Founder of investment and retirement research consultancy FinalytiQ and author of ‘Beyond The 4% Rule’, Abraham Okusanya, said in a tweet last week that the average multi-asset fund cost was approximately 1.15% per annum compared with the average ongoing charge for advice of 0.8%.
The tweet said: “If an adviser recommends clients pay more for investment management than they charge for financial planning, what does that say about how they perceive their own value? Advice is infinitely more valuable than investment management, therefore adviser cost must be more than product (platform + funds) cost.”
In a separate tweet, Okusanya said fund managers don’t seem to recognise this as they continue to “price funds higher than advice” but questioned why advisers continue to indulge them.
Speaking to Portfolio Adviser, he explains: “If you are an adviser and you have control over what the client invests in, why would you put them in something that essentially, disadvantageously, says that this part is more important than what I do?”
Okusanya says asset management is not personal and is instead “a scale business”, and for the most part, “an area very hard to demonstrate skill at”.
An adviser’s role on the other hand is personal and involves considering the client’s goals, their risk, recommending a portfolio for them, managing their tax, building a cash flow plan and being there when the market actually goes down to “hold their hand”.
He says: “If you are an adviser, what is the justification for putting clients in products that are expensive, which don’t deliver much value but instead, imply that those products are more important than what you do. How can that be less valuable than the product you’re recommending?”
However, gbi2 managing director Graham Bentley argues that the annual management charge, based on what the manager actually gets, is closer to what an adviser gets at 0.75%. “A balance of the ongoing charges figure goes to audit, custody etc, so it’s less than advice.”
Fund managers make too much money
According to a search on Glassdoor by Portfolio Adviser, the average fund manager salary is £63,221 compared with £32,591 for a financial adviser.
Darren Cooke, chartered financial planner at Red Circle Financial Planning, says fund managers “make too much money, their profits are high, and you only have to look at the money they can spend on marketing, sports sponsorships etc”.
However, he argues that unless advice firms can find a way to come together and have a large amount of money to influence costs through economies of scale, it will be difficult to change this.
“The problem is the fund managers are huge and the advice firms, even the biggest, are tiny by comparison, so we have no leverage to force the fund managers to lower their fees,” he says.
“The likes of SJP can do that and some of the other very large restricted businesses, but they tend to use that power to get better rates which they then keep internally and do not pass onto the client. The problem is those huge advice businesses then have huge costs of management themselves.”
Advisers hold ‘incredible power’
But while Okusanya agrees that asset managers are overpriced, he strongly disagrees that advisers have no leverage.
He believes the answer lies in advisers opting for lower cost products, which will force asset managers to rethink what they do and who they serve – and essentially see that costs need to go down massively.
“To be honest, I think we’re telling asset managers to do this but I think advisers hold the control. Advisers with the click of a finger can move from an expensive product to a cheaper product, especially in this category for the multi-asset fund.
“Advisers are the gatekeeper; the clients do what the advisers recommend. It’s an incredible power that I wouldn’t underplay, scale or no scale.”
Pressure on asset managers
Yellow Financial Planning chief executive and chartered financial planner Dennis Hall agrees with Okusanya and chooses low cost funds from firms like Vanguard and Dimensional.
“When I saw the figures on the Mifid II disclosure documents sent to clients, by far and away the biggest cost was me,” he says. “However, even if I was recommending funds with the median cost of 1.15% that wouldn’t be an invitation to increase my costs to 1.16% just because I considered myself more important than the asset manager.”
Hall adds that the flight from active to passive would probably be less if active managers reduced their costs, such as some Vanguard active funds which have relatively low costs.
Likewise, Cooke says the industry is starting to see the move to passive investments have an effect on active management costs but it is slow.
Okusanya adds: “There is slow gradual pressure mounting up on asset managers, not enough for us to call it an instant transformation, but it’s certainly happening.
“Asset managers have a choice, it’s a matter of time, where cost will have to either go down or they will eventually find themselves out of business.”
No personal touch
Based on research by FinalytiQ, Okusanya says the cheapest product he found was Blackrock Consensus which is about 19 basis points and Vanguard Lifestrategy which is 22 basis points.
“Our research shows that the vast majority of multi-asset funds don’t do any better than what we call a ‘no-brainer portfolio’ of just equity and bonds. If you just have global equity, global bonds and rebalance annually, you’re going to be something like 95% of this multi-asset fund, on a risk-adjusted basis over any time period.
“We looked at this over one, three, five, 10 years – the same thing applies.”