Are we seriously talking about 0% asset management fees? Well maybe not yet in Ireland, but Fidelity recently announced the introduction of two core equity index mutual funds covering the U.S. and international markets without any management fee.
If we saw a similar development in Ireland, what would it mean for financial advisers? And even if we don’t, what impact will the downward pressure on investment manager fees have for advisers?
A forensic analysis of fund management charges by clients
The two big asset manager stories over the last year or so were first of all when Vanguard announced a flat 0.3% management fee, regardless of how much an investor has in their account. This fee includes access to a CFP professional who will provide financial planning and investment advice. This was followed this summer by Fidelity’s announcement of 0% fees on two of their funds. These price developments will inevitably move closer to Irish shores over time and when they happen, they will be (rightly) trumpeted loudly by providers. This in itself will bring a keen focus from clients on the level of fees that they are paying into their existing funds.
We are certainly not advocating that fund management fees are the only factor for investors to consider – far from it in fact. But should fees reduce substantially, the reality is that investors will more regularly raise this issue with their adviser who will need to be prepared. The adviser will need to be crystal clear about their rationale for guiding clients towards higher charge funds. Higher cost funds make sense for many clients – you just need to be ready to clearly articulate the reasons!
The bottom line is though, fund management fees are likely to come under ever-greater scrutiny.
A lower overall fee creates adviser opportunities
One of the most common refrains I hear from advisers being unable to charge 1% (or even 0.75%) trail for their own services is that the current fund management fees don’t allow it. They argue that when you add 75/100 bps on to a high management charge, that the overall charge is simply too high.
If the fund management fee went to 0%, surely this problem goes away? Now the only charge that would apply would be your 0.75% / 1%, which would not overly impact the returns achieved by clients. Could you charge a higher trail then and justify it to your client?
I’m not so sure that a reduction in fund management charges would be the silver bullet that some think it might be. The argument of fund management charges being too high sometimes hides an underlying issue of some advisers being unable to engage and convince clients in the value that they themselves (the adviser) are adding.
Can you articulate and demonstrate your value (and justify higher trail)?
How do you actively demonstrate to your client that you are worth paying 1% per year to? How clearly do you set out to your client the value that you add and the difference that you are going to make in helping them achieve their lifestyle and financial goals? How do you demonstrate the expertise that you bring to the table to help them, and both the quality and amount of work that you do on their behalf? How do you convince your client that they are fortunate to have found you, and that your 75/100 pbs charge is worth every single euro?
If you are not able to do this, even with reduced fund charges your client will still baulk at the charges. Now they will realise that most / all of the ongoing management charges are going to you and will really want to understand what they are paying for. Your fee won’t get “lost” any more in an overall charge.
To be able to articulate and demonstrate your value, you need to take a step back from your business and spend time identifying the value that you add and the difference that you make to the lives of clients. You need to articulate that value, your advice methodologies and be able to demonstrate the structure and rigour of your approach.
Only then can you justify your trail amount, irrespective of the direction of fund management fees in the future.