'In a world of lower returns and reduced risk, shouldn't fees be lower too?' This was the question posed by Harry Morgan, Thomas Miller Investment, who acted as Chair of a highly distinguished panel of active investors and activist commentators at the Broadgate Mainland/Scottish Investment Operation's fourth breakfast briefing, recently held in the Balmoral Hotel in Edinburgh.
A panel of financial services experts spanning, wealth managers, private client stock brokers, wrap providers, an active manager and award winning financial journalist proffered very distinct views.
Colin McLean, SVM Asset Management, disagreed with the assertion that this was a world of lower returns and less risk, with a strong view that with equity markets cheap and the US economy starting to recover, there was still a clear role for performance-focused managers.
But are investors more risk adverse that they used to be? Bryan Johnston, Brewin Dolphin felt that the biggest risk was "being in the wrong asset class at the wrong time." What investors want is long term performance not observations about short term performance and to this end Bryan believes that we have the investing opportunity of the decade in equities.
Merryn Somerset Webb, editor, MoneyWeek, was concerned about how investors can identify who the good managers are: "There are a few very good active managers, but you can't know who is good until they've done the job. For an investor, that might be too late and uncertain returns bring more concern about fees." She also strongly felt that charging structures needs to be clearer and lower.
All the panellists agreed that RDR should help bring in greater transparency, and that financial education at an early age would be very beneficial, with Colin adding that he'd like to see more professional bodies taking an interest in financial education. He cited the CFA as an example for others to follow.
But the key aspect, and assistance that RDR will provide, is that investors need risk management or put another way, 'anxiety management' to stop mistakes such as selling out at the wrong time. Too much risk profiling, currently a tenet of 'suitability' under RDR may not add value - but most people want the same thing; security and making a profit.
In Merryn's view: "Everyone has the same risk profile," and "40 year old women across the nation would all have the same financial goals at heart."
She pointed to the range of websites springing up 'replicating financial advice' and suggested that for most people, this might be all they require. Conversely, David Ferguson, Nucleus Financial Group, thought that "a dearth of advice for the mass market is the big risk."
Outlining the current disparity between the number of passive investments in the UK compared to the US and elsewhere, David pointed to the fact that passive funds are unpopular among advisers in the UK because they carry no sales commission.
He added that while fees are falling across all financial services companies, over the last 30-40 years there had been "an enormous collusion against the customer." The reason for this was that there had been no real competition to challenge high fees.
The sheer amount of financial services products available in the UK was also raised as an issue, with David pointing out that the market was grossly oversupplied. With regulatory costs high and unlikely to fall, fund managers and wealth managers will see lower margins. The consequence - a shrinking industry, which will be good for the survivors.
An interesting consensus among the panel was who will win as a result of current volatility, namely boutique managers and passive funds. Colin McLean said that 'it's easier for smaller funds to perform better due to liquidity issues and the alignment of interests between investors and manager ,who has usually has his/her own money in the fund.'
Passive investments, such as ETFs might not be the industry panacea however, according to Colin McLean who countered that some products which look simple, like ETFs, can carry "very great risks". In Merryn's view however the bigger risk to investors was the current lack of transparency from more traditional investments; "[Investment companies] can't tell investors how much the investment will cost."
Perhaps then it will be market forces which, combined with increasing client awareness, ultimately bring down the costs of investing to the UK investor? In Merryn's words, "everyone will have to take a bit less so that the investor can take a bit more."
Roland Cross
Ps. At last year's event I noted that at the end that we were 'left with another sobering thought - is there another imminent financial crisis - the eurozone?' Wind forward 12 months, has anything changed?