The RDR deadline has come and gone, but the adviser ‘cultural revolution’ still has some way to go. Early adopters of the fee-based model figured out years ago that focusing on investment management (trying to pick winning funds and beat the market) links their value proposition to market and fund performance – an outcome they cannot control. When it all goes wrong, as it often does, the client blames the adviser.
Rather than picking funds, successful fee-based advisers employ some form of asset allocation process to determine the most suitable portfolio for their clients’ particular goals, time horizon and tolerance for risk. They have figured out that they have a greater chance of adding value, or alpha, through relationship-oriented services, such as providing wealth management and financial planning strategies, asset allocation, rebalancing, tax-efficient investment strategies, cash-flow management, discipline and behavioural guidance, rather than by attempting to outperform the market. If it were easy for advisers to beat the market through investment selection and market timing, then these other value-added services might be a less important. But evidence suggests that beating the market is anything but easy.
In my experience of working with fee-based advisers in the UK and overseas, shifting an adviser’s value proposition and implied service promise away from market outperformance to valued-added personal service usually results in improved client retention. When clients understand that services such as behavioural coaching actually add value above and beyond what they could have achieved on their own, they are not as likely to judge you solely based on your performance relative to a market benchmark.
Having decided to focus on asset allocation, advisers need low-cost, high-value, transparent methods of delivering the broad market return to build their client portfolios. Indexing offers the benefit of transparency as advisers and clients can see what they are investing in by looking at the index constituents.
If the experience of other markets where the fee-based model is further developed is anything to go by, indexing will continue to grow as the cultural shift gains strength. The experience in the US in the past 15 to 20 years, for example, shows that as advisers shift to a transparent, fee-based model, low cost takes a permanent and significant place at the centre of client portfolios. Active management has its place, but a concurrent theme will be continued downward pressure on costs, along with more transparency in charges, a trend that is wholly in the client’s interests.
