Money Matters: Parties, profits and fair returns

By MARY HOLM

Q. I read your column with interest. However, nothing will ever persuade me to invest in managed funds again.

I know too well, from articles I have read, that the fund managers are living it up on the proceeds of investments.

When I had unit trusts, there was always an excuse why they were not doing well, yet the directors and managers always took their cop (high salaries, fringe benefits, big parties) and the investor got what was left (if anything).

That is also why I will not buy shares, because the directors and others cream off the fat.

I will always stick to property, where I have control and I have bricks and mortar to show for my money. I also have a roof over my head, or someone else's head.

I am quite prepared to bear the ups and downs of the property market. At least I can drink my own champagne and not be subsidising fund managers' parties.


A. Fair enough. As long as you don't object if you find yourself sipping the cheap stuff while investors in shares and managed funds enjoy their Moet.

It's true that, somewhere across town, the directors and managers of their investments might also be getting stuck into some pretty high-class bubbles. But should that affect investment decisions?

Many people seem more worried about what someone else is getting than about what they, themselves, receive. It's a type of jealousy. And it's not very fruitful.

I'm not saying its okay for the people who run investments to live high off the hog, particularly if their share or fund isn't performing well.

That sort of behaviour should be challenged, and sometimes is. Generally, directors and managers don't last too long if their performance is notably worse than others running comparable investments.

But if an investment performs well, does it matter much if the people who run it are well rewarded? Indeed, shouldn't they be?

In your case, you obviously haven't been too impressed by the performance of some unit trusts.

It might be that you didn't stay in long enough. Any fund that holds shares or property will go through periods of low or even negative returns. Often, investors who stick in there are rewarded when things come right - although that may take several years.

But it's also true that some funds invest badly and/or charge high fees. And if you get into them via some financial advisers, you pay even higher fees. These can really eat into returns.

I still say, though, that many managed funds with lower fees can be good investments. They give you broad diversification for much less hassle than going into a lot of separate investments.

Over time, too, shares or managed funds holding shares usually bring higher returns than property.

Lots of research has been done on this. Recently, for instance, Armstrong Jones calculated that $1 invested in 1956 in residential property would be worth just over $25 in 1999, not a lot more than the $20 in six-month term deposits.

In the much-maligned New Zealand sharemarket, it would be worth almost $207, with reinvested dividends. And in overseas shares, it would be more again.

We should note, though, that the property calculation doesn't include rental income, because the researchers were looking at owner-occupied property.

If we included rent, the property return would increase. Still, you would have to get a handsome rent to match the performance of shares, especially after allowing for rates, insurance and maintenance - to say nothing of the time most landlords put into rental property.

Keep in mind, too, that with one or a few rental properties you are much less diversified than in a share fund. That means you are taking on more risk.

So where does all this leave you and your properties? Perhaps not doing as well as you might do, especially after taking risk into account.

But then you do have the comfort of bricks and mortar and roofs over various heads - all the cliches the real estate industry loves. It's your choice.

Q. As the marketing manager of New Zealand's largest unit trust manager, and also the largest provider of services to financial advisers, I was disappointed at the generalisations you made with respect to financial advisers in last weekend's Herald.

Several points: I agree that advisers don't add any value in day-to-day investment decisions. Good advisers also recognise this. They add value by helping clients set and run long-term financial strategies designed to achieve their lifestyle requirements.

If an adviser assists a client to accumulate a substantial amount of capital that they would not have otherwise accumulated, then the client should be willing to pay for that, irrespective of whether they achieved any investment return.

The concept of monitoring fees being measured against investment value-added is flawed.

I am sure you are aware of the study that found that the average investor in a US mutual fund over a 10-year period returned minus 2 per cent, while the fund actually returned 12 per cent, because investors instinctively buy high and sell low. Averting that sub-optimal behaviour is the value of an adviser.

Our investor turnover for advised clients is around 8 per cent, while our turnover for unadvised clients is around 25 per cent. That is the value of an adviser.

We have more than 15,000 clients who are advised by financial advisers. Our customer feedback from that client base is overwhelmingly positive.

Despite your best efforts, investment is complex and often counter-intuitive. The vast majority of the population needs advice.

No one in the advisory business that we are currently aware of is making super profits ...

New Zealanders need encouragement to save and invest. In our view, the vast majority would benefit from the services of a good financial adviser. Despite your cynicism, we can assure you that there are plenty of them out there.


A. Perhaps you're right. Perhaps I tend to hear more about people's bad experiences than good ones. But, believe me, there are lots of worrying stories.

That aside, you make some good points and some I would quibble with.

I agree with you that linking fees to investment performance probably wouldn't work, although it's a pity.

One problem is the period over which you judge performance. A good long-term portfolio might do atrociously in any given year.

But I don't think the common way of calculating monitoring fees, as a percentage of money invested, works well either. Generally, it takes the same amount of work to handle $1000 as a $1 million.

Why can't all advisers do what a few do and charge fees on the basis of hours worked, in much the same way as most accountants and lawyers charge?

I also agree that, to the extent advisers are telling clients to hold on to their investments rather than trade them, that's great.

But people don't actually need an adviser to learn that. For one thing, I say it repeatedly in this column.

Also, you must admit that some advisers do the opposite, encouraging clients to move in and out of investments so that the adviser picks up fees en route.

Your research suggests this isn't common, and I hope that's right. I suspect, though, that your findings might also reflect the different personality types of those who use advisers and those who don't. Many "advised" clients are probably buy-and-holders anyway.

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