FOR UK FINANCIAL ADVISERS
Cost conscious – delivering quality while managing costs
03 Sep 2020
Balancing price pressure while delivering a quality investment proposition is a familiar challenge to most Financial Advisers. But the current focus on value for money feels like there’s something new in the air. So what’s the context of the current focus on costs? We’ve identified four main themes.
Of course, there have been periods of volatility, but generally returns have been strong since the 2008 Credit Crisis. That’s thanks to a combination of factors like cheap money, cheap labour and low inflation. But looking ahead, returns are becoming more challenging; the prudent Financial Adviser may be wise to expect lower returns than we’ve been able to take for granted. When returns reduce, costs automatically become a bigger proportion of the overall return and that means they’re subject to much closer scrutiny.
From responsible investment to patterns in retirement ages, the FCA’s remit is wide. No prizes for guessing that fees are also in their sights. They’re particularly interested in the metrics Investment managers use to evidence the value for money they provide: quality of service, fees and performance. Historically, profit margins have been high and it seems clear that the FCA feels fees can be reduced to benefit investors.
There’s mixed evidence on the overall – net of fee - value active management brings. In Morningstar’s active/passive barometer it showed that only 43.8% of active UK large cap managers outperformed the index in the first half of 2020, despite many active managers claiming market volatility is when they would come into their own.
The market has exploded, particularly in retail. It’s not just new entrants, there are plenty of new products too, from different index tracking options to factor investments. Choice and competition are good for investors, partly because they drive down costs – and the new entrants emphatically compete in the cost space. That doesn’t mean quality suffers though; a ‘quality product, competitive fee’ approach is perhaps the new entrants’ trademark. This trend is set to continue, particularly as more traditional products like institutional pension funds reduce over time and managers seek revenue elsewhere.
The consumers’ view
Fees really do have a big impact on outcomes. We used our Sustainable Income Tool to run a couple of different scenarios and we found a difference of 60bps made a huge difference to our fictional investor, to the tune of an extra £1,000 income pa for life.
The view from Hymans Robertson
So what’s our view? Fees and costs do make a difference – but is possible to achieve a well-defined investment strategy, with a diversified approach to implementation at a reasonable cost. Don’t hesitate to contact me if you’d like to discuss this further. You can also catch up on the replay of our recent webinar on how to deliver a quality investment proposition while managing costs to find out more about our approach.