The mutual fund companies and the brokers and dealers of today should be thinking about the landscape, services and the systems of tomorrow. They are fighting to save the past, a way of life that was never as rosy as it is painted to be, when they should be innovating and investing in the wealth management platforms of the future, a place where all investors, large and small, can indeed access and benefit from good advice.
And back to the present CSA mutual fund discussion paper:
You have to ask yourself, why is the industry screaming Chicken Little at the mere whiff of the taking away of transaction remuneration and replacing it with fully disclosed fees for service and best interests standards.
The answer is that the industry has failed to invest and innovate to provide the infrastructure capable of delivering sophisticated, lower cost, personalised advice for all investors, large or small.
They are stuck in a low skilled, low tech, labour intensive transaction return focussed business model. That is why, and that is why change is needed to move this dinosaur into the 21st century.
You would also think, after reading most industry submissions, that it was the industry and not the investor that was paying for all this distribution infrastructure.
The investor pays for the fund managers, the brokerages and investment dealers and advisors, and it is the investor that the industry is preventing from having a real say in how they pay for their advice and what advice they pay for.
It is the industry that has been taking the much better part of the equity risk premium for decades now. For many high fee products it would not be an exaggeration to say that the entire risk premium, for some time, has been transferred to the industry, via fees and transaction and other advice costs, leaving investors with the risk.
The industry does not even want the investor to know what their benchmarked performance is, let alone take responsibility for the advice.
Is it the fault of the investor that the industry has barely progressed in its skill set, its service options and its ability to distribute innovative cost effective wealth management solutions to the masses? No.
The industry has known for a long long time that it is not cost effective to service the smaller investor, to the best of their ability. The only way to make money from the smaller investor is to transact as much as possible and/or to drastically limit the time, the service and the advice.
Smaller investors are not served well by the current regime. These investors need solutions that are cost effective, that take responsibility for the integrity of the advice and that are accessible. But this would just as easily apply to higher net worth individuals as well.
Make no mistake, the industry has the ability to deliver much more cost effective solutions to smaller (and larger) investors but has chosen not to do so. As to why not? There are many reasons, none unfortunately in writing. I would suggest that one of the reasons is the hold of the distribution channel and regulation of advice within this channel. Developing advanced interfaces that would allow those with smaller sums to invest in personalised, low cost wealth management would risk overriding the broker/dealer distribution channels. It would not just be the smaller advisory investor that would migrate, but also the larger investor too, especially once the sophistication of these interfaces develop.
The industry’s arguments are not about value for the investor, or access to advice for the smaller investor, or the economy, the savings rate, or our futures. The arguments are about self interests, and the interests of a transaction led financial services industry in particular. They do not want change, they want things to stay the way they are. This is the history of the world, and the world keeps moving on and changing for the better.
To tell you the truth, the needs of the smaller investor are not complex: low cost, long term, simple asset allocation structures (taxable and tax exempt) for investment (with easy payment options) combined with simple insurance (term) can easily be provided via modern day technological prowess. This is just basic stuff.
Most advice is generic and most of the portfolio planning and management can be handled by systems (with sophisticated decision rules and assumption generation) in mere seconds, and much if not most of the communication and education can be handled interactively with appropriate systems. The amount of advisor interaction (hand holding) will be dependent on how much the investor wants to pay, but not necessarily dependent on the sophistication of the solution.
For investors with complex financial needs, these are more likely to be the wealthier who are able to afford this advice. But even here, the portfolio construction, planning and management processing can be handled in seconds (click of a button). The days of the financial advisor that transacts are soon to be over.
I am not against mutual funds. Collective investment vehicles were a great invention and still have an important role to play. But, the high cost vehicles that permeate the market place, that charge active fees for more or less indexed allocations and have high distribution costs are not efficient and do not improve investors’ chances of saving for retirement. These will go, and will need to go, and the mutual fund market as we know it will and should become a much smaller place. There is a need for true active management, but true active only exists at the margin anyway. Perhaps only 10% to 20% of today’s mutual fund market has a role in a portfolio.
The mutual fund companies and the brokers and dealers of today should be thinking about the landscape, services and the systems of tomorrow. They are fighting to save the past, a way of life that was never as rosy as it was painted to be, when they should be innovating and investing in the wealth management platforms of the future where all investors can indeed access and benefit from good advice.