How to dodge dodgy money manager fees

There are so many issues coming out of the Royal Commission into banking that its hard to maintain the outrage.  Here is yet another one that might have slipped through in the torrent of misdeeds:

Hayne: “As beneficiary you can’t call for the asset which is held on trust for you? Is that right?”

AMP: “Yes, that’s correct,”

Hayne: “An unusual form of trust, I would have thought. ”

long pause

Hayne: “The benefiary can’t call for the asset, is that your position?”

AMP (eventually): “No, in order to move they would need to sell that asset.”

Hayne’s point is there are a multitude of ways that platforms get customers to stay, and denying in-specie distributions is just one of them.

Say you bought a fund through AMP and put it on their platform, being charged 2.5% per annum for the privilege. Then, a few years down the track you go to another planner and you want to keep your investment but simply access it through another platform. On the platform discussed above, AMP will make you sell the asset and realise a taxable gain. Which AMP is betting that you won’t want to do, locking you into the AMP platform for longer.

Having been in the industry for a long time on the wholesale end, and then going through the process of putting my fund onto a retail platform it was horrifying to see the fees and the conditions on some platforms.

There are a whole range of platforms that I could not in good conscience recommend to any of my clients and I have no idea how advisers can. I have pulled the same face Hayne does on the video, and asked the same incredulous question about the definition of “custody” or “trust” on more than one occasion…

My tips for best of breed platforms:

  1. You want in-specie distribution. i.e. when you leave your manager you don’t have to sell the assets. This is the most tax efficient and shows confidence from the manager and the platform that they will rely on performance to keep your investment rather than high exit costs.
  2. You need a 3rd party, reputable custodian. This prevents fraud.
  3. You shouldn’t be paying more than 0.5%. And the fees are coming down over time – you should be seeing the decreases rather than being locked into a rate from 10 years ago.
  4. Buy/sell spreads on fund or trading costs should be low. Less than 0.5% generally, for large-cap funds less than 0.3%.
  5. My preference is for separately managed accounts rather than unit trusts as it means that your tax position isn’t mixed up with everyone else’s. Not everyone offers this yet. But the better managers do.

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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Comments

  1. A very large proportion of people spend more time researching their mobile phone plans and writing fatuous drivel on Twitter than they spend on researching super.The only chance you have of avoiding dodgy managers that charge dodgy fees – or even avoiding large ticket-clippers with reputable (but rapidly declining) brands – is through education. Money spent on a basic finance course would be the best investment you ever make. There you will learn the risk versus return trade-off, you can’t get something for nothing and if it sounds too good to be true, it is. it might even make you look for the fee structure to decide whether you are getting value for money.

    • The mobile phone analogy is interesting. Almost all the profit made from selling mobile phones is from customers who continue to pay the monthly rate after the plan expires (the so-called inertia rentals).

      In the UK there are rules against Telcos exploiting this but none in Aust.

      • This is what’s been happening in the IT world for quite a while now – a continuous drive towards “subscription services”: nah’ can’t get a full standalone license – but you can get a “monthly/yearly/whatever” subscription, with really fuzzy or insufficient thresholds between tiers. Death by a thousand cuts – some deeper than others.

        Welcome to the digital plantation, slave! Here’s your login and password.

    • Very true Phil.

      The solution is to start a SMSF where you take control of your superannuation assets, but you need to do some research and improve your investment skill set. This is not very difficult, but many “advisors” will say otherwise, for obvious reasons.

      Why do people hand over hundreds of thousands $$$ to total strangers and trust them to do the right thing ?? I have a waterfront block of land to sell you in Moreton Bay Qld, it is high and dry for 50% of the time….. sarc.

      Why is Labor dead set on killing off the SMSF industry ??

      Could it be that Labor wants all your superannuation money in a “Industry Super Fund” managed by the Unions and ex Labor Staffers.

  2. Platforms are dead things walking. The money “managers” are just squeezing every last drop from the lazy investors while they can.

      • True, but mine is a fatuous comment on a blog not Twitter. I like to think that is more highbrow, so at least humour me…..

    • Tim FullerMEMBER

      Hi Paul, at present we offer investment only advice through our onboarding portal for the purposes of investing in the MB Fund and with Nucleus Wealth.

      Happy to discuss any further needs you might have as we are licenced to provide personal advice outside of this as well as required. Cheers.

  3. AMP does have a platform that offers in-specie transfer. The platform in question in RC is a very old platform that are for some reasons still being offered by AMP (god knows why). Given AMP’s internal benchmarking says this platform is not cost competitive, it raises a really good question on why people still have investments on this platform (maybe Centrelink grandfathering?) if they are receiving advice from planners.

    • thomickersMEMBER

      AMP have a Wrap account (obtained through AXA acquisition). However more than 50% of their fum sit in AMP non-wrap accounts charging 1.8% to 2.5% per annum in retail manager fees using standard multi-manger diviersified balanced portfolios. Using a wrap account, a standard multi-manager would cost roughly 1% per annum all up. There is no short to medium incentive for executive management to move everyone to those new wrap accounts without taking a big hit to the revenue.

      • Yep. AMP acquired North through AXA. North is closed but they now have a MyNorth platform which is basically the same.

  4. It is the strange position that you seek advice from a knowledgeable advisor and they use that knowledge to squeeze you within an inch of your life. Another case of a wolf in shepherd’s clothing.

    Under the old system for those with defined benefit (before the government threw us to the wolves) they would just pay a portion of final salary forever. Why the heck didn’t they just enforce standard top line agreements where money managers guaranteed a certain return for life (after fees) and after the agreement was signed – the money manager needed to insure themselves to provide any shortfall to the customer? Too simple? All the risk is on the retail customer, it should be shifted – yes off govt – but onto the ones responsible for managing the money. Set up a default govt money manager with low but acceptable returns to balance competition and surely you are done?

    • The solution is simple – put your retire savings into a low-fee index fund and be done with it.

      The trouble is, there will be a long queue of unemployed fund managers and advisers.

      • “Put your retirement savings into a low-fee index fund and be done with it.” – it’s comments like this that reveal precisely why people need financial advisers. Taking a ‘passive’ approach to harvesting risk premiums requires an institutional investment horizon (aka forever). If you’re like most people saving/investing for retirement, your horizon is waaaaaay shorter – probably just 10-15 years by the time you really apply yourself to the challenge. Buying and holding (and praying) exposes you to a raft of other risks (e.g. sequencing risk, capitulation risk etc) that not only go unmanaged, but are usually completely unacknowledged. If you suffer a market set-back at the wrong time (e.g. <10 ryrs out for retirement), or if those risk premiums can't be harvested in the time-frame allowed (very likely in the current environment) then you will eventually find yourself in a position of 'permanent compromise'. (Your goals and objectives will be irrevocably dashed). Valuations matter. Risk matters. When you buy a share for example, what do you honestly think you are buying? I'll tell you. You are buying a claim on a series of future cash flows. Thus when you buy shares in a company, you must first ask yourself: "What are the cashflows worth? Am I prepared to pay $10 per share, or $50 per share for the same cashflows?" This is why a golden observation of investing is: as capital gains increase, so future returns diminish. When you buy and hold an index fund, you acquire the underlying investment exposures with no regard for valuation whatsoever. You're essentially saying that valuations don't matter and that no matter what price you pay for a company's shares…you'll still make money. Utter rubbish. As for risk? let me assuire you there is no risk management at the portfolio level whatsoever. Zero. When you accept a passive strategy it doesn't matter what your "risk profile" is (another nonsense concept by the way). Instead, you're going to get whatever risk the market dishes up, which will almost certainly be either too little risk, or too much. Achieving your goals and objectives requires that you (i) identify the total risk required to achieve your objectives and to (ii) spread the risk out over the life of your investing, and (iii) importantly…to dial-down the risk as you approach that point in your life when you won't be able to recover if there is a set-back. The logic of this is very simple – at the point you have the most to lose, you need to be taking the least amount of risk. There is no way, none whatsoever that an Index Fund, or a passive approach to investing is going to achieve this and in fact it is just going to expose you to the evry thing that you need to avoid! Index Funds and Industry Funds and ETFs etc are cheap and they're cheap for a reason. If you're with a financial adviser and they are recommending a passive strategy (e.g. Index or Industry Funds) then please….run a million miles. They clearly have no idea what they're doing.

    • The key reason is that the original defined benefit schemes are unsustainable. The capital supporting the pension is, in most cases, too low. There was a time when First State Super was offering large incentives for members to switch to defined contribution schemes because the FSS unfunded liabilities were enormous. Unfortunately, many people accepted and are now worse off.

      The only options to make them sustainable are a) reduce the pension (e.g. 50% of finishing salary) or b) create a pension ponzi where new contributions from other members fund cover the unfunded liabilities of the pension members. The problem is that option a) is unattractive and option b) is a recipe for disaster.

  5. But I heard that the primary aim of Strayan investing is to lose money.

    If I remember correctly it is called negative gearing, I think.

  6. “My preference is for separately managed accounts rather than unit trusts as it means that your tax position isn’t mixed up with everyone else’s.”

    You should be careful with this assumption as there is some risk that an investor who holds their investments through an SMA holds them on revenue account and not capital account (investment held through an MIT are deemed to be on capital account).

    That said, when the ALP win government this may not be such a bad thing as the CGT discount will be heavily reduced and you might want to offset capital losses against other investment income.

    • Come on, that is a very low risk scenario unless you are regularly trading. If you are regularly trading, the MIT Capital Election is of limited value as you probably aren’t holding positions longer than 12 months.

      • Not really. The deemed capital account rules came in because the ATO was about to issue a ruling saying that managed funds, due to the nature of their activities, hold their assets on revenue account (similar to LICs and insurance companies). The industry lost their na na over it and convinced Swan to introduce the deemed capital account rules.

        But those only cover register MISs, not bare trusts like SMAs. And there is pretty much no difference between what a managed fund does in an MIT and what an individual does in an SMA other than the number of zeros.