By Jason Fittler
Last I wrote about moral hazards, now let’s explore why the MINC Townsville fees model is structured in such a way that our future is aligned with your future.
But first, what fees are you paying and to whom?
One of the big problems in the Financial Services industry is the complexity of the advice we give and the fees we charge for this advice. End of the day most people really do not understand what they are paying and what they are getting for these fees. The most complex fee model is when you are investing through Wrap Platforms and managed funds.
Wrap Platform and Managed Fund Fees
When you are dealing with an adviser who invests your money through Wrap Platforms, there are three levels of fees you pay. First the Wrap providers fee, next the fund managers fee and finally the advisor fee.
To explain the relationship between the three I will use the analogy of a concert.
The wrap provider is like the stage at a concert, it provides the platform for the bands to play their music on. The fund manger is like the different bands at the concert, each with their own style of music. The advisor is like the promoter of the concert organising the ticket sales and which bands will play. Each one doing their part to put on a good show, each requiring payment for their efforts.
The concern is what risk do they take when it come to managing your portfolio and how are they affected when your portfolio under performs? Is there a moral hazard?
Let’s look at how the fees are broken up between the three:
• Wrap providers general charge a flat rate of around 0.6%pa, for larger investments, this may scale done a little.
• Managed funds also charge a flat rate however; this will differ between each managed fund depending on the style of investing. On average you will pay around 1%pa, this fee is called a MER and goes directly to the fund manager.
• Adviser fee, this goes directly to the advisor and the industry average is 0.6%pa. However, this is soon set to change to a flat fee each year once the government’s fee for service rules come in. The trend at present is for the adviser to charge a flat $5000 pa.
• Adviser up front fee, the industry average is 4% but this is only a one off fee so I will not include in below example.
If we look at an example of an investment of $500,000 placed in a Wrap provider, your fees would look something like this.
1. Wrap provider fee, $500,000 X 0.6% = $3000 pa
2. Managed fund fee, $500,000 X 1% = $5000 pa
3. Adviser Fees, $500,000 X 0.6% = $3000 pa (or flat fee of $5000)
Total $11,000 or 2.2% of the amount invested.
The Moral Hazard
• Wrap providers do not give advice, as such their business is based on economies of scales, the larger they get the cheaper it is to run per account. These benefits however are not passed on to the investor but are kept in ever increasing profits. Their aim it to simply have more investors place their money in the Wrap platform. Clients are sent their way by the advisor; as such, their interest is in looking after the adviser not the investor.
• Managed funds, the managers who run the managed funds are paid based on their out performance of their fund against a certain index. In the GFC, we saw these managers receiving bonuses because their fund out performed the benchmark index even though the investor lost up to 50% of the value of their investment. Their focus is not in step with the investor.
• Advisors, as the investors portfolio falls so to does the advisers income, so in this sense they have no moral hazard except for the following two issues;
1. They receive only 27% of the overall fee, you the investor pays, ($3000/$11,000 =27%) as such they cannot afford to spend too much time on your account. In fact, the only way for advisors to increase their income is to get more clients. This leads to advisors not providing any ongoing advice.
2. When flat fees are introduced, advisors will be paid regardless of the performance of your investment.
As you can see when dealing with wrap platforms you need to be aware that there are many snouts in the fee trough and that, the majority of the fees do not go to your adviser.
To make sure that MINC Townsville is not subject to this Moral Hazard we have structured our fees in such a way that the majority of the fees come to us the advisor.
This way we can afford to provide a higher level of service.
We also link our fees to the value of your portfolio in such a way that if the value of your investment drops, our fees drop along with it.
During the GFC our office fee income fell in line with the drop in our client’s portfolios, this keeps our focus on real growth in your portfolio instead of focusing on beating some index.
MINC Townsville Fee Structure
Our preferred investment platform is the Grow Your Wealth Private Wealth Management service. Through this service we invest only in direct shares cutting out the middle man (the managed fund).
Your fee structure is as follows:
1. On going fees at a scale rate of
1.32% on first $250,000
0.99% on funds between $250,000 and $500,000
0.66% on funds over $500,000
2. Our only up front fees are 1.25%, which is the cost of brokerage when buying the shares.
3. Financial Plan fees, we also do charge $2500 if you require us to prepare a full financial plan. This is optional, although recommend for new clients.
If we look at the same example as above, the investor has $500,000 to invest and places it in our Private Wealth Management platform:
1. Platform fees are $5,775 pa, that is the total for the year. In percentage terms 1.16%.
When we compare the two fee structures, some interesting fact arises:
• As the entire fee goes directly to the adviser, we can make more money, while still charging you less. This means we can provide you a better service, cheaper.
• You pay less overall
• Our income is directly related to the size of your portfolio; as such, our focus is in growing your wealth.
• Our fee percentage gets lower as your portfolio get larger to reflect the economies of scale we receive as your portfolio grows. We also offer a flat fee for very large portfolios.
• Our up front fees are less being 1.25% as opposed to 4%.
• Being direct equity advisors we can go directly to the market and cut out the middle man, most financial planners can not, as such they have to use managed funds to achieve the same result. This is our advantage.
This has all been achieved by simply by reducing the number of snouts in the trough; the kicker is that we have been doing this for over 10 years.
Like to find out more? Give me a call on (07) 4771 4577.