In discussions about post-Brexit Britain, the City understandably looms large. Financial services is one of our biggest exports. But just how much value does it actually add? On the face of it, the value appears to be substantial. According to PwC, the financial sector employs 3.4 per cent of the UK workforce, generating 6.6 per cent of economic output and 10.9 per cent of total government tax receipts.
But UCL professor Mariana Mazzucato says we are missing the bigger picture. In her book, The Value of Everything, she explains how the difference between value creation and extraction has become increasingly blurred.
This allows certain actors in the economy to portray themselves as value creators, while in reality they just move existing value around, or even destroy it.
By charging high and opaque fees, Mazzucato argues, asset managers extract more value than they add.
Worse, they destroy value by encouraging excessive pay and prioritising short-term gains over long-term investments. Paul Woolley from the London School of Economics made a similar point in a recent Financial Times article.
He wrote that the majority of asset managers are following strategies that destabilise asset prices and promote short-termism, which not only undermines the shift towards sustainability but does untold damage to the macro-economy.
It is no longer just academics debating this subject. In a recent paper, Baillie Gifford partner Tom Coutts wrote: “The industry itself creates little of value. It is a facilitator; a lubricant for the economy.”
Another dissenting voice is former Fidelity director Charles Payne. Interviewed for my blog, he remarked: “If you live your life in the financial echo chamber, then what you are charging doesn’t appear excessive compared with other parts of the industry; but when viewed from the perspective of the rest of the economy, sustained margin pressure is inevitable.”
It is hard to disagree with Payne’s contention that profits will be squeezed. In its report on competition in asset management in June 2017, the FCA said average annual profits were 36 per cent, around three times the average for the rest of the UK economy.
There will undoubtedly be job losses. UK asset managers currently employ about 38,000 people; my guess is that number will be cut by a third or more over the next few years. Salaries and bonuses will also fall.
Statistician Chris Sier recently recalled how his income shot up when he left the police to work in asset management.
He said: “As a police officer, you’re dealing with people’s lives and seeing some terrible things … Then I came to the City and I had no line responsibility, was just fiddling with numbers, and my salary nearly doubled overnight.”
Industries that don’t provide genuine value for money will get found out. For asset management, the great unravelling is only just beginning.
Robin Powell is a journalist who blogs as The Evidence-Based Investor and runs Regis Media. You can find him tweeting @RobinJPowell