Active managers are under fee pressure from all sides, with the Financial Conduct Authority’s (FCA) asset management market study deeply challenging their value proposition. Cheaper alternatives have also performed relatively well, such as passives.
Disintermediation has closed in on managers as advisers use middle men to run their investment propositions, meaning their customers are increasingly bulking them for better fee deals. Whether you sit in the ‘feel sorry for them’ or ‘it’s about time’ camps, there is no doubting the trajectory of their fees.
Advisers, in some contrast, have held their line on fees and some have even increased them over the same period. Should they be next in line for a challenge on fees?
The cost of advice is slowly edging higher than the cost of active management, and we are being asked: how can advisers rival the value add of an active manager, when the active manager employs banks of research analysts across the globe and fund managers with decades of experience picking stocks? Is the value proposition of the adviser greater than that of the active fund manager?
Overlap in value
There are certainly some overlaps between the value propositions of both. Each tends to charge fees as a percentage of their client’s underlying investments, and so the ongoing revenue models are largely equivalent. Fund management and financial advice are also intellectual capital endeavours, meaning their revenue is highly reliant on individuals and their cost base is mostly made up of staff remuneration.
But as business models they are vastly different, easily seen by referencing some basic industry statistics. According to the recent FCA Financial Advice Market Review, the number of financial advisers in the UK who advised on retail investment products in 2016 was about 35,000. Contrast this with the roughly 7,400 people employed as fund managers and research analysts in the UK – according to the Investment Association’s Annual Survey 2016 to 2017. This is a ratio of around 5:1, the number of advisers per fund manager/analyst in the UK.
We expect that this ratio is higher because many fund managers run money for non-UK clients, and the term analyst captures so much more than an analyst informing fund management decisions. But whatever the correct ratio, it tells us that fund management is exponentially more scalable.
We work with quite a few advisers and it is eye-opening how frequently they are in contact with their clients, whether face-to-face, by email, letter or over the phone. Besides being a trusted confidant in all sorts of personal issues related to the client, the volume of specific advice queries and related administration seems relentless and the associated paperwork quite overwhelming.
Scalable alternatives such as call centres or automated servicing just will not work; clients often expect one-on-one attention. Their margins are also tight. For example, we seldom find offices with signs of excess and few have the wallet for centralised functions like compliance or reporting.
Fair and decent living
It feels to us as though advisers, for the most part, earn a fair and decent living. We are not suggesting that active manager’s do not. But to equate their professions, and therefore their value propositions, is not reasonable in spite of the similar cost to the end client.
Active fund managers are in the business of delivering excess returns and their offering is a scalable product. Financial advisers, in quite stark contrast, sell a non-scalable service, rather than a scalable product. In our experience, they are mentors, coaches and financial advisers to their clients and need to deeply understand individual clients’ needs and have a personal, hands-on relationship with each.
Are their fees too high, on average? If you looked at their margins rather than their revenue, we suspect you would conclude they do not have too much fat in their fees.
Rory Maguire is managing director of Fundhouse
