-based percentage fees.
This is something I have been banging on about for years. Some of the percentage fees charged by fund managers, advisers and super funds are outrageous – adding up to more than 2% in many cases. The problem is not so much the fee on the initial sum invested, but the fact that these fees compound along with the returns and eat massive chunks out of final retirement savings.
Even the small basis points fees that ETFs charge end up chewing large holes in final sums.
Percentage fees based on the entire sum invested were a scam but they started so early that everybody has simply taken them as part of the landscape and accepted it. As a result, vast riches have been made by investment “helpers”, as Warren Buffett calls them.
The main reason I joined InvestSMART in 2018 is because of the company’s plan, now in operation, to cap fees on passive portfolios. The portfolios are now starting to gain a lot of momentum as word gets around. These portfolios invest in a mixture of ETFs which of course themselves have a percentage-based fee. Until ETFs change their fees, they remain the most cost-effective way for us to get adequate diversification no matter the size of the client portfolio.
It’s a start. We are trying to bring about a fee revolution, and now we have the regulator on our side. This could be the year when it really takes hold and the chickens come home to roost for the financial advice and funds management industries.
Click here to view the InvestSMART capped fee range.