Dave Ferguson of the Abacus hopes the days of advisers lining the pockets of poorly performing fund managers are nearing an end
Perhaps more than anything else, the massive changes we have seen in the market over the last few years have resulted in many advisers reviewing their approach to investment selection, asset allocation and such like. While some have put their faith in modelling tools and others rely more on data tables and gut feeling, the market has unquestionably moved on from the 'trust us, we're a life company' mentality of the 1980s and 1990s.
While the with-profits myth has been well and truly exploded and consigned to history, there are still large swathes of the adviser market approaching the matter of investment selection with something of a 1990s mentality.
Meeting clients' goals
The true beauty of open architecture is that it not only allows advisers to create portfolios that best meet clients' goals within their risk context, but these portfolios can also be constructed in the most efficient manner possible.
It never fails to stagger me just how much money is driven into - and remains in - poorly performing managed funds of one type or another, particularly where such funds often charge a top of the market price for the manager's so-called expertise. There is something of a structural problem in the pricing of retail asset management. Not only does the market exhibit cartel-like characteristics but, broadly speaking, the value for money is dismal.
No-one has ever been able to explain to me just why, for example, the vast majority of retail UK equity funds are offered with an annual management charge of 150bps. Even once one strips out the trail fee of 50bps often associated with these funds the residual cost of 100bps is still approximately five times the cost of an institutional fund which may be run by exactly the same team/manager employing an identical process.
Given that it is possible to buy tracker funds for as little as 10bps and exchange traded funds for c30-40bps and that the majority of the average UK equity funds look terribly tracker-like, why on earth don't advisers allocate a de cent share of the client portfolio to a passive vehicle and then try to pick up some alpha by employing a high quality specialist manager for the balance of the portfolio?
Of course while this has all been possible in principle for some time, the administrative overhead associated with such an approach has been cumbersome at best and overwhelmingly taxing at worst. Now though with the increased emergence of truly open architecture platforms, such as wraps, advisers can adopt this approach without the headaches associated with dealing with a handful of legacy providers.
I should say at this point that there is a clear distinction emerging between open architecture platforms such as Transact, and the rest of the market that is persisting with a fettered approach. Advisers should be extremely wary of constrained platforms as they offer the potential for a non-aligned party - such as the platform provider - to have an unhealthy influence over the performance of client portfolios through manipulation of the client offering. Why on earth should a good quality and capable adviser be limited by the investment beliefs of the marketing department of ABC Life Co?
Anyway, and back to the point, I expect smarter advisers to make increasing use of passive vehicles, investment trusts and specialist funds and fund managers in order to create the best possible environmentfor a client's portfolio both in terms of performance potential and cost efficiency. These are clearly linked features and the challenge for advisers is to ensure that their clients do not continue to line the pockets of mediocre or poorly performing fund managers.
Not only is this a basic requirement of financial advice I fully expect regulatory scrutiny to emerge in the form of the TCF regime. Quite how this is implemented is open to debate but I do not see how one can be considered to be treating customers fairly in a world where the client is being charged an exorbitant 150bps (say) for a managed UK equity fund that is drifting along delivering -100bps on the market each and every year. Sadly of course there are plenty of these around and the sooner this is rectified one way or another, the better.
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