Questions about the value of active management may not be easily applied to the value of advice
With a growing consensus that active managers are delivering the kind of results that would justify their high fees relative to passive funds, the spotlight on advice fees compared to robo-advisors is easy to understand. So as active managers start working to trim down their fees, should expenses for financial advice go down to a similar degree?
Rory Maguire, managing director of UK-based fund adviser Fundhouse, recently shared his thoughts on the issue. “[W]e are being asked: how can advisers rival the value add of an active manager, when the active manager employs banks of research analysts across the globe and fund managers with decades of experience picking stocks?” he said in a think piece for FT Adviser.
He acknowledged that the value propositions of active managers and advisors may seem similar. Both tend to charge fees as a percentage of their client’s assets, and fund management and financial advice are both reliant on intellectual capital.
But he went on to cite industry statistics showing that as of 2016, the number of financial advisors in the UK was five times that of fund managers. “{I]t tells us that fund management is exponentially more scalable,” Maguire said. “We work with quite a few advisers and it is eye-opening how frequently they are in contact with their clients, whether face-to-face, by email, letter or over the phone.”
He then noted advisors’ burden of being trusted confidants in a diverse range of personal issues their clients face, as well as the volume of specific advice queries and related administration and paperwork they must attend to.
“Scalable alternatives such as call centres or automated servicing just will not work; clients often expect one-on-one attention,” he said. “Their margins are also tight … [W]e seldom find offices with signs of excess and few have the wallet for centralised functions like compliance or reporting.”
While active managers and advisors may impose comparable costs to their end client, Maguire asserted that equating their professions and value propositions is not reasonable. Active fund managers offer a scalable product, while financial advisors offer non-scalable services.
“In our experience, they are mentors, coaches and financial advisers to their clients and need to deeply understand individual clients’ needs and have a personal, hands-on relationship with each,” he said. “If you looked at their margins rather than their revenue, we suspect you would conclude they do not have too much fat in their fees.”
