Partial to impartiality
Investors in Asia are turning to fee-based financial advisers for unbiased views, writes Andrea Li
The role of the independent financial adviser is becoming ever more important, as investors are increasingly understanding the benefits of impartial advice.
A survey conducted by the British wealth consultancy Scorpio Partnership found that an overwhelming majority of millionaires in the region recognised financial planning as a core capability for the wealth-management industry. More than ever, they want unbiased advice that can help them manage, preserve and pass on their wealth.
"There is a strong trend across Asia showing investors' desire for independent financial advice at every level of the wealth management sector. That is the direction the market is shifting towards," says Sebastian Dovey, managing partner at Scorpio Partnership.
Impartial advice, advisers say, is best achieved when there is a clear distinction between advice and services provided, and fees rendered.
That's why Britain will ban advisers from receiving commission for recommending investment products by the end of this year. Australia, too, is planning to widen its clampdown on commission to all financial products, while Singapore has just launched an industry review of the financial-advisory sector aimed at raising fees transparency.
To many, the fee-based structure is ideal. The adviser charges a fee for their expertise and time, and the client is free to do whatever he wants with it.
"If you went to a doctor, you would expect him to charge you a consultation fee rather than try to make his living off the prescriptions he gives you. It is the same concept in financial planning," says Rick Adkinson, managing director of Private Capital, one of Hong Kong's few fee-based advisers.
Hong Kong has been slow to adopt this model because the commission-driven insurance agency culture dominates much of the market.
"It will be very difficult to dismantle the commission-driven thought process because this is so engrained in the psyche of people. I don't see the fee structure changing unless the government steps in and regulates the industry," says Glenn Turner, chairman of the Independent Financial Advisors Association, which represents the interests of independent financial-advisory firms.
Despite this challenge, there continues to be a small group of committed, independent fee-based financial advisers in the region, who have embraced the model because they believe it is the best way of offering clients true independent advice.
Though they serve a largely expatriate and Western-educated market, they remain hopeful things in Hong Kong will change as the fee model gains momentum elsewhere in the world.
The Henley Group, CEO
The Henley Group has crafted a cost structure designed to ensure impartiality in wealth management. Its Investment Advisory Service charges a recurring annual fee, calculated usually as 1 per cent of the client's portfolio, for the advice and service they provide on portfolios.
"This fee we see as voluntary from the client in that it requires the individual to be satisfied our delivery of value is consistent both in terms of performance and service and if this falls short they have the right to cancel our service. With this simple mechanism, we believe the interests of our clients and The Henley Group are aligned," says Mark Rawson, CEO of The Henley Group.
There are also other structures in place to optimise objectivity. For example, advisers do not receive any fee, commission or income from funds recommended in a portfolio and where commission is applicable for specific financial products that work on such basis, the rate of commission is standardised across the group to avoid product biases as a result of commission differentials.
With a growing number of investors now better informed, Rawson has seen increasing demand for more choice in the methods of remuneration, be it through fees or commissions.
Noto Financial Planning
Tony Noto is a rarity in Asia's financial industry; one of the few IFPs to operate purely on a fees-only model.
His fees - 1 per cent for assets under advisement for financial planning and investment advisory over a 12-month period - are not affected by where or what the client chooses to invest in. In fact, he is happy to work with an individual's pre-existing brokerage account and construct a portfolio around what they already have.
"Fees only benefit the client, by taking out the biggest conflict of interest that exists with the majority of financial planners - commissions. The problem with commissions is that the products with the highest charges for clients also offer advisers the highest commissions," says Noto, who runs Noto Financial Planning, his own financial planning practice, a division of international tax consulting firm Diacron Shanghai.
Noto works with index funds and brokerage accounts; straightforward low-cost solutions that provide a stark contrast to the commission-driven, investment-linked insurance schemes, which can generate about 4 per cent commission on scheduled insurance contributions.
He believes the best solution to Hong Kong's splintered industry is for regulators to force advisers to get explicit approval from clients on how much they are paid, be it through commission or fees.
The Fry Group, senior wealth manager
While many in Hong Kong may be loath to pay for financial advice, Sheila Dickinson believes that with investor education and a better understanding of what an IFA can do, clients may be more willing to embrace the fee model.
"In the local market, investment returns are of paramount importance, and many do not embrace the fee culture because they are so focused on the returns. Investors need to understand that investment is an important element of financial planning, but it is not everything. That can change with greater awareness and investor education," says Sheila Dickinson, a senior wealth manager at The Fry Group Hong Kong.
Dickinson's model includes an initial plan fee that pays for the overall plan preparation, advice and recommendations. This is a set fee agreed upon at the outset depending on the complexity of the client's situation. On any subsequent investment, an initial fee may be payable and an annual advisory fee charged as a percentage of assets under management, for ongoing advice and review.
Private Capital, managing director
Hong Kong's disjointed regulatory framework overseeing the financial-services sector opens up loopholes for unscrupulous advisers to cash in on high-commission products, particularly investment-linked long-term savings plans, says Rick Adkinson, managing director of Private Capital.
This is because insurance-licensed advisers are not in the best position to advise clients on long-term financial planning, because without the SFC licence, they cannot tap into a wide range of other fund platforms that offer similar products though at much lower rates, he says.
"Some companies will have a mix of SFC-licensed and insurance-licensed advisers and as a result, are able to duck and dive between the regulators and take advantage of the fractured industry," he says.
Adkinson uses the Singapore-based iFAST platform to tap into hundreds of mutual funds for his clients, at minimal costs, and allows them to benefit from reduced investment costs.
Using an hourly charge rate to calculate costs, Private Capital will agree with the client an upfront overall capped fee for reviewing one's financial plan. A one-off administrative fee will then be charged for clients who decide to set up an account, with a 1 per cent fee on total assets under management.
HFS Asset Management, senior associate
Hong Kong would do well to move towards a fee-for-service model if it is to compete as an international finance hub, though this is unlikely to happen without some form of regulation, says Melanie Nutbeam, a senior associate at HFS Asset Management.
She disputes the perception that a fee-based model would not work in Hong Kong because the local Chinese population is not interested in paying for advice. Rather, Nutbeam believes the fee model has been slow to take off because there is not enough fee-for-service advice being offered.
"Understanding the value of advice is not a cultural matter. There just needs to be more awareness and education," she says.
She works on an hourly rate of HK$3,000, taking a customised approach to tailoring financial plans around the needs of clients. Clients then pay a 1 per cent fee for assets under management.
While the fee model does better align the interests of the adviser with the client, Nutbeam recognises its limitations, in that it locks out low-income earners who struggle to make ends meet, and cannot afford to pay fees.
Jessica Cutrera and Todd Pallett, partners and managing directors, EXS Capital
Starting a fee-based practice is costly, requiring stronger initial funding and a stable base of loyal clients, but despite these challenges, it is a far superior model, says Jessica Cutrera, a partner and managing director of EXS Capital.
"Commissions are often hidden from the client and can also vary widely, so a fee-for-service model is a much fairer way o
f doing things," she says.
The commission range can vary hugely between one and 10 per cent, and the rates levied depend not so much on the asset class, but on the way that the product has been bundled and designed.
"There are instances where, by the time you factor in all the associated costs - the entry fee, the performance fee, the exit fee and the management fees - you are paying 8 per cent in fees per annum for a structure you are locked into for a long period," says Todd Pallett, a partner and managing director of EXS Capital.
The firm quotes an overall fee for financial planning services, ranging from US$2,000 to US$10,000 with an additional one to 1.5 per cent annual fee for assets under management.
Chad Creveling and Peggy Creveling, managing director and principal, Creveling & Creveling Private Wealth Advisory
While the impact and structure of fees may not always be clear, what you pay out in investment fees is hugely important because it could be the difference between meeting or falling short of your long-term goals.
"For example, the long-run, inflation-adjusted returns on a diversified portfolio will generally run only three to 5 per cent, so if commissions and internal fund fees total 2 per cent or more per year, then 40 to 60 per cent of the real return is eaten up by fees. This can make investment goals like saving for retirement nearly impossible to attain," says Chad Creveling, managing director at Bangkok-based Creveling & Creveling Private Wealth Advisory, a firm specialising in working with expatriates across the region.
"Lowering excessive investment fees is the quickest and easiest way to boost investment returns while taking on no additional investment risk. For example, saving fees of 1 per cent can boost a portfolio's long-run real return by as much as 50 per cent," added Peggy Creveling, a principal at the firm.
The firm's fees start at 1 per cent of investable assets per annum and decline at various break points, subject to a quarterly minimum.