James Coney  

Love of passive is blind

James Coney

James Coney

Judging by the influence Vanguard has had on the investment industry, the company’s potential launch into financial advice could be the greatest shake-up of the sector since the Retail Distribution Review.

When it comes to passives, clearly there is a split in opinion among the adviser community. Based on my Twitter following, most financial advisers think the lovers of passive funds are blinded.

The view seems to be they have been lulled in to a sense of security by 12 years of rising markets and are now 100 per cent exposed when the market does fall – and it will. 

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It is hardly surprising that most financial advisers are active management advocates, with a belief that only a good manager can protect your returns from a storm.

Whatever your position in the active versus passive debate, there is little argument over the downward pressure Vanguard has applied to fees.

Its greatest achievement is not in taking billions out of active and into passive management, but in forcing price changes across the industry.

I do not believe that this is for one minute the result of unbundling of charges or of Mifid.

As far as ordinary investors are concerned these changes have been meaningless.

For more than a decade before the onslaught of Vanguard the consumer press tried to argue for lower fund charges, pointing to the dramatic reduction in yield over time.

The argument back then was that ordinary consumers did not care. 

But then came Vanguard and a voice from inside the industry that talked about costs and charges – and it practised what it preached.

And what do you know? Once consumers were able to get a grip on costs, it turned out they did care after all.

Financial advisers should take note of this pattern.

I am afraid to say that I do find the industry complacent and unwilling to acknowledge its own failings.

That is a generalisation, I know, and there are good individuals, but as a whole the industry is poor at analysing where it can improve, and too quick to reject criticism.

Should Vanguard come in with a low-cost, flat-fee advice model, as it has in the US, what would that mean for financial advice over here?

Last week, new entrant Bancroft Wealth announced a single-cost advice figure, and was met with large amounts of disdain from advisers (again, those that popped up on my Twitter feed). 

I happen to agree with the assessment that there is no way a company can offer a low flat fee and whole-of-market advice and financial planning. The problem is that many companies are currently very bad at setting out the value from their current model. We have been here before.

If you do not know the true cost and do not fully understand the service you are getting, you cannot tell the value – and financial advice has a value problem. Vanguard has been very good at showing where it can add value in a market. When it arrives, shake-ups normally follow.