It’s exciting to see evidence-based investing starting to grow fairly quickly now in the UK, the Netherlands and Germany, but it’s frustrating that, elsewhere in Europe, it has hardly made in-roads at all.
One country where active management and conflicted advice still rule rule the roost is France. So, why is that? And will it change? I asked the Paris-based consultant and investment blogger Philippe Maupas for his views.
Tell me about your business, Alpha Beta Consulting. What exactly do you do?
I am a consultant on fund-related issues. My clients are asset managers and fund distributors, and I help them address issues that affect the industry globally — essentially how to get ready for a world of evidence-based, lower-cost investing, where it is widely expected from all players to place investors’ interests first. I do also blog at alphabetablog.com and I must confess, Robin, that you are one of the people who were instrumental in my starting blogging, along with the Ritholtz gang (Barry Ritholtz, Josh Brown, Ben Carlson, Michael Batnick and Tony Isola).
You’re a strong advocate of low-cost, highly diversified investing. How did that come about?
Very slowly. I started my career in the business and financial media industry at the end of the 1980s, then became CEO of Morningstar France in 2001. I was very much playing by the prevailing rules — in other words, active management is good and can outperform. I started questioning the gospel after completing the CFA Program in 2007. With its strong emphasis on ethics and on the fiduciary duty owed to clients, it led me to dig deeper and deeper into academic research, to read Vanguard’s impeccable research, to discover fabulous evidence-based bloggers and to become quite naturally an advocate of low-cost, diversified investing.
Evidence-based investing seems to be growing very slowly in France. Is that your experience? And if so, why do you think that is?
Yes, the growth is very slow. What are the main reasons? Fund distribution is still very much controlled by banks and insurance companies and the bulk of it takes place in a life insurance wrapper where the distributors get a commission on the underlying funds’ management fees; their motivation to promote low-cost index funds is therefore very limited; the overall level of financial education is not very high and there is no pressing need to improve it, as we don’t have any pension funds like in the USA; and surprisingly, fees are not part of the conversation between advisers and their clients.
One of the reasons, in my experience, why indexing has been relatively slow to take off in Britain is the influence of the media and the trade press. Is it the same in France.
The business and financial press is not as developed in France as it is in the UK. But similar to what’s happening in your country, it doesn’t really question the shortcomings of active management. Interviewing an active manager is sexier than talking to an index specialist. Active sells because it tells stories; passive is boring. And, like in the UK, but to a much lesser extent, advertising comes mostly from active managers, not from indexers. A few journalists do a very good job though, be it in the trade press or in traditional media.
It was two Frenchmen, of course— Jules Regnault and Louis Bachelier — who first helped to formulate the idea of the Random Walk.
Yes, and they deserve more attention. They predate Markowitz, Sharpe, Fama, and French by many, many years, but the French are not very good at marketing their luminaries in the field of finance, which, you probably remember, was our former president’s faceless enemy!
Are there any signs that the French regulator is getting tougher with the industry? Of course, MiFID II comes into force in January. Will that make a difference?
The French asset management industry is powerful, but it hasn’t had to fight the regulator here, which has so far refrained from being as vocal as the FCA has been in the UK.
I’m not holding my breath about MiFID II. I don’t expect the French authorities to ban commissions, or retrocessions as we call them here. In those countries where people have to manage their own pension funds, the trend toward much cheaper products has already started, and MiFID II will only accelerate this existing trend.
In the USA, and also in countries like Britain and Ireland, Australia and New Zealand, there is a growing realisation that financial advice is only partly about the investment piece, and that advisers mainly add value in other ways. Is that happening in France?
There are much fewer independent financial advisers in France than in the countries you mentioned, because we don’t have pension funds. But because those financial advisers use mostly active funds, they over-emphasise their ability to select the “best” products instead of promoting their expertise in financial planning and in behavioural coaching.
As long as the bulk of their compensation comes from commissions paid by asset managers, they will keep pitching themselves as selectors of active funds. An aggravating factor is the fact that advisers don’t operate under a fiduciary standard in France, but under a suitability standard like broker-dealers in the US. I see tremendous potential for the equivalent of fee-based registered investment advisers in the US, and I am sure that we’ll have, one day, local equivalents of Ritholtz Wealth Management or Index Fund Advisors.
For a while you were chairman of the CFA Society in France. What success has the Society had in trying to raise professional standards in financial advice and wealth management?
The CFA Program is very successful in France. Almost unknown at the beginning of the century, it now attracts over 3,000 candidates every year and has a huge recognition among French business schools and universities. CFA Society France has close to 1,000 members and is growing at a fast rate. As members and candidates are bound by a code of ethics and standards of professional conduct that places clients’ interests first, this will inevitably contribute to raising professional standards.
Finally, what are your predictions for the fund industry and the advice profession in France for the next 10 years or so? Do you expect to see some major disruption?
We have a very vibrant asset management industry in France. I am not convinced that all players are big enough to survive in a very competitive world dominated by what the Boston Consulting Group recently called alpha shops and beta factories. I do expect significant consolidation to take place.
On the advice front, the emergence of low-cost index investing is very slow. As long as banks control fund distribution and keep promoting actively managed funds, not much will change. But I am quite sure that mid-sized banks will realise that they can’t compete in the asset management space because they are too small and will open their doors to low-cost ETFs. Until then, it’s up to the small local robo-advisor industry to disrupt established players, and it will take time.
Independent financial advisers have a bright future in France, provided they act as fiduciaries and are fully transparent on the cost of advice. The fee-based model is probably the best one, but it will be a tough sell.