Ongoing costs

In 8 out of the 10 investment plans our panel couldn’t definitively work out the initial and ongoing costs of the recommended strategies.

Shoppers were given conflicting information about service fees – and sometimes the information they needed wasn’t supplied. In instances where our shopper was advised to put most of their investments in a managed fund, few advisers provided a complete picture of the fund’s expenses.

And when advisers recommended direct investments in bonds and shares, none of them provided information on how often they’d recommend changes to these portfolios. As changes incur brokerage costs, our shoppers had no idea how much these ongoing costs might be.

Such information could easily be provided from the adviser’s experience with similar portfolios.

If our expert panel couldn’t work out the costs, no one could. We think the industry is not coming clean about fees – probably because if consumers knew the true costs, they wouldn’t bother being customers.

Poor-value strategies

Some advisers recommended significant holdings in both shares and fixed interest – a balanced portfolio. Regardless of whether this was in the form of direct investments or managed funds, our shoppers were advised to hold these portfolios inside a “wrap platform”.

We estimated the ongoing costs of this advice by working out the annual fees paid to fund managers or brokers and the annual “wrap-platform” fees (we calculated the cost after tax where appropriate). The ongoing costs were so high that the likely earnings “margin” above what you’d get from a simple cash investment was in most cases small and sometimes negative. What’s more, these shoppers were taking on significant investment risk because they were advised to have at least 40 percent of their investments in shares.

This is consistent with what we’ve found about the long-run performance of balanced managed funds in the past. They rarely do better than six-month term deposits – and that’s without the extra costs of holding these funds inside a “wrap platform”.

What managed-fund providers and financial advisers don’t take into account is New Zealand’s relatively high interest rates. This is a structural feature of the Kiwi economy commented on by the OECD and the IMF – and it makes us unlike other countries. So term deposits here (apart from those with poor-quality finance companies) have been able to hold their own against managed funds. This means there’s a high annual-returns “bar” that the funds have to leap, before they can add investment value.

Managed funds and financial advisers have been able to get away with the repeated mantra that “cash is bad” even though this simplistic claim can’t be justified here.