The funds management industry has failed investors with limited transparency and no alignment of interests, a boutique portfolio manager has said, pointing to “naked pricing” of fees in the value chain as a solution.
Peter Bell, co-founder and director of Bellmont Securities believes the fees charged by managed funds to advisers and their clients are an example of the alignment between the two parties being too opaque.
He has said that despite improvements in recent years, too many fund managers continue to be paid fat fees to essentially track an index, only to underperform.
“Australian equity funds traditionally charge management fees of around 1 per cent, however it is still possible for a manager to run an equity portfolio at significantly less than this and turn in a performance that sits at the top of its peers,” Mr Bell said.
“Net returns after the deduction of all fees and taxes are the only returns that matter to investor.
“The lack of transparency within managed funds means that it’s almost impossible for investors to detect, with limited disclosure of the fund’s holdings or transactions which is an issue the industry needs to better address.”
He pointed to the Bellmont Australian equities portfolio ranking second out around 500 comparable funds on the Morningstar database in 2019, and ninth out of 480 funds over two years, but unlike its counterparts, it charges a base management fee of 0.385 per cent, lower than its top 10 peers.
The Bellmont model portfolios are available to the advice market on adviser platform alternative, WealthO2, which has aimed to avoid conflicts of interest and hidden fee layers through “naked pricing”, showing each fee in the advice value chain.
The platform’s managing director Shannon Bernsaconi said the portfolios operating on WealthO2 have used naked pricing than bundling fees in the value chain with other elements or cross-subsidising with third parties.
She declared the shift is resulting in fundamental change in the industry, moving from vertically integrated product distribution models.
“Bellmont, for instance, charges a model investment management fee and a performance fee only if it performs,” Ms Bernsaconi said.
“WealthO2 charges a fee for service, but there are no fees on cash, no shelf space fees for the model (like SMA fees), and none of the other conflicted payments you often see.
“Fortunately, we’re now seeing products and services being selected on the basis of merit. This provides a strong tailwind for top-performing boutiques, advisers and their clients.”
Mr Bell said another advantage of model portfolios for investors is the potential tax implications.
“Despite their dominance of the investment landscape, unitised investment structures are inefficient from a tax perspective,” he said.
“A better approach is to ensure that advised investors retain full beneficial ownership of their shares. Historically, this has been very costly and cumbersome for advisers, but that is where the next generation of investment platforms really [comes] in.”
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].