The maths behind the total cost of delivery components for advice businesses reveals that the case for implementing exchange-traded fund (ETF) investments is compelling for advice firms, particularly those with SMSF clients.
MSCI Australia vice president of ETF client coverage Tim Bradbury said with fees for products and platforms creeping down, using ETFs was worthwhile as unchanging adviser fees would be unsustainable going forward.
“Cost is important in terms of the overall delivery of advice,” Bradbury told the SMSF Association NSW State Chapter breakfast last week.
“But we all know that playing lotto is potentially a bit of fun, but the odds are astronomically large.
“Advisers that use ETFs actually understand mathematics and the equation, and they understand it from their perspective, but more importantly from the clients’ perspective.”
He said active products in the old world cost 0.6 per cent to 1 per cent, whereas in the new world would cost 0.3 per cent to 0.5 per cent.
Platforms were moving from between 0.4 per cent to 0.8 per cent to the new world cost of 0.2 per cent to 0.4 per cent.
Finally, delivering advice cost 0.7 per cent to 1 per cent now, and was expected to stay in the same range in the new world.
“[The cost of advice] looks unsustainable going forward,” Bradbury said.
“The new world starts to [reveal] it’s seeing compression in terms of platform cost and we’re certainly seeing compression in terms of product, so the overall cost of delivery is certainly coming down and advisers should be in the position, having [being in] a situation of sitting across the table from their client, to retain their margin or their revenue.”
As an example, imagine a consumer price index plus 3.5 per cent return target in a standard balanced strategy, he said.
“If the cost of delivery is 30 per cent of the total return, pre-tax, this spells trouble for advisers,” he said.
“It’s not a great outcome for the client for the foreseeable future.
“If they’re getting 3.5 per cent before fees, costs and the delivery of advice and then they’re losing two-thirds potentially of that through the delivery of advice, that starts to get hard to justify as an advice proposition.
“So the ability to retain flexibility around some of these components, especially around product and therefore utilising ETFs is going to become much more mainstream.”