The price of everything, the value of nothing
Financial services should worry more about delivering value than being cheap.
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.
More from Jon Cudby
- Past habits are no defence for mistreating customers
- Pension debate must go beyond the industry
- Cognitive dissonance undermines our ethical values
- Pension versatility should be exciting, not frightening