There is constant discussion on how much choice should be given within the range of long-term savings products available within wraps such as Isas, life bonds and pensions. Choice is available on a number of levels – investment providers, funds and alternative investment solutions.
The first reason why choice is important seems to be built around the need for competition to deliver top-class investment products. No efficient investment market could be delivered in a mature economy such as the UK without a number of investment houses offering a number of products each.
The availability of choice is essential to feel confident that an efficient industry exists. Competition encourages value-for-money products which deliver real value to investors over time.
We need a choice of active and passive managers, packaged solutions and individual building-block funds, regional and global funds as well as structured products. Only with these choices to hand can we meet a range of customer needs with differing risk tolerance.
Within this context, do we have the optimum product solution? I think I can confidently say it is good to have a number of fund houses each delivering multiple offerings to the market. However, can investors and advisers choose effectively from such a broad range of products? Here, I think we have the makings of problems and solutions within the current UK set-up.
There is no doubt that to study the full range of fund houses and their product ranges is a complicated task. An effective research function which allows advisers to do whole-of-market research is essential. However, there are some issues in the current market which seem to get in the way of effective delivery of this research.
I think the solution lies in a number of developments. The consolidation of adviser firms could help to bring scale to the research function. It seems sensible for any adviser to recognise the need for sufficient resource to research the market. If a business lacks scale, it has a choice between merging with other firms or buying in or outsourcing this function.
In addition, some more modern solutions are emerging and the growth of multi-manager funds would seem to be ideally placed to help address this challenge.
Effective multi-manager solutions tend to be provided by firms which are able to dedicate enough resource, skill and expertise to deliver the full initial research capability as well as ongoing monitoring and control. As these multi-manager offerings are built around scale assumptions, there are inbuilt economic advantages for advisers and clients.
Multi-manager solutions seek to build propositions on a best-of-breed basis. The research, selection and monitoring process is built into the proposition and hence advice is embedded within the fund selected. Managers and funds can be rebalanced, changed or added to within the proposition.
This does not create chargeable events or switching costs for the client while the adviser knows the client’s interests are looked after by experts. The adviser can spend less time on research or monitoring and more time meeting clients.
Trail commission structures would seem to give all parties the best possible outcomes. Clients benefit from lower initial charges and knowing that advisers are incentivised to give initial and ongoing advice which is aligned to produce the long-term outcomes they want. Advisers know that good initial research and selection combined with ongoing service and performance will provide a secure and growing revenue stream to their business. Fund houses know that good mediumto long-term performance will be rewarded with retention of business assets.
It seems that having a full range of fund houses, funds and alternative product solutions available is essential to secure efficient markets. At the same time, this range of options makes it onerous to make informed decisions. These issues can be dealt with by increasing scale within advisory firms, through a move from initial to trail commission and through the enhanced use of multi-manager solutions.
Robert Noach is head of UK financial institutions at Schroders.