Asked who is likely to feel the heat most across the value chain, advisers say: “The one area of true value is advice; the rest is just a commodity.” Bold assertions indeed. They believe 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 called optimism bias? That is the fancy name for “I know there’s risk but it won’t happen to me.” Much research indicates that people underestimate their personal probability of encountering negative events. As Oscar Wilde submitted, 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.
In spite of the emergence in some performance-based pricing models, clients, in the main, are paying for security and trust. As one adviser put it, “that is how SJP knocks out products at 5 to 6 per cent.”
With this in mind, advisers believe 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 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.
In the emerging world, there will continue to be serious compression across the value chain. Deep, enduring value is expected, though 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, as professor of psychology David G. Myers puts it: “Success requires enough optimism to provide hope and enough pessimism to prevent complacency.”
Phil Wickednen is managing director of Cicero Research