Advisers insourcing funds management


By Sarah Kendell

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Financial advisers were increasingly choosing to take client investment decisions into their own hands in order to justify increasing fees as a result of regulatory change and retain clients being lured by low-cost robo-advisers, according to Pinnacle Advisory Group.

Speaking at the PortfolioConstruction Forum Strategies Conference 2017 in Sydney yesterday, Pinnacle partner and director of research Michael Kitces said the rapid rise of exchange-traded funds (ETF) did not illustrate an adviser preference for passive investments, but a desire to manage client portfolios for themselves and cut fund managers out of the equation.

“The interesting phenomenon is not only are we seeing ETFs rise in the US, but we are seeing a small but steady rise in the use of individual stocks and bonds and private equity funds, which would be a strange thing if advisers were really shifting from active to passive,” Kitces said.

“Instead, what we are seeing is advisers are buying more of pretty much anything they can manage that isn’t a mutual fund that someone else manages.”

He said as advisers re-evaluated their pricing structures and value propositions in the wake of commissions being phased out of the industry, it made sense to look at managing a broad in-house portfolio of ETFs or direct securities for clients.

“Historically the client would pay the fund manager a fee and advisers got paid trailing commissions. Now what we are seeing is advisers say ‘instead of using a fund manager, I am going to manage’,” he said.

“While the adviser doesn’t have time to analyse thousands of stocks, they do have time to evaluate asset classes and ETFs, and if they start charging a management fee for that ETF portfolio, it looks cheaper for the consumer and they get paid the same thing as the adviser.”

Advisers were also responding to the threat of robo-advisers that were able to take on their traditional asset allocation tasks for a fraction of the price, meaning they had to justify their fees through either the provision of additional services or becoming more hands-on in investment selection, he said.

“Anyone can now participate in financial markets at almost no cost, which leads us as advisers in one of two directions – we can focus on value adds that don’t have anything to do with the portfolio itself or we have to figure out how to bring alpha to the table,” he said.

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