This month I want to talk about the function of technology in our industry at a base level, and about what this does – or should do – to costs. And no, by ‘at a base level’ I don’t mean by the use of fart gags, although that might not be a bad idea.
Fundamentally, the story of technology is one of aggregation and automation. Jobs that we used to do are parcelled up together and done with less, or no, human intervention. The end result, supposedly, is that goods and services reduce in price, humans spend less time on drudgery, and humanity’s quality of life inches its way towards tolerable.
Of course, all this is a very long way away from children in free-trade zones soldering their fingernails into phones so we can take better pictures of yummy cupcakes, but such is life. It’s also a very long way away from the situation in which we find ourselves in retail financial services in 2017. I’ll explain.
A false dawn?
Our industry operates sort of as an inverse of Moore’s Law. Moore, as you may know, posited that the number of transistors in an integrated circuit would double every two years or so. That’s more or less a rule of thumb that computers will double in processing power every two years, and usually goes with an assumption that a given level of computing power will get cheaper over time.
To put it another way, the computer chip in your washing machine is considerably more powerful than the 4K machines which sent Apollo 11 to the moon.
Financial services has, of course, benefitted massively from advances in computing. After all, without the awesome power of mainframes and later developments, we’d still be phoning up providers, hoping they could locate paper trails and give us a valuation which wasn’t hopelessly out of date... oh.
It strikes me that the more technology we introduce into retail financial services, the worse things get. Not only worse, but more expensive. This says little about the technology itself, of course, but plenty about the people and companies who introduce it.
With my marketing and copywriting hack’s hat on, I’ve written plenty of blurb that extols the virtue of people and technology working together in blissful harmony to provide you as advisers with exceptional service, and so on.
Actually, the tech is hardly ever the issue; it’s always good people who really give a company the edge. A £200m piece of middleware is no match for a call centre operative with 10 years’ experience who knows how to skip between systems at subatomic speeds.
The cost equation
Let’s think of a typical retail advised proposition. We’ll use a £250k fund, a wrapper mix of 50 per cent Sipp, 25 per cent Isa and 25 per cent general investment account, add together core platform costs, wrapper administration charges and assume investment in a 10 fund in-sourced MPS with quarterly rebalancing to correct a 2 per cent drift, and an adviser charge of 0.75 per cent.
Custody and administration: 0.34 per cent (average), portfolio total expense ratio: 0.87 per cent (average), adviser charge: 0.75 per cent, and total: 1.96 per cent.
This is a completely vanilla proposition, which ignores hidden trading costs inside mutual funds. We regularly see propositions considerably more expensive than this – 2.25 per cent is very common.
The thing is, there isn’t a single part of this tripartite glorious dance of ‘total cost of ownership’ death that doesn’t have technology all over it. Platforms are all technology. Fund management companies are the same.
Adviser firms still have an element of meat-sack requirement, of course, but there’s plenty of tech sitting behind it all. How come we are still charging 2 per cent?
Actually, the word ‘still’ there is misleading. I remember the fury about stakeholder pensions and their 1.5 per cent charge cap, dropping to 1 per cent, and given how old we all are I bet you do too. For many clients of many firms, 1 per cent all in would seem like a birthday present.
So what gives? What’s going on? The answer’s slightly different for each participant in our little example above.
Platforms and providers
Platforms and providers find it hard to make money at all. This is mainly due to a) not being very good at doing the basics right; b) overpaying massively for large tech programmes by underestimating – every time – how hard it will be to re-platform or change technology and c) over-specifying their kit to the extent that a huge amount of what platforms can do sits around unused. And yet we still build more.
It’s interesting that the last six months has seen six changes to pricing in the advised platform space. Transact cut its price by 1 basis point and Nucleus trimmed its top-end pricing. Everyone else that made a change put their prices up, or mixed cuts and increases in such a way as to increase core charges for most clients. This represented pretty much a reversion to the mean; the industry clustering ever closer to that 0.34 per cent figure in just the way that the life companies used to do.
Fund managers
I can’t even. I mean, where do we even start?
Adviser firms
This is really interesting. There is more tech available to firms than ever. But no-one ever taught advisers who specialise in advising – how to buy technology, let alone how to stitch different systems together to drive efficiency.
As a result, we have seen adviser charges creeping upwards over time, but little sign of firms becoming more profitable as a result. Regulatory change is of course a cost driver, but I’d lay a decent size bet that if most clients saw how inefficient the tech is in their adviser firm, they’d be stunned.
One firm we looked at recently – and this isn’t a joke – uses a back office system and a platform, which talk to each other tolerably well (in our opinion). The practice manager has the administrators double keying all data – once into the platform, once into the back office – because he doesn’t trust the integration. His logic? If it gets screwed up and we’ve typed it, we know where the problem is. If we haven’t, we don’t know whether to shout at the platform or the back office – and you can bet they’ll blame each other.
What’s distressing is that this isn’t a daft approach. There is something in our sector that resists efficiency. Restricted firms – who should, logic dictates, charge less than independent firms – are no more efficient or lower cost than their unfettered cousins. Vertically integrated firms, who should pass on the efficiency benefits of not having to worry about looking outside the host organism – sorry, parent company – are some of the most expensive around.
The next year will see huge shifts in the adviser market with consolidators and new-model networks really picking up pace. New entrants – notably Vanguard – will offer ways of investing, during the accumulation phase at least, for less than 0.5 per cent all in.
Meanwhile, the rest seem to be rolling the dice and hoping that the clients of a sector which is limping along in a technological sense are so bedazzled by their 25-page smudged client valuation report that they don’t vote with their feet.
I spot a flaw in that plan. Let our reaction, then, be not to fight about shaving a few basis points here and there (although that is good fun), but to work out how we can use the kit at our disposal to really remake how it all works.
As a friend of mine says: ‘don’t do things better – do better things’.
Mark Polson is principal of platform and specialist consultancy the lang cat
