You may not have noticed this article Playing Fund Manager amid the wave of news that is published every day courtesy of modern media. Very often, it is the small items that begin to herald the change that appears obvious with hindsight. The article does not go in to great detail, or even suggests that it is plotting a path for the future of financial advice and investment management. However, what we think it does do, is hint at the direction of change and the logical path of that process.
If you look at the big economic picture from cotton to trains, shipping and communications all industries experience some form of premium returns which are eventually superseded by cost and efficiency innovations. The financial advice and investment intermediation process is no different. We are continuously seeing the cost of platforms and access to markets being chiselled away either through technological innovation or scale and consolidation of processes.
Attempting to retain a market position based on cost or process efficiency is extremely difficult. If for no other reason that the owner of today’s cutting edge technology is the same person that will have to overcome the cost of replacing a legacy system in the future.
It is ownership of unique knowledge that defines long term success, look at Coca Cola and KFC with their secret recipes. However, failure to address inefficiency of costs and processes is a sure path to terminal decline.
In the absence of the consistent growth and performance of the 15 years running up to 2008 the emphasis of investment performance has turned to cost control removing pressure on investment growth. Therefore what we are now seeing is probably the deferred implementation of efficiencies of the past decade driven by the faults of the industry highlighted by events running up to and including 2008.
Across the industry there are efficiency drives to bring down cost averages and highlight specific advantages of one service over the other. This process is continuous in each of the individual services that an adviser chooses to deploy, whether in-house or outsourced.
However, managing the cost burden does not lie in the individual service providers but increasingly in the manner that the adviser chooses to coordinate or combine services. The article in IFAonline is a reference to this process. If the IFA is inclined they can bypass mutual funds in favour of a trading package from a brokerage house.
To quote them directly:
“Advisers are now able to build, run and trade share portfolios as actively as a fund manager – but with trades costing as little as 50p, a fraction of the usual cost, a firm has said.
Discount broker Clubfinance said IFAs using its Frequent Trader service to buy 50 shares and make 60 share deals in a year – the Lipper average for an actively-managed UK fund – could save hundreds over a mutual fund.”
Surely, it makes sense for a client to have their IFA at the coal face making money for them? After all it is the adviser that understands their risk appetite and tax situation. The client will naturally want to close this gap between adviser and investment manager to reduce costs.
It is inevitable that you must choose service providers in order to keep up with the demands of the business. However, the key to success is what you hold close and what you pass on. The article indicates that advisers can already manage assets more directly. This would seem to contradict the general process of outsourcing investment services that advisers appear to be keen to do at the moment.
From our own experience since setting up in business we have been told at times that investment decision making and general asset allocation are “dangerous games” and too time consuming when faced with the other elements of the business of dispensing financial advice.
However, it is increasingly evident that the more inclined individual can secure execution only investment and even “bite sized” financial advice online as indicated in this review by Mark Polson.
Faced with all of these possibilities it is clear that the market will fragment in an entirely different manner to that of the past. It is how you manage your role in this process that will determine whether you evolve and thrive or suffer the attrition in fees that all industries experience when knowledge becomes process.
The real question is can you apply your own unique skills to the wealth of information and data that is available to make yourself, if not indispensable, at least highly valued by your client. Your success will be derived from where you place yourself in the advice chain and how you control costs on behalf of your client.
We think advisers will inevitably be drawn to the asset allocation and investment management role where their ability to manage investment intermediation on behalf of clients will be understood as a skill rather than a process. On the other hand the cost overload and the people that it will affect are those that fail to combine customer service and investment intermediation effectively by allowing the value to be delivered elsewhere.
This will be evident in decisions to outsource investment management and effectively add extra layers of service providers or on the other side finding themselves hitched to processes that limit market access and extend the time for execution of client decisions.
Long Term Value Lies in the Delivery of Your Knowledge
We use a combination of our proprietatry knowledge and data management to construct and deliver our reports. In fact, we are taking steps to further develop this aspect of our business (more later in a separate item). However, we are very clear that embedded at the heart of the process is our unique methodology for identifying and exploiting price trends across asset classes, markets and industry sectors.
We have always been confident that this statistical edge is what makes us different from many other providers of analysis and “free” research that has a limited shelf life. Like all business, our day to day activity remains a continuous process of improving the delivery and accessibility of this edge to our target market.
We don’t think that you can maintain an effective business model as a financial adviser or investment manager without having a very clear view of your investment methodology and its application on behalf of your clients.
Once you have decided what your USP is and where it lies in the chain, it is a case of continuously developing the service that ensure it is delivered to your clients while passing along the cost efficiencies of the process.