The evolution of asset management: observations from the US

Wealth Management & Private Banking

19 July 2016

Wealth Management & Private Banking

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A Meeting of Minds Wealth Management & Private Banking June 2016

Experts:Lorna Robertson and Gavin Ward, Invesco

 

 Key message

Alongside robo-advice, the other major theme developing in the US is the debate around active versus passive investments. The overwhelming majority of investment professionals struggle to beat the benchmark consistently, which is adding to passives allure.

Exchange-traded funds (ETFs) are one investment product which is helping to move investors towards a passive environment.  

 Headlines

  • There are commonalities in the US and UK, but ultimately, investment performance boils down to two key aspects, fear and greed.
  • Estimates suggest that in Europe, there is approximately one trillion dollars in ETFs, which puts Europe ahead of the US at this stage in the evolution of the space.
  • The preference of investors to choose passive funds means investment houses can focus on other aspects of the investment process for differentiation. 

 Key themes

The first key trend in the evolution of asset management from active to passive began with the introduction of the first ETF launched in the US in 1993 and 2003 in Europe. In many ways, ETFs were the first and most successful FinTech disruptor as they brought asset diversification and investment risk management disciplines in a single wrapped product.

The subsequent growth of the ETF market has come from three distinct areas: new money allocated to it, new client books tending to be ETF oriented and strategic asset reallocations from individual equity holdings.

“In many ways, it’s like football. It’s very difficult to find the Ronaldo’s and the Messi’s, although they do exist. However, investors are coming to view that it’s increasingly difficult to beat the benchmark both before and after fees, consistently. ETFs offer an opportunity to share in market returns and mitigate much downsize.”

One aspect worth considering is how in the past, ETF’s have struggled to be integrated into some firms’ investment platforms. In fact, ETFs used to show up as an equity holding at one large US-based institution. As a result, relationship managers and clients were being warned about being overweight on equities, despite these products offering far greater risk management and asset diversification opportunities.

Yet what, initially drove conversations in the US and the subsequent trend towards ETFs was performance. Fees tended to become an amplified issue in times when investment performance was weak.

“If you start an investment conversation around fees, you’re in the wrong spot. The real question should be ‘What are you trying to accomplish in your portfolio?’ Then go from there.”

ETFs are cheap and pragmatic as a way to get to where clients want to go, as such the question often gets asked, ‘why would you pay for an expensive and often underperforming human when your portfolio can be automatically updated through changing the underlying holdings in an ETF?’

There are some theories that despite the original intention of the retail distribution review to regulate the IFA and advice space, it may well have hurt asset managers more. Ultimately, the person who owns the client relationship holds the reins.

But this doesn’t mean to say that IFAs can move further up the value chain necessarily. Unless they are prepared to outsource money management, tension may well develop.

“The industry’s challenge is that it currently asks advisers to do two things: manage money and people. There is conflict baked in to it. RDR in my view, is the clarifying moment which should be forcing advisers to choose which they would rather do.”

Some advisers concurred with this opinion and felt that ETFs made value propositions much cleaner even if the client relationship evolved a bit as a result. RDR has increased transparency and so people know what they’re paying for along the value chain. In this context, under-performing investment managers need to justify every basis point charged.

Of course it’s not all plain sailing as there are key questions about the suitability around ETFs for clients.

Finally it is worth considering that though there has been an explosion in ETFs, there has been no correlated reduction in the need for advice. On the contrary, if you were starting an RIA today, while you could outsource significant aspects of your business, you’d still be the person responsible for the goals-based investment conversations.

And while ETFs were helping to move the needle on active to passive investments, the other elephant in the room, technology and robo, are continuing to disrupt the marketplace. In that sense, although this trend continues to develop, the wealth management space in the US, contrary to popular belief, is no further ahead than the UK or Australia, based on the tools available.

 Conclusions

ETFs represent an opportunity to focus on client service rather than asset servicing. In doing so, advisers have a chance to go further up the value-chain to offer advice around life goals investing and wealth planning – areas which provide significant value add and enable clearer differentiation in the marketplace.

This will mean that providers of ETFs and other investment solutions will need to continue to develop distribution channels, building strong relationships with advisers and bring down costs to access them. This is good news for the end-client but represents a real challenge for the industry long-term.

 

 


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