“The one area of true value is advice – the rest is just a commodity.”
This is a bold assertion, indeed, from advisers regarding who is likely to feel the heat most across the value chain. With client fees moving south of 2 per cent and the advice fee around 1 per cent, advisers believe that it is fund managers and platforms that will bear the weight of downward pricing pressure.
But how much of this expectation is rooted in something boffins call “optimism bias”? That’s the fancy name for: “Yeah, I know there is risk but it won’t happen to me.”
A lot of research indicates that people underestimate their personal probability of encountering negative events. As Oscar Wilde said: “The basis of optimism is sheer terror.”
Intense competition, outsourcing and the growth of passive strategies are increasing client and adviser price sensitivity and making it harder for fund managers to sustain inter-brand differentiation, for sure.
The days of promising and delivering a 20 per cent return for clients are well and truly over. Now, more than ever, clients are paying for security and trust (“that is how SJP knock out products at 5-6 per cent initial commission” as one adviser put it). As such, advisers believe that advice propositions based on ongoing investment advice are likely to come under further pressure, with only those business models founded on financial planning (with deeply embedded relationships) less vulnerable to price sensitivity.
Views on cost are shaped, in large part, by the increasingly accepted view that it is impossible to find consistently outperforming funds. More advisers have rejected (and are rejecting) the theory that “better advice” is active fund management. Many are coming around to the notion that better advice is “buying the market”.
Yet there is always plenty of opportunity for differentiation even in the most commoditised markets. As the saying goes: “There are no mature products, only mature managers.” Fund manager and platform marketers must (and will) use their imagination.
In the emerging world (according to advisers) there will be serious compression across the value chain. Deep, enduring value is expected although only in the advice fee. Basis points will come down on both tax wrappers and fund management with the momentum towards passive investments likely to continue. There may be some value-adds in alpha but they will be few and far between.
Much of this is true but the rosy picture painted by advisers feels a touch too neat. Back to my point on optimism bias. To quote psychologist David G.Myers: “Success requires enough optimism to provide hope and enough pessimism to prevent complacency.”
Phil Wickenden is the founder of So Here’s The Plan