Work cut out for advisers to add value

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Advisers will need to start putting in the hard yards to show true value to their clients when it comes to fund comparisons.

For the first time, Russell Investment’s After-Tax Survey shows four quarters’ worth of after-tax results. What the results show is that there is a greater difference between pre-tax and after-tax returns than most advisers and investors think, says Raewyn Williams, Russell’s director of after-tax strategies.

“There has been, I think, this unspoken assumption to date that the difference between pre-tax investment outcomes and after-tax investment outcomes is not meaningful, it’s not mature and it’s not worth focusing on, but nobody has really bothered to measure that or check whether that underlying premise is correct,” says Williams.

She says that the survey has proved that assumption wrong, and if advisers want a better set of data that’s more accurate to clients’ needs, then they need to base decisions on after-tax return outcomes.

Advisers are well placed to do this work because they generally have to understand the tax profile of their client, and apply that profile to different investment strategies to get better outcomes. Williams says that matching those two is better practise for advisers and not something that is always done at the moment.

It is not necessarily the fault of advisers however, as fund managers don’t typically make after-tax investment returns available, and it may take a bit of work from advisers to push managers for the better information. Williams encourages advisers to seek out those that are prepared to provide the right numbers.

“There are the ones that dumb down the issue or push back completely on it. From the advisers’ perspective they shouldn’t think that that’s the only option. There are a few fund managers out there, as this survey shows, that are willing to work with these advisers.”

And whether the tax side of things will fall under TASA is still a pertinent issue, says Williams, but she says that most advisers have probably formulated their own position as to what they can advise on or not.

“My understanding is that a large number of those financial advisers see that they really have to give the tax advice as well as the financial advice – it doesn’t make sense to carve that out – and if they’ve done that, as most of them will have, then licensing doesn’t come into it. This is just a way of making sure they practise fully what they’re licensed to do across the full opportunity set for their investor.”

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  • James Smith on 19/09/2013 9:55:03 AM

    Interesting that the heading Advisers Will have their Work Cut Out Adding Value is used to describe an article on the after tax performance of fund managers. Is the author insinuating that advisers don't understand this ? Or is the author insinuating that all advisers do to add value is choose fund managers ?

  • Ben CFP on 19/09/2013 10:36:07 AM

    To James Smith: James I think what it shows is that unfortunately, like most clients, the author only believes adding value comes via higher returns. Obviously saving tax, reducing fees, meeting lifestyle, maximising Centrelink etc are not adding value. Like usual greed in respect to returns is at the forefront of people's minds. Sad really.

  • Pat on 19/09/2013 11:59:06 AM

    Perhaps you can re-read the preamble and see the phrase "...when it comes to fund comparisons". The article is specifically focussing on fund comparisons; not meeting a client's broader objectives or other matters that an adviser considers and on which they add value.

    To paraphrase: the research shows that advisers, like clients, do not focus on the after returns generated by funds, but on the pre-tax, headline returns. Further, this is not aided by fund managers reporting pre-tax returns and trading without keeping the tax effect in mind. One of the many problems of actively managed funds.

  • GAB on 19/09/2013 4:41:13 PM

    It's a very important issue, particularly if you are gearing into the sharemarket and looking for some sort of tax relief at the same time. Deductible loan interest nullified by a rather large and unpredicted CGT distribution....ouch.

    Mind you...who does margin lending anymore anyway.....that strategy has now been replaced by gearing up property in SMSFs....but that's another story.

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