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November 04 newsletter - Editor’s Note – the Shape of Money stopped providing financial advice in April 07

Over the previous month, we've been treated to a cat fight between respected members of the financial services community: Dr Gareth Morgan (Economist and Investment Portfolio Manager) versus the industry representatives Vance Arkinstall (Head of the Investment Savings and Insurance Association) and David van Schaardenburg (Chairman of Fundsource).

The charges and counter claims are, in our opinion, sufficiently serious to merit discussing them in this month's newsletter.

We found that there were valid and important points from both sides - even if they were delivered in the tone of jilted partners who had just gone through a particularly bad break up.

It's important to realise that all the parties have something to gain by investors believing their point of view. As a further point of disclosure, the Shape of Money recommends managed fund products developed by Mr Arkinstall's members, and we purchase research from Fundsource to assist in choosing products and fund managers.

We believe that the most important claim made by Dr Morgan in his recent three-part series in the New Zealand Herald was that investor returns, by investing in managed funds, were being "gouged".

If that's true, why does the Shape of Money persist in using managed funds?

If we take fixed interest investments as an example, the Shape of Money doesn't have the resources to research the credit risk of the many debt issuers that would be required for an appropriate level of diversification, and nor can it predict interest rate movements. These and other factors may impact on the eventual return of your fixed interest portfolio.

But there are fund managers who are very good at analysing and understanding these influences. We use Fundsouce research to help identify those managers who have consistently outperformed the market and who are likely to continue to do so in the future.

There are many poor performers in the managed fund industry. This has been demonstrated by the likes of Consumer. However, we believe that we have identified a small number of very good managers.

The following expenses were seen by Dr Morgan as not "ideal":

1) Tax inefficient vehicles

Dr Morgan correctly argues that the managed fund products are tax inefficient. We accept this, but believe the funds we recommend produce a return that is still superior, due to diversification and the application of proven skill sets, to that which could be achieved if we attempted to use other investment options. As a post script, the Minister of Finance announced plans a few days ago to remove this inefficiency by 2007.

2) Entry fees

We absolutely agree - so the Shape of Money does not charge implementation fees.

3) Planning and on-going management fees

We disagree, and believe that very good financial advisers fully justify their planning and on-going management fees.

Financial advisers offer more than just investment advice. If your idea is to get "rich", don't waste your time with a financial adviser. Instead follow the advice of Buffet and Kiyosaki, which includes ignoring diversification - a basic tenet of sound financial advice.

The counter claims to Dr Morgan's assertions were, in part, based on the value that financial advisers offer. The following is offered by the Shape of Money as part of its financial planning process. Not all financial advisers are born equal, though, so check out Sorted and Consumer for their advice.

  • Our fees and commission are always disclosed in full.
  • We do not charge implementation fees on managed funds.
  • We charge a fee for the financial plan. Because we earn a fee, we are not dependent on selling a product to earn commission - we have already earned our money. This allows us to recommend direct shares and residential property if applicable.
  • The financial plan is holistic. It covers asset allocations, risk profiling, insurance needs analysis (including independent product solutions), retirement and estate planning.
  • We purchase and use third party research.

The on-going fee, charged directly to the client or paid by commission, is used to fund annual reviews with clients which help to ensure:

  • That a client's financial plan is still relevant and consistent with their personal goals and objectives,
  • That we can provide guidance during both the "good" and "bad" investment times, which helps to manage the twin emotions of greed and fear, and
  • Rebalancing and changes to the asset allocation as required.

You haven't heard the end of the war of words from the financial services industry. The advisory industry is young and immature. This is no more obvious when we witness the warring parties refusing to acknowledge the obvious truth in an alternative viewpoint.