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Oracle: Mifid pressure on adviser charges
For every £100 of IFA advised savings invested into a mutual fund, only about £97.70 gets a chance to grow. There are many mouths to feed: the active fund manager (usually 0.9 per cent ongoing charges figure), the stockbrokers (via transaction costs in the fund of about 0.25 per cent a year), the wrap platform (usually 0.3 per cent) and the cost of independent advice (about 0.85 per cent).
This is set to go up. The Mifid investment requirements are onerous, from an IFA’s perspective, encouraging a renewed wave of investment delegation to managed portfolio services and discretionary fund management providers. On average, this would add a further 0.3 per cent to the food chain, reducing the £100 of client savings to £97.40 after these costs.
Value for money
This creates a substantial challenge for end-customer value for money. Value for money, as a customer sees it, is the added return and service being received from this for the 2.6 per cent annual cost. Put another way, if they pay 2.6 per cent in costs they should expect more than £2.60 of value for every £100 they invest, otherwise there is genuinely no point in them doing it.
This may seem rather obvious. Yet, we find ourselves in a world where inflation is low, robust real economic growth is no longer the norm, yields are at historic lows and returns look set to be low from bonds and equities from these inflated market levels. Before adding any value, where do you find a 2.6 per cent return these days, after inflation, just to break even?
It is easy to see a world where clients go one step forward in returns and two steps backward in costs and inflation. This equation could have profound implications on end savers and our industry over the long term.
One remedy is passive investing, where costs can be meaningfully reduced. Mifid’s cost spotlight makes this tempting.
But when asset prices are high, we fear the use of passives. Besides the risk to the downside that buying market returns presents today, when prospective returns are low, excess returns can be powerful.
A 1 per cent excess return a year, when the market delivers 3 per cent, is far more significant than if the market was delivering 10 per cent a year. As an aside, I am a fan of passive investments, just not at the moment.
Aggregators, such as vertically integrated firms and networks, are also gaining ground. Putting aside any potential conflicts, the large assets under advice of these firms drives scale in investments, platforms, model portfolios and advice. All of a sudden, we are starting to see some very reasonably priced offerings from this sector, like a free model portfolio service. This sort of price disruption by the large asset aggregators is only set to continue in my view. Mifid is only going to speed this up.
This pressure point, where rising costs and regulation intersect, is likely a central driver of the future landscape of our industry. It seems likely that cost pressures will favour those who increasingly own more of the food chain.
This might place IFAs at a competitive disadvantage to more tied distribution models, which can reduce costs through a cross subsidy of services across the entire food chain.
One way IFAs can regain pricing power is via fund platforms. We are yet to see fund platforms, which aggregate a significant proportion of investor savings, take advantage of their scale by seeking institutional fee rates for their adviser base. This seems to be the one area where substantial cost savings can be made. Perhaps the FCA’s platform review will yield this benefit because independence should be preserved, rather than priced out the market.