We use cookies to improve site performance and enhance your user experience. If you'd like to disable cookies on this device, please see our cookie management page.
If you close this message or continue to use this site, you consent to our use of cookies on this devise in accordance with our cookie policy, unless you disable them.

Close
In association with

Home > Opinion > Jon Cudby

The price of everything, the value of nothing

Financial services should worry more about delivering value than being cheap.

By Jon Cudby | Published Sep 24, 2012 | Your Industry | comments

The ubiquitous austerity culture has a lot to answer for. We’re all “in this together” and tightening our belts and that’s all great. But surely it’s enough to apply this penny-pinching philosophy to our weekly shop, cutting back on holidays or how often we fill the car.

Sadly the approach seems to have pervaded all corners of financial services too.

From investment fees to insurance premiums to pension management charges, increasingly the focus is on cost. That’s fine, but there is a growing danger we are becoming so obsessed with price that we omit to look at value and what you actually get for your money.

The most obvious place we can see this is investments, where a by-product of the impending RDR has been an increased focus on passive funds. This shouldn’t be a bad thing; there is and always will be a place for a tracker as a hedge in a balanced portfolio, but they seem to be becoming the focus of what advisers do.

By definition trackers will not outperform their peers, so they have to undercut on cost. A resulting downward pressure on charges has led to TERs of 0.09 per cent. This headline-grabbing figure garnered huge amounts of publicity earlier this year, despite the cost being the fund’s only eye-catching feature.

There is a growing danger we are becoming so obsessed with price that we omit to look at value and what you actually get for your money

But this publicity is backed by demand. The renewed focus on charging and transparency has pushed advisers, terrified of having to justify the cost of active fund management, towards passive funds.

Active funds are more expensive than passive, but calculating whether they are worth the extra expense involves a fairly simple equation: the return needs to outweigh the cost. If active managers are not beating the market by more than their fees, you would be better off with a tracker. Admittedly this is an easier judgement to make with the benefit of hindsight, but choosing the most appropriate active funds is where advisers should be able to differentiate themselves and add value for clients.

Up front, a low-cost option might be an easier sell, but at the other end, when looking back on stellar growth that has been missed, the conversation will be less straightforward.

Even if an active fund has underperformed, if explained properly at outset the client should accept this. I would rather my investments were trying to return a profit irrespective of what the market is doing, not just blindly following the FTSE (which is also no stranger to crashes).

The obsession with cost is by no means restricted to the investment world. Since auto-enrolment was first mooted, all the scrutiny seems to have been on what Nest and its competitors will charge their members.

Underfunding retirement has long been an issue and now something is being done. Auto-enrolment is by no means a perfect solution, but it is a solution. We should be celebrating the fact that individuals, who for years have done nothing, will now be doing something before we start getting picky about how many pennies they are paying for the privilege.

Page 1 of 2

COMMENT AND REACTION

Our Columnists

Hal Austin

Hal is editor of Financial Adviser and has been for more than a decade. He has previously worked on a number of local and national publications.

Ashley Wassall

Ashley is editor of FTAdviser and writes on all areas of retail finance. Previously supplements editor at Money Management and editor of a European private equity publication.

John Kenchington

John is editor of Investment Adviser and has written about investments for several years. He has worked at titles including City AM and was recently named in the MHP 30 To Watch list of up-and-coming media names.

Tony Hazell

Tony is a freelance financial journalist, having been editor of Money Mail at the Daily Mail for a number of years. He has been writing a column in Financial Adviser since 2005.

John Lappin

John is a weekly contributor to Investment Adviser with 15 years’ experience in financial journalism and 10 years writing on the IFA sector. He was formerly editor of an IFA trade magazine.

Most Popular
More on FTAdviser
FTA jobs
  • PARAPLANNER

    Location: Horsham, West Sussex

    Salary: £30,000 basic + bonus (OTE £50,000)

  • Financial Planner

    Location: Cheshire

    Salary: To £36,000 + Car (BMW or Mercedes) + Benefits + Bonus

  • IFA

    Location: Cambridge

    Salary: £55000 - £75000 per annum