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28. January 2014 09:44
by Allan
0 Comments

‘It’s the product, stupid’

28. January 2014 09:44 by Allan | 0 Comments

So Hargreaves Landsdown has cut their fund supermarket platform fees and all hell breaks loose.  Fidelity has followed suit and mutterings abound that talk of unfair competition.  Who said RDR would not have any real effect on the invest management industry in the UK?  If you are one of those columnists go to the back of the classroom.

Anybody attempting to make sense of all of these news stories invariable faces the same problem, how can one exactly make a price comparison between two different providers in the financial services industry?  Before one gets too incensed here it is worth remembering that if the question could be reduced to comparing two singles numbers then it would be a doddle.  The fact is one instead is forced to compare a range of separate fees, at which point one’s eyes tend to glaze over.

What exactly would define a fair price for financial services?   It strikes me as highly appropriate that the word supermarket is used to describe some of these fund platforms; at least I have my own prejudice view of how I expect them to behave towards their suppliers.  You want your product on our shelves then we’ll dictate the terms, but there is only so much you can charge for the same box of cornflakes.

It stands to reason that the ‘box shifters’ should only earn a fee consistent with being a supermarket. Where the story gets much more interesting though is when one starts to put a different value to each of the boxes being shifted through the system.  In fund management, one we move into the advised space, not all fund products should come with the same management fee, and not all financial advisers should expect to be able to charge the same fees. 

In the main, god forbid, investors expect a return on their investments, but as with the comparison of fund supermarket fees, exactly how should one compare the various fees of the services on offer?  Is an adviser displaying skill when they recommend a particular product?  How much more would you be prepared to pay if an absolute return manager always delivered good returns?  However, with many equity index products up 15% to 20% last year, when is a good return, really a good return?

So there we have it, there is clearly more questions than answers.  As a parting shot it is worth pausing to consider the following fact.  In the 28 years for which there is data for the FTSE 100 Index, comprising more than 7,000 trading days, on no less than 56% of the time the overnight market move was more than 0.5%.  Or that in any one typical year that investment might go up or down by 20%, suggests to me that the time has come when the commentators should stop going on about a few basis point fee reduction here, and a few more basis points there, and instead start talking about the elephant in the room. 

As Bill Clinton’s campaign strategist, James Carville, once said ‘It’s the economy, stupid’, and post-RDR this need to be replaced by ‘It’s the product, stupid’.

 

 

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