Head of intermediary distribution at Vanguard Investments in Australia, Michael Lovett, said the entire financial services value chain is under pressure due to factors such as market volatility and Future of Financial Advice changes.
Total margin pressure costs need to decrease by around 0.5 to 1.0 per cent between investment managers, platforms, dealer groups and advice practices, Mr Lovett told InvestorDaily.
Investment costs to the end investor are usually around 1.5 to 3 per cent, and at 3 per cent it is hard to generate good returns. “So where will that cost saving come from?” he asked.
“For advice to be reasonably priced, there needs to be pressure at the other end of the value chain [from advisers],” he said, referring to asset managers and platform providers.
Advisers can also help reduce the cost of advice by investing via a core/satellite approach, and using model portfolios from their dealer group rather than attempting to become investment managers
“An index core dramatically reduces the cost of a portfolio,” he said.
“Then you can choose two or three managers who you think will outperform; a [passive] core gives you consistency.”
A core/satellite approach keeps costs down but retains the potential for outperformance, he said.
For assets such as listed property and fixed income, an index core makes even more sense because there is less potential for outperformance and an expense ratio drives down the bell curve of expected returns, according to Mr Lovett.
An index core also brings the added benefit of transparency, which is an advantage in a post-fee disclosure world, he added.
