Beware of the Middle Man

A lesson we can all take from how AustralianSuper manages its investment portfolio is eliminating intermediaries where they aren’t seen to be necessary or to add value. AustralianSuper regularly invests directly in major property and infrastructure assets, removing the use of an intermediary structure and/or manager. It is also internalizing management of a significant portion of its Australian equity exposure, which will remove the cost of investment managers and reduce costs to members.

Why are they doing it? Because they can and because they don’t expect it will adversely impact on returns. You too should look to remove intermediation where it is not necessary and won’t adversely impact on returns.

The financial services industry would have to involve more middle men, and women, than any other industry. Intermediation is the name of the game and clipping the ticket is the aim of the game.

Between you and your investments/loans/insurance/money there could be only one person or a football team of people/organisations. The following is a list of common intermediaries.

• Financial planner/adviser
• Stockbroker
• Accountant
• Mortgage broker
• Insurance broker
• Banker
• Super fund
• Investment/Administration platform (Wrap)
• Custodian
• Trustee
• Investment manager

Each layer of intermediation involves another layer of costs. Some will add value, some won’t. Some are easy to avoid, some aren’t.  The hard part is to work out which intermediaries will add value for you and those that won’t.

This is where an independent and objective financial planner can play an invaluable role, as a financial planner is by nature a GP of the financial world, or at least they should be. A primary role of a financial planner is to manage your interactions with the financial world to get the best outcome for you, accessing specialist skills as required, and ensuring you avoid unnecessary costs.

If an industry super fund will provide sufficient investment flexibility and do it at a lower cost than a for profit “retail” fund then the industry fund should be used. If a client can access ASX listed securities and/or managed funds directly and is happy to spend some time and money on research and administration then they can eliminate the use of an investment/administration platform.

A good financial planner should be looking to reduce the intermediation in their client’s arrangements to only those that add value to the client, even when this includes eliminating themselves.

If a financial planner has a client they do not believe they can add adequate value to they should say so and try to point the client in the direction of someone that can. That’s truly being independent, unbiased and acting in the client’s best interests.

Disclaimer

This advice is of a general nature only and may not be relevant to your particular circumstances.  The circumstances of each person are different and you should seek advice from a financial planner who can consider if any strategies or products mentioned are right for you.