Most advisers need a new value proposition

Posted by Robin Powell on April 11, 2016

 

I remember once having a conversation with a fellow journalist about why indexing is so much less popular in the UK than it is in the US. The main reason, he said, was what he called “the lumpen mass of IFAs”, who were far too set in their ways to embrace new and better ways of doing things.

My colleague had a much lower opinion of UK advisers than I do. My experience is that most of them are conscientious, professional in their approach, and genuinely want the best for their clients. Why, then, do they continue to advocate using high-fee, actively managed funds when the weight of evidence clearly shows that doing so will leave their clients worse off in retirement?

According to research by Zurich, 95% of the cash that has recently moved into pension drawdown retirement products on its UK platform have gone into actively managed funds. The trend contrasts sharply with the habits of individual retail investors, who invested a record £5.4 billion in passive funds in 2015.

I personally find it hard to believe that there are advisers out there who are not yet aware of the evidence for not using active funds. Nor do I understand how advisers can study the evidence with any degree of thoroughness or objectivity and still maintain that trying to pick future star managers is the best way to go.

My own view is that advisers are increasingly troubled about this whole situation. They want to do the right thing but, ultimately, they need to earn a living. The bottom line is, they have a value proposition which still appeals to a large number of investors.

All right, UK advisers no longer earn commission for recommending particular active funds, but it remains a much easier sell than plugging index funds. People instinctively dislike the idea of being “passive”; they like to think there are managers out there who can beat the market, and they also feel a sense of security at having their money managed by large financial brands that they’re familiar with and read about in the media.

I believe it all comes down to fear. Advisers are a cautious lot, and the biggest fear they have is that changing course and introducing an evidence-based investment strategy would put their business and their livelihood at risk; that clients would leave them, and that those who remain would no longer be willing to pay the same level of fees if their adviser uses index funds.

This fear is completely understandable, especially for advisers nearing the end of their careers, who are looking to retire themselves and perhaps wanting to sell their business before they do. Perhaps when they started out index funds were not widely available, and there may have been just enough outperforming fund managers to make a case for investing actively. To acknowledge, late in your career, that you got it wrong certainly isn’t an easy option.

It is though, something advisers must do if they genuinely care about what’s best for their clients. What they need, in short, is a completely new value proposition; a proposition built not on any claim to be able to forecast the future or identify the “best” funds; but one founded on giving their clients the very best chance of achieving their financial goals, and keeping them on track when their human emotions put those goals in jeopardy.

Yes, it will take time. It will mean hard work and severe disruption. It will also mean, for some, a degree of loss of face. But it will also give their businesses a viable future. Most of all, it will mean better outcomes for clients; and that, for most advisers, is ultimately what this noble profession is all about.

 

Related posts:

Financial planning has nothing to do with products — an interview with Paul Armson (Part 1)

Why are advisers still so obsessed with products? — Paul Armson (Part 2)

Video: The problem you face as an investor — and why your adviser may be part of it

 

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Robin Powell

Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.

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