Speaker Interview: Nathan Lim

ETF Stream: Everyone’s wondering what the advice industry looks like in a post-royal commission era. It’s been said that the AUM-based fee model is the way forward as it means advisors co-invested. Would you agree with that?

Nathan Lim: I would definitely agree that there is a preference for the AUM based fee model. But I don’t think you can make the assumption that there is not a place for other models, such as brokerage commissions.

Morgan Stanley has both AUM-based and brokerage offerings. Our clients work with their advisors to determine which is the right solution for their needs.

The Morgan Stanley product list is kind of an El Dorado for product manufacturers. How do you decide who gets on and who stays out?

Our approach to product selection is different for active and passive investment options.

For managed funds we require a fund to have at least two investment grade or equivalent ratings from research houses, including Morningstar, Lonsec or Zenith. If it only has one rating, then that rating must be Recommended or higher. This narrows the universe of managed funds in Australia from over 3,400 to approximately 730 for inclusion on our Approved Product List.

My team then runs a 3-part quantitative screen to narrow the list further before conducting fundamental due diligence. It is those funds that emerge from the fundamental review that are selected for our Focus List which currently has 34 preferred funds in each asset class we cover.

For passive instruments, like ETFs, our process is more quantitative. We look at tracking error versus our desired exposure, produce structure, liquidity and value for money to arrive our Focus List of 38 preferred ETFs in each asset class we cover.

I’d imagine you spend a lot of time speaking with ETF providers

It’s an area where the industry has seen strong growth and interest among investors. Whenever there is a new issue or a new product, we’re one of the first to hear. Fund managers are calling us a lot and it’s always helpful to understand developments in the sector.

ESG investing has been all the rage the past few years. Is it something your clients are clamouring for?

Clients seeking ESG integrated solutions forms part of a broader Responsible Investing strategy. At the moment it’s a smaller group of clients seeking such solutions however the growth potential for this segment is significant. I think uptake could be improved by having access to more specialised products that appeal to people’s values and are true to label, rather than taking a middle of the market approach to Responsible Investing. This may result in products that don’t fully target people’s values or don’t go far enough.

So for example we’re seeing some products claiming to avoid fossil fuels but still have exposure to oil companies. This may discourage people from choosing responsible investing products. That’s one of the real challenges we’re seeing.

Where do you see the advice industry in the next five years?

I think the big puzzle is how we can use technology to improve the client experience as well as create greater efficiencies in managing compliance and administrative requirements. There’s good reasons for regulation of financial advice but as an industry we need to figure out how it can be done in a way that doesn’t result in advisors spending more time on paperwork and then having less time to service their clients.