There are more discussions on costs just now than I can remember at any time, writes Brendan Llewellyn.
Debates rage on the cost of fund management, of discretionary management services, of platforms, of the cost of advisory services. Cost conventions are being questioned, although a better question would be – why did such conventions last so long?
When costs are fixed either formally or by convention it isn’t really a good sign; it indicates a lack of real competition. It indicates protectionism. Commission conventions implied a commoditised advisory service, which is not and was never the case.
For example, 3% and 0.5% from one adviser might be great value, but from another it might not.
As the post-RDR world gradually reveals itself, every firm in all parts of this sector will have to think whether its biggest cost, invariably people, is commensurate with investor or client revenues.
The sector has enjoyed relative immunity from price competition partly because price itself has been so difficult to nail down. With greater transparency this should start to change, but it won’t be easy.
Where in the world?
There is no common agreement as to how we should measure the price of funds, to take one obvious example. In what conceivable universe would the annual management charge (AMC) not represent the cost of management expressed annually? This one, apparently.
So we move to another measure – total expense ratio (TER). But even this isn’t unequivocal so we have total cost of ownership (TCO). Personally, I think the idea that costs should also include the costs of dealing is unhelpful. As an investor, I would expect dealing costs to be reflected in fund performance but I don’t think a fund with a more active style of active management should carry higher explicit costs. But, we don’t need cost or price conventions – but we certainly do need conventions as to what price is.
But what does a more open, transparent price competitive market mean?
It should mean that real talent will get its just reward. It should also mean that companies or individuals that cannot command a decent price will have to try harder or find a different kind of job. In other words, the market will do its job more effectively if price is nice and clear.
Nothing to fear
But we do tend to wax a little paranoid over price. The phrase “a headlong rush to the bottom” pops up whenever price competition is raised.
Horror is expressed that a consumer might seek a cheaper adviser. The wider retail world seems to manage to compete on price without rushing to the bottom. John Lewis ran with “never knowingly undersold” for many years without even approaching the bottom. Last week in Harrods (just browsing), I heard a chap negotiating successfully over a TV system. Nothing wrong with that.
Conversely, I was walking along New Bond St in comedy pricing land and concluded that the default pricing strategy there was to be never knowingly oversold – a headlong rush to the top, you might say.
This is also a strategy worth thinking about in this sector, if not quite so brazenly. If an adviser can command three times the hourly rate of another, why not? If in doing so he appeals, New Bond St-style, to the deepest of pockets then again, why not?
If a fund manager is a star, a big red supergiant star, and the people will pay him 3% AMC, or TER or TCO or whatever, then that’s the right price for his services.
If I had a pound for every time I’ve heard some provider in the financial services sector say “we don’t seek to be the cheapest, but we do aim to be there or thereabouts”, I’d have, well, about £16.
Come on down… the price is right (isn’t it?)
The problem with that sort of half-thinking is that it appears to relegate price to the role of embarrassing uncle. Now, of course, we are all much more comfortable talking value or quality.
But let’s allow price onto the table – it doesn’t have to be tacky.
The only price competition we should fear is that borne out of a failure to understand the value or benefit of a product or service leading to the dreaded “they are all the same so you might as well buy the cheapest”.
We know of course that they, whatever they might be, are not the same. There are few true commodities in any market and certainly not in the financial services world.
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