The increased focus on the cost of an investment is having a number of unintended consequences for clients, a multi-manager investment veteran has claimed.
Gary Potter, who manages £3bn of multi-asset funds at BMO, said “it is always right” that advisers work to ensure the costs paid by the end client are appropriate.
However, he warned the regulatory scrutiny that began with the introduction of the Retail Distribution Review, which required advisers to disclose the cost of the fee the client is paying, has led many clients to focus on the cost of the investment product, rather than suitability, and this could come to haunt them further down the line.
This will lead to worse investment outcomes for clients, he warned. He said: “I think what has happened is that clients have been presented with the costs, and in some cases not been happy. This has led advisers moving the client into multi-asset funds that invest in passives, or other passive products.”
He said the policies pursued by global central banks since the financial crisis have suited passive funds and multi-asset strategies that invest in passives.
Mr Potter said: “A sort of loop has been created. Low interest rates have boosted certain types of stocks. Those stocks have gone up and so become a bigger part of the index. So the passive funds buy more of them; as a result the stocks become a bigger part of the index, so the passive funds buy more.
"But that can’t last forever, and when it does change, when the market starts to favour the more value-type stocks, investors will be in the wrong products, but the lower cost ones.”
As FTAdviser previously reported, data from Schroders shows January was the third worst month for 20 years for value funds, relative to growth funds.
Mr Potter added: “The number advisers are aiming for is 2 per cent. In the era before RDR the client didn’t know the cost, and while looking at the costs is good in many ways, it does lead to these outcomes that aren’t necessarily always going to be positive.”
Paul Stocks, investment director at Dobson and Hodge in Doncaster, said: “It all very much feels that cost is currently being seen as ‘the be-all and end-all’ whereas the reality is much more subjective and, purely from an investment sense, net return after all costs/fees is what really matters.
"I’m broadly neutral on fund costs as I feel that the true bottom line is net returns and the total cost to invest (i.e. adviser, platform and funds) – we also believe that there are active strategies which can deliver above average, net of fees, performance over the medium to longer term.
"Obviously there’s a lot of vocal coverage of passives (and we do use passives as part of our portfolios) however I feel that in certain aspects it’s due to us having to be defensive to being challenged on portfolio costs."