The Evidence-Based Investor

Stats that shame the UK advice profession

Posted by Robin Powell on January 12, 2018

Three years ago I had some email correspondence with a fellow journalist, now working overseas, about why active funds were so utterly dominant in UK asset management — compared, for example, with the United States.

“The main problem for the UK,” my colleague said, “is the lumpen mass of IFAs. The entrenched interests in favour of active managers are that much more powerful in the UK than they are elsewhere.”

I recalled those words earlier this week when reading new research by Platforum on the funds held on UK adviser platforms. The findings illustrate just how wedded advisers continue to be to actively managed funds.

Here are the bullet points:

— only 10% of assets are in passively managed funds;

— just 1% of assets are in exchange-traded funds; and

— only 15% of advisers invest more than half of their clients’ money in passive funds.

Let me say this first. I firmly believe in the value of good financial advice. When TEBI readers ask whether they need an adviser or not, my answer is always the same; no, they don’t need one, but everyone would benefit from the help of an adviser with their very best interests at heart.

I have, however, grown very disillusioned about the UK advice profession. Although there are some excellent, evidence-based advice firms out there, I have come to agree with the assessment of my afore-mentioned colleague of advisers as a whole. The profession isn’t just part of the problem; to a large extent, it is the problem.

The evidence is overwhelming that active management is not worth the fees. As studies by the Pensions Institute and others have found, only around 1% of funds outperform the market over the long term. Crucially, the tiny number of funds that do add value after costs are almost impossible to identify in advance. I don’t know of a single adviser who can actually prove that they’ve  consistently picked out future winners in the past.

Up until five years ago, UK advisers were routinely paid commission to recommend actively managed funds. Thankfully, commissions have now been banned. Why, then, does active management continue to be the strategy of choice for the vast majority of advisers?

There are several reasons. For a start, platforms are still charging far too much for access to passive funds; 29% of advisers surveyed by Platforum cited transaction costs as one reason why they didn’t use ETFs specifically.

Then there’s the trade media which, of course, is largely funded by active managers. Although, very slowly, we’re starting to see some editorial balance, it’s almost invariably active funds that receive the most attention.

Another issue is conflict of interest. As I discovered last year, when I was asked to leave an adviser conference after “upsetting the sponsors” with my presentation on evidence-based investing, the big fund houses still have a hold over the hearts and minds of the adviser community.

Interestingly, a couple of advisers who’ve watched Investing: The Evidence, our new documentary for the Cheltenham-based planning firm RockWealth, have privately admitted to being persuaded by EBI; but, for now, they’re locked into commercial arrangements with DFMs or big advice chains which favour active management.

But possibly the biggest issue of all, in my experience, is plain inertia. Anecdotally, the average UK adviser is in their early-to-mid-fifties. That generation of advisers (though not their clients) did very well out of active management and built financially successful businesses which continue to earn them a comfortable living. Many of them now plan to sell their firms, and there are plenty of cash-rich consolidators (again, mostly proponents of active management) willing to buy them up.

Why would those advisers want to go to their clients now, after all these years, and admit there was a better way of doing things all along? In any case, the last thing they want to do at this stage in their careers is to change their investment philosophy, their processes, and possibly their business model too.

In the meantime, it’s their clients who are suffering. Stock market returns, thankfully, have been extremely positive for many years now, so the situation is not as serious as it could have been. But those advisers might be well advised to fast-track their own retirement plans before the next crash comes. The advice profession, frankly, is better off without them.


If you’re a UK adviser and you’re thinking of using ETFs, this workshop in London on 25th January could be for you:

Adviser CPD workshop on equity ETFs


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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. Regis Media.

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