It was a cynical Oscar Wilde who famously penned those immortal words in reference to a certain gentleman with whom he had spent the previous evening. Some days it feels like the funds industry is being treated the same way by many observers and sadly, at times, those very people who work in the industry.
This week I was at a conference that was debating about the future of funds: how “tokenisation” would help investors get better value from their investments, and that this new and innovative idea would democratise the industry. The speakers on the panel were from a significant manager in the sector, a trade body representative, and an expert in all things techy. It was overall a very good presentation with some interesting comments, but one comment in particularly irked me and it is one that has been rolled out before, regarding the cost of investing for investors. Basically: are consumers being ripped off by the industry? It’s a debate that has been running on for years. This is not the argument between passive and active, long only vs hedge or investment trusts vs open funds, but about how much of the returns are “siphoned off” by charges that are levelled at the fund.
Firstly, I agree the fees associated with running a fund are high but, guess what, the industry isn’t necessarily to blame. The increasingly onerous regulatory environment has developed from the need to protect investors, which is a good thing of course. However, increased protection needs to come at an increased cost. So somehow technology needs to help the industry to develop with investor protection still paramount, but at a lower cost. For as many years as I can remember, the funds industry has dealt with wave after wave of new requirements to run a fund, not just regulation but also operationally and distribution related. More and more elements have come into the whole structure and consequently more firms now have their snouts in the trough. As many as thirty firms or bodies can be involved in ensuring an investment manager is running a fund that is compliant, legal, operationally fit for purpose and available to an investor. Ironically the comment about the expense of funds was made by such a firm. Oh, how I laughed!
If the funds industry is to become a truly democratised industry and become relevant to the next generation of tech-savvy investors who can open up Revolut bank accounts with half a dozen clicks, then we clearly need to embrace technology as quickly as possible. Tokenisation is an obvious route to take. However, to do so we will need the regulators to rewrite the rules, ensuring operationally and legally the funds can be run in a way that works for all parties. There seems to be no sign of that and now we are left with a 100-year-old structure which, to investors, seems not fit for purpose. We need a strong regulator to define new rules that hopefully allow firms like us to create products that are efficient and cheap to run. As technological advancements come along which enhance the proposition then the cost savings will be apparent, and investors will benefit overall.
It is also apparent that the advice chain is going to have to have a major overhaul to be relevant to new investors. If the next generation are buying crypto on their Revolut card in two clicks with “advice” coming from social media influencers, then how do advisers compete with that? The value needs to be seen and it is also worth bearing in mind that there is clearly a life cycle of investing. Significant sums don’t tend to come until later in life after the cost of house, children etc and we therefore see the average investor is in their 50s. How do we get younger people to invest/save and for them to see it as something they want to do and not something they have to do? It’s the pull rather than the push. Investing is a tedious task, but it shouldn’t be. Application forms are huge for UCITS and then there’s the prospectus, supplements, KIIDs… and we haven’t even got to promotional material. The disruptor banks have engineered it beautifully, but then they did have a clean slate to build from.
We need to show the value of investing, and that saving plans won’t get eroded by the charges from either the adviser or the manager over time to the extent they can’t build up a pot which has true value. I think it’s time to take on the disruptors at their own game!