The Hidden Wealth Transfer in Investing – The Human Side of Money presented by Client Care

Much has been written about the intergenerational wealth transfer currently taking place, where assets flow from one generation to the next. However, another equally significant transfer occurs every day, often unnoticed: the transfer of wealth from investors to asset managers.

Many financial planners mistakenly see their role as only picking funds for clients, acting more like asset managers than holistic advisors. The truth is that this approach often detracts far more value than it adds, with asset managers becoming the primary beneficiaries. While the most successful asset managers achieve respectable returns, it’s their marketing strategies that often attract clients, creating brand loyalty rather than focusing on actual investment performance. Investors often remain unaware of how their returns compare to the market or what portion of their wealth goes to fees rather than their own growth.

One baffling aspect of the industry is how asset management fees remain static even as fund sizes grow significantly. For instance, a fund managing R1 billion might charge a 1.5% fee. Years later, when the same fund has R5 billion under management, the fee remains unchanged. This defies logic. In most industries, larger volumes typically result in discounts, but in asset management, the opposite holds true. Additionally, as funds grow larger, their investment options narrow, reducing their ability to capitalise on opportunities and diminishing potential returns.

Despite these challenges, fee pressure disproportionately falls on financial advisors rather than asset managers. Studies show that skilled advisors can add up to 4% annually in value through proper financial planning, but this fact is often overshadowed. Many asset managers, meanwhile, fail to consistently meet their performance mandates while charging fees that escape scrutiny.

This isn’t to suggest that all asset managers are problematic. However, investors must align their long-term investment strategies with their lifestyle financial plans, crafted with a capable advisor. By doing so, they can ensure that their wealth serves their goals rather than inflating marketing budgets. Choose wisely and make sure the wealth transfer benefits the people and priorities that matter to you.

Dirk Groeneveld, Certified Financial Planner.