Sometimes I long for the much simpler investment landscape of 30 years ago. You knew that Old Mutual agents distributed products manufactured by Old Mutual Asset Managers and Liberty representatives sold products by Liberty Asset Management. Exchange controls were tight, so there was no point in researching international asset managers. It was a short value chain offering the choice of a few vertically integrated product providers. The main issue was that endowment policies were favoured over unit trusts due to high upfront commissions earned.
When independent brokers came into the market — now more grandiosely styled as independent financial advisers — there was the opportunity to get a wider range of products from a single source. It was realistic to expect the broker to be knowledgeable about the handful of product providers in the market. It was certainly a core competence for advisers to keep up to date with the latest of these products, just as doctors keep up with the latest antibiotics.
The best advisers, such as NFB and Citadel, still have dedicated investment departments which keep in touch with the investment landscape out there. But an increasing number of advisers rely on the proliferating breed of discretionary fund managers (DFMs) to build their portfolios. Yet many clients assume this is the main service that they’re paying for when they go to advisers. It is rather like going to a law firm and finding out that it is simply a front office that passes on all its legal work to another company.
DFMs build increasingly complex model portfolios (what used to be called wrap funds) with dozens of specialist managers, instead of practising split funding between the top balanced funds, which is the simplest solution.
Victoria Reuvers, head of Morningstar Investment Management, says it makes sense for advisers to outsource specialist areas of financial planning such as portfolio construction, freeing the advisers to focus on more generic financial planning advice.
But for most advisers their core competence is sales, and they are more than happy to be spoon-fed the investment options.
Cheaper options
For both DFMs and linked investment platforms, the adviser is considered the client, not the ultimate asset owner — you or me. This explains why the number of business-to-consumer transactions remains negligible — far fewer than in short-term insurance, say. Few platform websites are friendly to consumers, while their apps, if they exist at all, are somewhere in the technological stone age. Still, there are cheap business-to-consumer options to be found, such as Outvest, which uses cheap CoreShares index funds as its backbone. And EasyEquities, which is increasingly the preferred alternative for investors, is now 50% invested in low-cost exchange traded funds (ETFs).
Reuvers believes there is no pressure on advice fees, and argues that consumers will continue to tolerate giving away 1% a year of their portfolios indefinitely.
Yet surely the growth of EasyEquities is proving that wrong. In fact, why not simply cut advisers out of the food chain entirely?
As index funds become more popular, we need to ask what will happen to the adviser and DFM industries. Their implicit promise, after all, is that they can help you pick the best active asset managers. But investors are already rebelling against the complexity of overengineered model portfolios by snapping up ETFs instead. The real casualty here is that, as index funds need scale, there will be little room for niche fund managers.
*This article was modified on November 22, to further distinguish Reuvers' view from the writer's comment when it came to the value of financial advice.
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