Graham Bentley: Asset managers under pressure to prove value

Regulatory changes will mean asset managers having to be much clearer about the benefits they bring to investors

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Sep 12, 2019
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As the costs of delivering financial planning and investment advice have risen, and the expected returns on assets remain subdued, advice professionals labour over the term ‘value.’

From 30 September however, asset managers will have to do more than merely philosophise – they are required to articulate the value they have delivered to a customer, and it remains to be seen how they choose to define the ‘V’ word.

Buffetologists believe price is what you pay, and value is what you get, but the latter is rarely defined. The concept of value is more likely described in nebulous terms. Some advisers airily declare, “My clients determine the value I have delivered,” conveniently absolving themselves from detailing the benefits delivered.

Cost isn’t just about price, or charges. It includes time, emotional and physical outlay, convenience and so on. As for benefits, these are often confused with product features –what the bells and whistles do is irrelevant, it’s the advantage gained by the client that counts.

Potential benefits are constrained by the service or product being purchased, and many are intangible. But the financial planning community delivers palpable advantages like access to the solution to a problem, enhancement of knowledge, and success from use of the service via an associated product. Benefits from financial planning may not involve profit at all, but an advantage such as peace of mind, well-being, comfort and convenience.

Defining success

So, what does success look like in this context? Any positive scale of value demands that in the first instance the benefits are clear and outweigh costs. Increasing multiples of value reflect not only the sum of the benefits versus what was expected but must also be compared with what is available elsewhere in the market.

An obvious benefit of a financial planning service is discovering a need the client may not have otherwise recognised, and the subsequently avoiding a disadvantage. Conversely, it is easily argued investment recommendations are simply features – routes to a benefit rather than benefits themselves, ie maintaining spending power.

Single-strategy fund managers have a tougher job to describe the benefits they deliver because historically they have focused almost exclusively on performance, or stayed silent.

More recently, an appeal to investor sensibilities has resulted in ethical and environmental, social and governance elements that might deliver peace of mind to certain investors. Well-written, perceptive and educationally informative market commentary can serve a similar purpose.

Multi-asset costs and value

Multi-asset funds on the other hand remove the asset allocation and fund selection responsibilities from the client and adviser, and they do not require a platform’s involvement. This saves on costs and delivering convenience from a monitoring perspective.  Consequently, the articulation of value to a client might have to include the units of risk-adjusted return per unit of cost, relative to comparable offerings elsewhere in the market.

Take two multi-asset investment solutions, A and B.  Solution A is a discretionary fund manager portfolio that delivered a return of 8.55 per cent pa with a volatility of 10 per cent, after total charges of 245 basis points. Solution B is a passive multi-asset fund purchased online directly from the manager and has delivered 6 per cent with a volatility of 5 per cent, after charges of 12bps. Their shared peer group average (ie the marketplace) has delivered 7 per cent return in the year after charges of 110bps, with a 6 per cent volatility. From a performance perspective, which solution has delivered better value?

Expected return on a fund is calculated as the risk-free rate, plus its beta multiplied by the market’s excess return over that risk-free rate.

On a risk-adjusted basis fund B is the winner. Portfolio A should have delivered 10 per cent before charges, given the higher risk it took relative to its competition, in effect its beta. We can assume therefore that were the peer group to suffer a negative return, its drawdown would be worse than average. Fund B only needed to provide 5.5 per cent for the risk it took, after charges.

Notice here, the charges were a red herring. The measure of value was the primary investment benefit enjoyed versus what should have been expected. Our performance was ex-charges. Of course, were the associated charges lower, then the respective investment benefits would have been more pronounced.

That said, the client may not give two hoots about Beta and the rest of the alphabetti spaghetti that purports to clarify performance and aimed at observers like you and me. The fact is an investor in portfolio A had her expectations exceeded assuming she knows how the rest of the market – the peer group – performed.

Hidden performance

In many cases, portfolio performance is not freely available. We don’t know how one DFM performed versus the marketplace because there are no agreed sector sets, no price histories, so no tables to consult. Most DFMs are not challenged on performance to anywhere near the extent of their fund cousins. In fact, one could argue the majority of DFM portfolios are unlikely to demonstrate risk-adjusted returns better than naïve selections by amateur investors armed with a free asset allocation template.

While investment managers choose to illustrate value, they should not assume customers will find the same things important as they do. A preferred approach might be an inventory of all costs and benefits compared to the market but in their widest definition – financial, psychological, time and convenience.

But I won’t hold my breath…

Graham Bentley is managing director of gbi2

You can follow him on Twitter @GrahamBentley



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