The latest Morningstar asset-flow figures are frightening
They show American investors deserting high-cost active fund management for Vanguard, a predominately passive fund manager with a mutual structure that puts the investor first.
Vanguard’s gain is at the ruination of more established players
If you take into account inflows from ETFs, Vanguard’s inflows are $288bn, a staggering sum of money.
Normally, such seismic shifts in the market would be a matter for concern for regulators, but I can only see the FCA impressed by what appears a consumer driven phenomenon.
Not only is Vanguard radically cheaper than market benchmark costs but it is a brand that is trusted for delivering what it says on the packet. The FCA’s Asset Management Market Study accuses the active management industry of over-charging and under-delivering.
Could such a shift happen over here?
The UK fund market is not consumer driven , it is driven by advisers. That is why you rarely see fund managers talking directly to their customers. The UK investment industry is organised around platforms through which investors access funds. Pension Funds tend to use insurance platforms which parade insurance funds (known as pooled funds). Wealth managers use non-insured platforms and OEICs. individuals sometimes buy funds boit from asset managers but directly from stock exchanges (exchange traded funds and investment trusts). The percentage of investors investing directly has been shrinking (which may be because it is diluted by the huge influx of wealth from the baby boomers which is now managed via platforms
What we have in the UK is a highly intermediated market with advisers taking around 1% pa of assets as a fee for their services, the platform typically costs an extra 0.35%.
The cost (OCF) of a Vanguard FTSE 100 Tracker Fund is 0.09%pa, the equivalent Vanguard actively managed fund is 0.60%pa. These fees are massively below the average cost the UK retail investor is estimated to pay (1.0%pa + according to Nucleus’ David Ferguson.
However, if you add consider the fund management cost relative to the combined advisory and platform fee, you can see why many wealth management propositions cost well in excess of 2%pa. At a time when the cash return is below 0.5%pa and best estimates for equities are around 7%pa, it seems inevitable that the UK investor will either seek a disintermediated proposition or look for radically lower combined charges.
The rise of robo-advisers is not just a function of available technology, it is in recognition that most small investors cannot afford to risk the costs of “wealth management” -even if the wealth managers would work with them.
A more radical question is whether we will see more investors walking away from advice altogether, attracted by direct offers such as those that can be found here https://www.vanguard.co.uk/adviser/investments/product.html#/productType=etf
Advisers and fund managers hold their breath.
After a generation where the received wisdom is that consumers should take independent financial advice, are we to see a return to the direct purchasing on investment products by consumers encouraged by a new kind of Regulator? Will the charts produced by Morningstar for America be replicated in the UK in the final years of this decade?