Chris Gilchrist: Middle of the road fund managers face extinction

Chris Gilchrist 700

When I started in the financial services industry, all the big retail fund managers had direct relationships with investors. The biggest – M&G and Save & Prosper – had hundreds of thousands of savers and investors and their helpdesks dealt with scores of calls from them every day.

Fast forward to the days paper certificates began to die and fund supermarkets started. Fund managers faced a choice: develop their own platforms enabling investors to hold and trade funds efficiently or let others take over the relationship. The industry chose a muddled middle by trying to develop joint platforms, which, in some cases, turned into capital-destroying, reputation-shredding blundernauts.

The bosses of fund management firms earned fat bonuses and share options for profits they delivered by skimping on investment in their own businesses. But since platforms have taken over relationships with customers, fund managers have become price takers rather than price makers, with nasty implications for profitability. Only Fidelity has held onto its customers – at a cost that makes UK rivals blanch.

So, under threat from steady downward pressure on management fees, what can fund managers do? Given how high retail profits are compared with institutional, you would think you might want to try harder to hang onto them. That means disintermediating advisers.

Step forward M&G, re-entering the retail world with a direct-to-consumer digital offering. Would that be like the one JPMorgan (the former Save & Prosper) folded last year? No, of course not. Designed by FNZ, M&G’s service will be more like what we can expect from Aberdeen once it has used its cheque book to deploy the technology from its recent purchase: digital award-winner Parmenion.

And these will not be the last. Fund management bosses will pay lip service to the IFA channel but will continue to slash the cost of supporting intermediaries and cast about for ways of reducing their vulnerability to churn. Most such defensive strategies will fail. A few disruptive digital ones will succeed but only by taking over most of an adviser’s role in terms of risk profiling, asset allocation and fund selection.

Advisers deliver most value to clients in planning, prioritisation of objectives, tax optimisation strategies and personal reviews. It will be some time before robo progresses from its KFC diet to consuming this Michelin-starred lunch. Advisers can add value through asset allocation but only if they are prepared to abandon stochastics (any old robo can take me for a Monte Carlo spin) and use judgment to take tactical tilts away from a strategic allocation validated by history. And they can also add some value through fund selection.

I expect fund management to barbellise. On the one hand, we will have more concentrated, unconstrained equity funds – a trip back to the 1970s with “gunslinger” fund managers. On the other will come more tramlined, formulaic absolute return-type funds aiming to crank out steady returns. Many supposedly active fund managers – and a lot of clever-clog smart beta funds – will die in the middle of the road.

Chris Gilchrist is director of Fiveways Financial Planning

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Good article Chris.

    Your reference to stochastics is noted and I agree with you on that, but it does imply that advisers have to step away from just following the market. You have previously said that market timing is impossible, so how do we reconcile the two views now if active management is the way forward, as I agree it is?

    • Chris Gilchrist 4th July 2016 at 4:24 pm

      The best fund managers don’t time the market. I think low turnover is one good selection criterion for active managers. ‘Masterly inactivity’ is a key skill of good active managers, cf Nick Train.

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