Feb 25

Investment Fees…room to trim (wonkish)

When a financial adviser gains a investment client, on an ongoing basis that client pays fees for 3 main services/providers…

  1. Financial Adviser
  2. Investment Management…typically a fund manager
  3. Platform…for investment administration and reporting

There can always be a fair amount of debate as to what the true margins are, particularly given some of the vertically integrated companies might be a little creative in some transfer pricing between the above businesses. However, with IOOF Holding releasing their half yearly results today I thought I’d take a peak at their margins for each of these businesses to see how they stack up.

IOOF’s financial advice businesses include such brands as Bridges, Ord Minnett, and a few more; their investment management brands include their Multimix diversified funds as well as Perennial…both active managers; whilst they have numerous platforms businesses that include IOOF Pursuit, Lifetrack and more. Each of these businesses are substantial and relatively mature so their margins should be a reasonable indicator for their respective sub-industries…

…So what are the margins for each of these substantial businesses?

  1. Financial Advice – 0.23%
  2. Investment Management – 0.26%
  3. Platforms – 0.69%

Whilst I’m sure my logic here is not exact, I’m also sure that many in the industry will not be surprised to see platforms having the biggest margin of all.

In this current environment of continued regulatory change, increased fee transparency, and clients and advisers looking to save wherever they can, there’s no doubt many platforms have reduced their fees but there’s also little doubt that there is some way to go. These large margins are why there are so many platforms in the market…despite the rhetoric, they can survive on relatively low FUM.

BUT…lets not forget those high fee charging managers who have a LOT of room to move…and there are two that always spring to my mind. Firstly because they charge the highest fees and secondly because they are very popular (of course…good performance too). They are Platinum and Magellan!

Every adviser’s favourite long/short global equities manager, Platinum Funds Management recently released their half yearly report…and for the half year Platinum’s investment management revenue was a respectable ~$130million (excluding performance fees and admin fees)…however their total expenses over the same period was just over $21million…resulting in a profit margin that to me borders on way way too much..i.e. 84% (and don’t forget I excluded performance fees).

Every adviser’s more recent favourite global equity manager, Magellan, isn’t too much different. Like Platinum, they charge the big fees and now they’re reaping the rewards…management fees of $59million and $18.3million of total expenses resulting in a profit margin of 69% (excluding performance fees).

Of course, everyone is happy to pay the big fees if the returns they deliver are big also…and there is no problem there (although both Platinum’s and Magellan’s flagship global equities fund unperformed their benchmark over the past year (to 31 Jan) but when you still return 39%…whoopy do!). Either way, lets hope these massive profit  margins that are highly unlikely to go away soon, don’t change the focus of the portfolio managers from managing our client’s money to spending their massive wealth. If they don’t perform…there’s not necessarily any need to withdraw your money…but definitely ask for some lower fees!

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