If you were asked to identify one word that sums up the driving force within our industry, what would it be?
For me, the word is trust. In all parts of financial services, the basic premise is the same. If your clients trust you, they will stick with you. Treat them with respect, celebrate their victories, guide them through the tough times and appreciate how difficult it has been for them to build up the financial assets that you are investing for them.
Let’s cut to the chase. How can you determine the monetary value of trust? Ensuring a balance between price and value is the basis of any good business model. What value do you place on your time, years of experience, qualifications and knowledge?
Few would disagree that we all want to see an industry which conducts itself in an open, transparent and professional manner. However, we must be careful not to damage our industry irrevocably by driving pricing down so low that we can no longer provide a good level of service.
We all aim to provide investors with top-performing funds that are also value for money. It is, however, a reality that pricing pressure within our industry will continue to force businesses to re-examine their investment strategies and fund pricing models.
By 2012, fund management businesses such as ours will find it difficult to continue charging initial fees within an industry that is consolidating on such a massive scale. Future revenue models will have to prepare for these changes within an industry increasingly using admin platforms such as wraps as a mechanism to meet their business management and TCF requirements. Fund management businesses are going to have to adapt to the new ways advisers are selecting and using specialist investment solutions, often with risk profiled or pre-defined portfolios. This is likely to affect the way that annual management char – ges are priced and the way commission and platform fees are charged.
So if we determine that the revenue models are likely to change, then so will the servicing models. A reduction in revenue from initial charges and a significant percentage of the annual management charge being paid out as commission to advisers or rebates to platforms leaves significantly less margin in the product to provide sales and sales support staff across the industry. The interpersonal relationship between an adviser and their investment consultant could become a thing of the past.
But is this not a people’s business? Do we want to see a depersonalised industry taking clinical decisions based solely on statistical analysis? Some would argue in favor of this approach, preferring to select funds based on an analysis of the past rather than taking account of global change and economic evolution. We believe it makes more sense to embrace change while greed and fear are human emotions that cannot be guided by a black box understanding the dangers.
Greed and fear drive our markets. These are human emotions that cannot be interpreted by a black box. Although computing power has made it possible for us to process an enormous amount of data instantaneously, they are merely tools. There is no substitute for experience and human intuition.
Knowledge is power and the balance of power regarding global consumption is moving East and with it the opportunities to make money. But companies listed all over the world are benefiting from this shift. By taking a global view on company research, we believe we can unlock opportunities potentially missed by more traditional analyst models. Consolidation in sell-side analyst firms is resulting in less sectors and stocks being analysed. As a consequence, it is likely that those fund managers who only use external research may be missing out on opportunities. This is where having our own research team adds value to our investors and, importantly, the potential for significant outperformance of the market over the long term. All of this comes at a cost.
Fund management companies need to be run as businesses with a strong profit agenda while providing value for money. What is most important is that the value they offer their investors must be enhanced and maintained. If the current downward pricing pressure on all mutual fund products continues, we risk destroying the industry we are working so hard to develop. This is a fine balancing act that, if managed properly, should continue to bear fruit for all parties involved.