10 lessons from the RC’s financial advice slaughter

Yesterday’s Royal Commission had all the elements for some great headlines: a celebrity taken down,  a $500,000 stuff up, impersonating clients and fake degrees.

But what I want to talk about is managed accounts.

First, some context from Fairfax:

High-flying celebrity financial planner Sam Henderson’s world came crashing down on Tuesday as the banking royal commission heard he instructed his employees to impersonate a client and misrepresented his tertiary qualifications.

Mr Henderson, a regular host on Sky News Business, also failed to disclose a conflict of interest and gave advice to one client that was described as “risible,” the commission heard.

Client Donna McKenna, who is a Fair Work Commissioner, outlined just what it was like to be a client of Mr Henderson, a principal of a financial planning firm awarded “Practice of the Year”.

And from the AFR

Ms McKenna said she was immediately put off by Mr Henderson’s hard sell of a self managed super fund loaded with fees that were far in excess of what she was currently paying. Ms McKenna said she had no interest of managing her own super and that Mr Henderson said: “We’ll look after it”.

…Mr Henderson was also skewered for putting a large proportion of his client book into managed discretionary accounts that included direct shares and charged high fees.

It would seem to me that Henderson Maxwell is not unlike a range of other financial planning outfits in trying to bundle every client into a particular type of a managed account where:

  • The fees are usually large (2%ish)
  • The fees are often structured as personal advice fees rather than a product fee (which have some regulatory implications)
  • The financial advisor runs the portfolio for you, often using direct shares

Some of these managed accounts are excellent – investment managers who have the experience and the capacity to research the stocks run the portfolios for the planning group. Direct share ownership can be tax advantageous. Having transparency is great. In the better cases, the total fees are closer to 1% than 2% and trading costs are cheap.

Other times these managed accounts are run by an adviser with a full book of clients to call and write plans for, accompanied by a newspaper and gut feel for research, picking stocks on a Friday afternoon at the pub.  The trading fees are high, maybe the adviser gets “rebates” from the broker as a reward for having clients who pay a lot in brokerage.

In a typical case:

  • platform costs are usually around 0.2%-0.5%,
  • investment management fees are around 0.5-1.25%
  • the adviser gets the rest.

If the adviser is also picking the stocks, then the adviser takes the investment management fees as well, probably doubling the revenue to the adviser. But the client has gone from having a full-time investment team running their portfolio to a part-timer planner who may not have the same experience in portfolio construction, risk mitigation or stock valuation as they do in financial planning.

The Upshot

There can be big differences on the investment side of managed accounts:

  • At one end you get low fees, transparency and professional management.
  • At the other end, you get high fees from an adviser with little investment process but a slick sales process.

For the high fee options, you usually need to be “sold” – a seduction process that will appeal to the heart rather than the head.

If you have a managed account, are thinking of getting one, here are my tips:

  1. Check the brokerage. It should be cheaper than you would pay with an online broker – probably much cheaper. If it is more then you may want to ask some questions about how payments are made and whether your planner gets kickbacks from the broker. Check how much the typical brokerage is for your size of account – for some accounts, this can be the largest cost. Brokerage is often hidden – the better managers will be upfront with the costs, the worse ones will pretend brokerage costs don’t exist.
  2. Check the platform costs. You shouldn’t be paying more than 0.5%.
  3. Check who is actually managing your money.  If you are paying for professional investment management, make sure that it is not being done by a salesperson in their spare time rather than by experienced, dedicated managers.
  4. Check the investment process. There are a number of different investment strategies that work over time. The overwhelming majority of these have a process that is followed. When you see something like “XYZ planning is a style neutral investment manager looking to invest in investments that match its thematic view” what they are really saying is that they will buy whatever they want whenever they want and there is no real investment process.  It may work out well. It often doesn’t.
  5. Check the investment constraints. There should be some. You want to know that they can’t bundle too much of your money into one investment, and so there should be constraints like “no more than x% in any one stock”. You want to know that there are also limits to asset classes. For example, you don’t want to see Cash: 0-100% Australian Equities: 0-100% as the limits – meaning that the investment manager can do whatever they want.
  6. Check your internal manager costs. If your adviser is putting you into other manager’s products, make sure you understand whether there are also underlying costs. Say you are paying 1.25% for a managed account with adviser ABC which invests in a model portfolio run by a fund manager XYZ. In some cases the 1.25% will include XYZ’s management fees, in other cases, XYZ’s fee will be an addition to the 1.25%.
  7. Check performance fees and conditions. If you are paying performance fees then you should have lower base fees. You should also have a highwater mark and a benchmark that actually reflects the return the portfolio should make.
  8. Check investment performance.  This should be of the model portfolio, assessed by a third party – probably the platform provider. Be very wary of advisers who offer (as evidence of performance) individual accounts not assessed by a third party – these can be “cherry picked” and may include assets that typical portfolios didn’t own. Past performance should not be the only thing you look at, but it can be helpful.
  9. Check risk metrics.  Your investment manager should have some. Now, I know there are issues with risk metrics and they don’t tell the full story. However, if your manager isn’t even watching ratios like volatility, relative return, tracking error,  sharpe ratios then it is a sign that you have a part-timer running your money. High returns are good, but if your investment manager is using your money like he/she is at the casino then you want to know.
  10. Check related parties. Who else gets paid. Some firms use low fees in one part of an operation as a bait for other divisions to make money.  Accountancy fees, brokerage fees, platform fees, life insurance commissions, mortgage broking fees can all generate tens of thousands for financial organisations. Say you have $400,000 in an industry fund paying 0.8% ($3,200 per year). You might move to a managed account provider at 1.1% ($4,400 per year), with the tax benefits / transparency / customisation more than paying for the 0.3% difference in fees. However, if you are also paying $5,000 per year in accountancy costs on a new self managed super fund and another $5,000 in life insurance commissions to then the equation might not look so balanced.

Damien Klassen is Head of Investments at Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.

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  1. Or just spend 5 mins to select international mutual funds with strong track records since inception.

    • Or go with a portfolio of index funds (not a managed account / SMSF, a public offer fund).
      Several providers have products with all-in fees of less than 0.30%.
      Of course they are bare bones but the real question is whether they will outperform over the life of the fund.

  2. GunnamattaMEMBER

    Great advice, but one of the other key elements of all this is just how bereft of real nous the business media is.

    Sky Business would hold itself up as the prime business media outlet in Australia (and often gets touted by those of right wing tastes as being so) and for sure there would have been people within their editorial areas who would have known that Henderson was a fraud – but obviously there was nobody within to say ‘he is a fraud, dont use him’ and to look at either his academic background or his track record. This week’s Royal Commission proceedings have been as damning for our business media as they have been for the banking sector which has cut and paste the banks media announcements into ‘news’ for far too long.

  3. ‘Practice of the year’. ffs.
    Another piece of that great jigsaw which is the epic fraud perpetrated on a docile and delusional populace.

    • The “docile and delusional populace” would not want to hold their fate in their own hands – that would be too much responsibility to bear. They may be crushed by the sheer weight of responsibility.

      • Know IdeaMEMBER

        You are right that there is a balance to be struck between buyers and sellers. My take is that the balance has gone a little too far one way, not that buyers should be absolved of any and all responsibility.

      • As I have said before, $500 to $1,000 on a basic finance course is the best investment anyone will ever make. It would save a large number of people from the catastrophes that regularly come around, and would give power back to the client when talking to salespeople disguised as financial planners.

        The problem is, in a world of ever-decreasing attention spans, people would prefer to wing it and then whinge if it goes wrong. Caveat emptor, lucky country.

      • Phil, I think people are just too lazy to learn the basics or make some effort to become literate. The Moron Side of the Force rules after all.

    • I’ve seen how marketing works up close. I can almost guarantee that they paid for the award.

      Whenever you see awards you should treat it with the same skepticism as any other advertising.

  4. Ronin8317MEMBER

    I think the biggest issue is how moving to a self mamaged fund makes no sense for the Faurwork commissioner, but the guy wanted her to do it anyway for the fee. Free finanical planners at the banks are notorious for doing this, but this is someone independent charging 5k for an initial consultation.

    When she complained about it to the regulator? Nothing. It took the RC to bring down his business.

      • Damien KlassenMEMBER

        She complained to the regulator – the review wasn’t finished but the draft agreement was the planner would make a vague admission but the complaint wouldn’t be public to protect the planners reputation.

      • I thought she complained to the FPA not ASIC? The FPA is simply a golf day organiser, not a regulator.

      • A complaint to the regulator would also be problematic, the advice never actually proceeded and the client never charged, therefore no loss actually occurred. it’s professional misconduct but as a regulator with minimal resources, are you going to target that or target instances where actual losses have occurred. The 500K issue is regrettable, points out pretty poor processes but it’s a mistake nonetheless and all firms in all industries make those. The customer service officer issue is also stupid, but again, the adviser already had authority to access the clients information, impersonating the client was just pure laziness not intentional fraud.

        The bigger issue and the one the RC should be focusing on is that a presumably ‘independent’, award winning adviser seems to have issued advice that displays all the same hallmarks of conflicted, vertically integrated advice? (regardless of what you want, start an SMSF and invest into a complex investment product, that I own and run). That’s what the FPA seems to have correctly focused on in their investigation.

        Once you understand that issue, you understand why simply ‘breaking up the banks’, open APL’s and an army of ‘independent’ advisers will not solve a thing! We have turned an industry of sales agents into fiduciary’s overnight, these outcomes are entirely predicable as is the failure of many of the proposed solutions.

      • Hi Brent, I think you are being a bit lenient here. The $500k “mistake” is far more insidious than you imply, one only need look at the transcripts to see that. And intentionally impersonating a client is not lazy, it is fraudulent. It would not be unreasonable to infer that the advice process at Henderson Maxwell – and many others – embeds these issues, rather than being simple “mistakes” that occur from time to time.

      • You’re right Phil, I am being a bit lenient. The $500K issue was a mistake, I don’t believe it was intentional as if it was ever uncovered it would be a 100% guaranteed payout by them or their PI insurer. Intent aside, it was a huge mistake and one that does indeed shed light on the general workings of the practice. the intent however behind my apparent lenience was not to down play the issues, but to remove focus from the headline grabbers back to the core issues, boring ones yes, but they are the ones the RC needs to be focused on, that the issue with poor and conflicted advice extends well beyond just a few Banks and AMP, and if you scratch the surface (as they did with Henderson) you will find the world of ‘independent’ advice is just as scary.

      • Hi Brent, I agree with your core issues, and the similarity between many (not all) privately owned financial planning businesses and the bank model. I suspect this stems from trying to shoehorn a complex advice process, which is inherently labour-intensive, into some E-Myth burger process that treats everyone largely the same. Why? Because it cuts cost and corners.

        We’ll have to agree to disagree on the “mistake” though. Lets see if any HM clients who previously had defined or deferred benefit accounts come out of the woodwork 🙂

  5. Managed discretionary accounts?
    biggest suckers ball, in most cases, the world has ever seen.
    Fin Planners are not stock Brokers but more aligned with accountants.
    And most live off the Trust Me story, more so than the equity performance story.

    • Before I became an investor I once had an advisor referred to me from my bank. I did not mind what the numbers on returns etc but I quickly found out that he did not know much after I had asked a few pertinent questions about their products. This was more than a decade ago. I figured that my money would not be in good hands and that I could do it myself and have been in the market ever since. I think that turned out to be one of the best decisions I have ever made.

      • That’s because bank linked financial planners are nothing of the sort – they are basically only salespeople.

      • Be that as it may, nothing can substitute the financial knowledge and wisdom one can gain from doing it yourself, which is far more valuable than the financial gains it generates.

    • There are situations where it makes sense. Esp for hnw or family offices, there is absolutely a place for cta type services, irrespective of asset class. But if you aren’t already rich and savvy (i.e. can sue the nads off the ‘advisor’), this is a terrible idea.

  6. I remember once trying to get the performance reports for some Ipac funds,….that were not available to the general public?

    • What they should do is ban Fin Planners recommending internal/related products full stop.
      Under this scenario, people may actually start to get impartial advice.

      • Won’t happen. Conflicted advice extends well beyond who’s name is on the door, the current construct of the financial services industry (systems, process, regulations etc.) almost demands conflict, to the extent that making a profit actually requires it! (outside of a very small boutique practice). For a multitude of reasons you are incentivised (financially and otherwise) to sell a product, any product as time & cost of issuing basic advice without a product attached is all but unprofitable, not to mention that consumers themselves have consistently reported they are not willing to pay for such advice (accountants, lawyers and doctors are seen as required costs vs financial advice is seen as discretionary).

        It’s the exact reason that the many successful (i.e profitable) independent practices end up being as vertically integrated as their insto cousins. Open up the books, remove the corporate label from the suite of products and you would be hard pushed to tell the difference between the business model of a bank and your average non aligned or independent firm.

  7. Hill Billy 55MEMBER

    The RC should recommend the creation of a Sovereign Wealth Fund for all Australians, managed akin to the Future Fund. The Financial Planning Industry is totally without foundation. Corrupt to its core.

    • Which will promptly be (a) ‘bailed-in’, or (b) required to invest a portion in ‘GrowOz’ government bonds, or (c) otherwise nicked (see also: financial innovation). There is no way you can leave such a large pot of money lying around – it’ll be stolen in 5 mins flat.

      The only reason the Future Fund can do as it sees fit, is that pollies are too scared/personally invested to try to steal from it. We are better off keeping it in our own bank accounts and loosing superannuation for good. Mostly because despite everyone’s best intentions (+ copious amounts of hot air / virtue signaling), super will soon die and we’ll be left with our own bank accounts. At least this way, when a muppet gets ripped off by another muppet, its just one life buggered and not leveraged into a systemic banking and political crisis.

      Super should be best thought of as an exotic creature, like a unicorn, or pets.com in ’98; in that its survival depends on (a) homogeneous society, (b) being near the start of a global credit bubble, (c) being at the start of a demographic bubble; the conditions where super made sense are unlikely to be repeated in our lifetimes.

  8. Know IdeaMEMBER

    Thanks Damien, that is a good list of tips.

    Any one who followed those should stay out of trouble. But any one with the financial literacy to be reading those tips will likely stay out of trouble in any event. The difficulty is with those who do not have that level of literacy – and why they do not is another issue altogether – being throw into the pool of sharks. Now there may be some nice friendly dolphins in the pool, but they do seem to be difficult to spot.

    Just as an example of how weird things have become, I get hit with the hard sell from bank tellers, who are people not really that interested in selling at all. The latter becomes clear once I discuss things further with them (as I tend to do). Then you move to the middle level in the banks and it is just blatant self-interest on show. Move up further and the self-interest is much better hidden and much more subtle. They may think I am a muppet, but they do not let on.

    I do not expect a bank to act in my interest, which is why I do not take advice from a bank. However, particularly in my dealings with the middle level personnel in the banks, there is an implied and sometimes an explicit suggestion that they are acting in my interest. My concern is that many will fall for that load of bollocks.

    In a complex system it is my view that the onus and obligation to do the right thing must lie more (but not entirely) with those having the capacity to deal with the complexity. An obligation asymmetry, if you will.

    Rant over.

    • I once floated the idea that people should be required to obtain a licence before they are allowed to spend their money. It was immediately shot down – as the nanny state gone too far, which was fair enough.

      If you don’t want a nanny state (which I don’t), then let “many who will fall for that load of bollocks” learn in a hard way.

      After all, no medicine can cure idiocy.

  9. All the above comments are spot on. So are the questions listed in the article, that you should ask a prospective financial ~speculators~, I mean advisors..

    Isn’t the saying in marketing. “If a profuct is free. You are the product.”
    Free advice from a bank is is tainted for obvious reasons. Now it’s just a clearer fact.

    To think the regulator wanted to slap this “celebrity advisor” on the wrist with a “she’ll be right, mates rates” no bad publicity punishment says it all. Yet.. the comment above that said most people dont want the pressure of doing it themselves, is the air these vultures breathe.. so this is a bump in the road for fin services.. next royal wedding or terror event and gen pop will have forgotten. Skynews lovesss to sell themselves as the premier financial media prostitute. This just shows they are what they are, albeit at a premium price.

    I’m all for corrupt fin services being crucified but I would like to see Labour double down and ask for an extension to the commission. Is the highlighting of the fin services mess just a switch and bait to keep eyes away from the big ponzi scam that successive govts perpetuated. The practise of liar loans, is still rife.

    With domain just two hours ago having to bite the bullet and admit at 2.5% drop in sydney this past quarter all with soft touch look in from the RC.

    What would an extended expansion on the RC do to the great australia ponzi scam…

    I think most people who read MB and the like have a touch of schadenfreude. Rightfully so. Being woke to the scam of forced mass migration, fhg, liar loans and political corruption or their guilt by inaction is hard to swallow.

    If you looked at gov with a view they have a duty of care towards its population. It doesn’t take much to see they have been negligent for a solid 30 years.

    Keep the pressure MB.

    • The RC findings will simply reinforce for the average Aussie their belief that finance is a world of sharks, investing in shares is like gambling, and that the only “smart” and safe place for your money is in residential bricks and mortar.

  10. Fake degrees! Tanya Plibersek loves those. She still reckons 50% of those who finish year 12 should be given one.

    Sam Henderson getting staff to act as imposters? Quite extraordinary that signatures written by hand are still a thing – why not verification via face recognition or fingerprints.

  11. “Practice of the Year”.

    My experience is that these kinds of awards are regularly bought and sold. They really mean nothing at all.

    They are essentially, for all intents and purposes, advertising.

  12. kiwikarynMEMBER

    Sky Business is just an outlet for their advertisers to push product. It is not independent financial news. Its more like “pay us $X a year in advertising fees, and you can come on and say whatever you like”.

    • Thing is, how does the average person distinguish an “independent financial news outlet” from ones that just take money for advertising? There are so many, there is just no way of knowing really.

      • One will have to read, and read a lot. Those who talk sense are sensible.

        One still needs enough brain power to (1) read and (2) think logically.

      • kiwikarynMEMBER

        The financial industry don’t want average people knowing any real news. That’s why its all hidden away behind big paywalls. Real financial news is only for the 1%. The rest are simply grist for the mill.

      • Mike, simply applying a couple of simple rules will help you determine quite quickly.

        1. If it sounds too good to be true, it is. Guaranteed. Run away screaming.
        2. High returns equals high risk. Guaranteed. In a country that celebrates gambling this is sometimes a difficult concept to grasp, but read up and you will see that the equation is immutable.
        3. Anyone described as an expert should have their advice taken with a pinch of salt. Apply Rule 1 to their commentary and it will help you filter out 75%. A real expert would know that you can’t see around corners, and confident predictions are the domain of self-inflated idiots.
        4. Making money comes easy to around 2% of the population. For the rest of us it is just hard work. Do your own research – books, podcasts, courses. Start with A Random Walk Down Wall Street to at least give you some background on investment. There is nothing wrong with active selection (choosing your own investments) provided you stick to a few basic rules, and there is nothing wrong with using a competent adviser. Use the rules to ensure you end up with one.

        As Red Pill has pointed out, inertia is generally the enemy of the people, not intelligence.

  13. “what you expect me to understand 10 things, you pencil neck!… oh look over here darl, this guy’s saying I can buy a brand new apartment with my super, let’s secure our future.”

    I do some work with fee based dimensional types. The average person is beyond help, they can’t DIY for sheet, and it’s a numbers game. It’s really a matter of luck if they walk in the right door and there’s 20 to 1 henderson maxwells to anyone useful.