As an Outsourced Chief Investment Officer (OCIO) for high-net-worth families and individuals, I get to help my clients assess all the investment ideas they get from their network, including other advisers, private bankers, stockbrokers and even friends. My job is to deeply understand my clients and their needs and to always defend their best interests. Last week I wrote about a hedge fund investment which was, to be kind about it, ‘massaging’ their performance figures (you can read the post here). As it turned out, not only was the depiction of their performance “rubbery”, their fee structure was so conflicted that I thought it deserved a second post.
To be clear, this investment was put forward by another adviser but the things they forgot to make clear were:
(1) There was a 2% placement fee direct from the client’s initial investment direct to the adviser. Not only is this a conflict, but it puts the client’s investment 2% behind before they even start.
(2) There was a 2% management fee that was split by 1% with the adviser and 1% with the investment manager. This is a massive conflict of interest. The adviser always has an interest in keeping you in the fund, regardless of if it is right thing for you or not. For me, this was the deal breaker.
Furthermore, when I see fee structures like this, I wonder what is wrong with the investment. Why do they have to pay so much to the adviser to get funds flow? In my opinion, if the fund was that great, they would not give up half their management fee.
It is true, conflicts occur all the time. They need to be disclosed and managed. Technically, this was disclosed, but it took a fair bit of digging by me to find it. In my business, I avoid conflicts of interest wherever possible and disclose conflicts clearly to the client when they cannot be avoided. I defend my independence fiercely. This means that my clients have the opportunity to make decisions on a proper basis. I wish the rest of the advice industry would do the same.
Kind regards,
Shelley Marsh
Outsourced Chief Investment Officer (OCIO) & Founder
Wealth Differently
General Advice Warning: Wealth Differently holds an Australian Financial Services licence to provide services to wholesale clients only. The information on this website is only for persons who are wholesale clients as per s761G of the Corporations Act. The information includes general advice which does not consider your particular circumstances and you should seek advice from Wealth Differently who can consider if the strategies and products are right for you. You should also understand that past performance is often not a reliable indicator of future performance and should not be solely relied upon to make investment decisions.
Wealth Differently Pty Ltd AFSL 547820.
