France might be home to the world football champions and some of the finest food and wine, but there is at least one area in which it trails the Anglo-Saxon world. You’ve guessed it: evidence-based investing.
PHILIPPE MAUPAS and JULIEN COUDERT recently formed Alpha & K, which they believe to be the only evidence-based financial advice business in the country. Astonishingly, out of around 4,600 advice firms in France, Alpha & K is also the only one registered as independent. That’s right, all of the other advisers in France are paid by commissions from product providers.
Here Philippe and Julien explain how the French investing industry operates, how it’s dominated by the banks, and how the cost of investing is a subject it seems nobody wants to talk about.
Thank you for your time, Philippe and Julien. How did you meet?
PM: We were both elected directors of CFA Society France, the non-profit association for CFA charter holders in France, of which I was the president and Julien the treasurer. So, we got to know each other then and we started discussing the future of the advisory profession.
You obviously discovered that you shared very similar views.
JC: Absolutely. We share the exact same view of the French market, which is that there is a lot that needs to be done to help investors to move on to something better, and to lower costs.
You’ve registered as an independent financial adviser under the terms of MiFID II — the new EU directive governing financial services. In effect, what does that mean?
PM: There are two options for advisers in France. They can either elect to be exclusively paid by their clients, in which case they have to register as independent with the authorities; or they can choose to keep receiving their compensation from product providers, in which case they cannot describe themselves as “independent”. According to the French regulator, there are 4600 financial advisers in France. Most of them decided not to be independent — in other words, they decided to keep being brokers, whereas we want to be advisers.
So it’s quite unusual for a firm to be an independent adviser in France, isn’t it?
JC: As far as we know, we are the only one, in fact. I hope we’ll be more numerous in the future, but for now we’re the only one.
That’s extraordinary. And of course, the banks in France are very powerful.
PM: You’re right. The advice profession is dominated mostly by the banks — the usual suspects, the large retail banks and, to a lesser extent, insurance companies with their brokerage networks.
Presumably, the big institutions use high-fee products which erode investors’ long-term returns?
JC: They do, for the very reason that brokers are paid by insurance companies, private bankers, or asset managers to sell their products. That’s just how it works, and so they’re charging large fees.
PM: According to the French regulator, in 2015 (and these are unfortunately the most recent figures), the asset-weighted management fee for equity funds domiciled in France was 1.8%, which compares very unfavourably with the US, for instance.
JC: That’s not including transaction costs; it’s just management fees.
So when you factor in the cost of transactions, French investors could typically be paying 3% or more?
PM: That’s very likely the case. Especially when they invest in life insurance wrappers where there is an additional charge, which is levied by the insurance companies and can run as high as an additional 1% per year.
There is no statutory fiduciary standard in France, is there?
PM: That’s correct. All distributors are under the suitability standard; there’s no such thing as a fiduciary standard. It’s very worrying that these people with responsibility over other people’s money have no legal obligation to act in their best interests. But there’s not much we can do about it. What we have decided to do at Alpha and K is build our own fiduciary standard by being a fee-only, independent financial adviser, and by being subject to the CFA Institute code of ethics, which asks us to place the interest of clients above everything else.
But presumably there must be intelligent and conscientious advisers in France who are suspicious of the status quo?
JC: There are a lot of good-minded advisers, but they are trapped in a failed system. They have made their career within this system, which is broker-based. They have no idea how to get out, and no-one is helping them to.
So, if a company like Vanguard, decided to work with advisers in France, it might be a message that would be well received?
PM: Possibly, but it’s a chicken-and-egg situation. Vanguard doesn’t give any kickbacks to intermediaries, and intermediaries need those kickbacks to be able to make a living. As long as there are so few independent financial advisers, it’s unlikely that Vanguard will be able to change the rules of the game.
Does France need something like the Retail Distribution Review in the UK, which banned commissions by product providers to advisers?
PM: That would help. I would say it’s needed, but then I’m heavily biased. The French regulator decided that it was not needed, and that it was sufficient to let advisers choose between being independent and not.
The UK regulator seems to be showing more interest now in exposing hidden fees and charges. Are there any signs that the French regulator will be getting tougher as well?
PM: It’s probably going to be a little more vocal on fees, which is the thing that nobody wants to speak about in the industry. It started releasing breakdowns of French investment fees, which are quite high, and used, at least, for the French regulator, some unusually harsh wording. The regulator is not traditionally known for being tough on the industry, so things might change, but it will happen very slowly because nobody has an interest in letting the genie out of the bottle. And fees are not a topic of discussion, except in some select circles of evidence-based professionals, of which we are a part.
Presumably, Alpha and K is going to be very open with clients about the fact that you don’t receive commission?
JC: “We advise you, you pay us.” It’s that simple and, if we have inducements, they’re for you. That’s how we work.
PM: We have to spend a lot of time at the beginning of a relationship explaining that it’s much better to receive an invoice from your adviser than not to receive anything, and pay through hidden fees and inducements. Usually our clients understand that, because it’s easy to show the long-term effects of hidden fees.
Of course, they’ve been paying commission all these years without really thinking about it. Now you’re asking clients to write you a cheque for quite a lot of money. Are you worried about that?
PM: Yes, we are. But we are looking for like-minded clients, with the same point of view as us. When your service provider is good, it has a value and a price, and so it’s normal that you receive an invoice. It’s quite easy, again, to show how much clients in the past have been paying in extraordinarily high fees.
Products that combine life insurance with an element of investment are very popular in France. Why is that?
JC: First of all, the reason they’re popular is due to the fiscal advantages tied to it. There is a huge fiscal advantage. But the total fees end up being quite high; on average they are 2.5 to 3.5% a year
.PM: Also, one of the main products, which is managed by the insurance companies and heavily invested in bonds, has had an extraordinary track record since the beginning of the ‘80s, when interest rates started to come down and it delivered way above inflation. So it’s seen as the holy grail of investing. Plus there is this tax advantage that Julien referred to. Investors are willing to pay a high fees to get a tax advantage, but that’s the way it is.
Of course, you have a state pension system in France. How does the government actually manage that money?
PM: It’s the equivalent of a defined benefit system, but it’s wage-run like the social security system in the US. It’s mostly invested in bonds because people working are today paying for people who have retired. And it’s a system that, without government support, could go bankrupt. It only works because the state borrows every year to keep it afloat.
Presumably, then, you would say that the whole obfuscation surrounding fees needs to be exposed. Is there any sense in which that is already happening?
JC: I have a feeling — just a feeling — based on the conversations I have with my friends. They’re beginning to feel something, but they have difficulty understanding exactly what it is. They’re talking about the banks — they’re too expensive, the service is not good, the returns are not good. They don’t really understand exactly what is happening, but they have a feeling. When we explain it, it very often really reveals it to them.
Do you have any campaigning journalists, like Jason Zweig in the US, for example, who’s trying to get to the bottom of what’s happening?
PM: Or like a Robin Powell in the UK, you mean?! We do have good financial journalists, but nobody has decided to go on a crusade and explain to retail investors how the whole system works and is rigged in the favour of product suppliers and intermediaries. We don’t have that.
We have a few bloggers. We’re among those bloggers, and we’ve been inspired by evidence-based bloggers from all over the world, including the bloggers at Ritholtz, Jason Zweig and yourself. We try explaining on our blogs how the system works. By being transparent about the way fees are charged and hidden, we try to educate retail investors.
Another problem facing retail investors in France is, of course, that you have limited access to index funds and ETFs.
JC: Yes, insurers are so reluctant to give access to ETFs or any passive strategy. It is accessible but people aren’t aware of it. But, like I was saying before, people are starting to realise. More and more people are starting to talk about ETFs.
There certainly seem to be fewer people in France who are speaking about these issues on social media. Is that fair?
PM: If you’re talking about financial Twitter, that’s true. But that’s also a reflection of the size of the financial markets and the limited appetite amongst retail investors for risky products. I don’t think there’s anything particular about the French being hostile to social networks. French people are addicted to social media! But they don’t have that same interest in the financial markets.
As a firm you take financial education very seriously. Why do you think it’s so important?
PM: Lack of knowledge is definitely a problem, especially because there’s no financial education taught in schools. We want people to understand the value of what we do for them and, for that, we need people who understand how financial markets work. We don’t want them to become financial experts, but we want them to have a basic understanding of how the system works. We are very much in favour of financial markets: we think that, over the long-term, listed assets reflect the overall growth of the economy, which has been positive for centuries. We don’t see any reason why that shouldn’t remain over the coming centuries, so it’s important that our clients understand the basics of investing. As product providers don’t want to provide that education, it’s up to independent advisers like us to do it.
You’re putting together a financial education programme. What is that going to look like?
PM: There will be two parts. One is the content that we publish on the blog and on our website. Secondly, we aim to provide a range of services that we’ll sell to clients — whether that’s people we advise on an on-going basis, or people who will just come to take the course. The promise will be, when you leave the room after eight hours of financial education, you will understand how the whole thing works.
These will take place mainly in Paris but, if we are successful, we will take it to other large cities. We haven’t set the pricing yet, but we want it to be accessible for retail clients.
Are you hoping that, having taken the course, people will then want to sign up with Alpha & K as their advisers?
PM: That’s not necessarily the idea. We’re genuinely convinced that financial education is needed and that it’s worthwhile. We’re not just targeting people who could eventually become clients. We are targeting people who are aware of their own shortcoming and are willing to pay to get better at investing.
Do you have any robo-advisers in France that offer low-cost investment solutions?
PM: We’ve identified three. The largest one is Yomoni. They’re independent, but some of the minority shareholders are large financial institutions , and they have 100 million Euros of assets under management, and are growing quite fast. They are only using ETFs and they are offering only mandates. So the client has to delegate the daily management to an asset management company and the overall fee is in the area of 150 to 160 basis points per annum. That’s in a life insurance wrapper, so that includes the life insurance fee as well. That’s reasonable by French standards, but probably a little too expensive by international standards.
One final question. You’ve only been going for a few weeks, but what has been the initial reaction of your prospects to your evidence-based approach?
JC: The reaction is good, but biased, because the first prospects are already interested in our approach. I created a company five years ago and I already had some clients, who are already convinced by the approach. I have history with them, so I can easily explain it to them.
PM: We had a couple of incoming calls out of the blue from people who told us that they’d found out about the launch of Alpha & K in the media or on Twitter. They said they had been waiting for ten years for something like it to be launched, which is very reassuring. Financial journalists working for trade publications were particularly interested, because this is a completely new story here!