The speed with which US investors have moved their money out of actively managed funds over the past two years has been so breathtaking that you could be forgiven for failing to notice the changes occurring elsewhere in the world.
Granted, in terms of the volume of assets that are passively managed, the UK remains far behind the States where, astonishingly, Vanguard attracted more inflows in March than all of its rivals combined. But the tide is definitely turning.
The online investment platform rplan, for example, has reported a spike of 160% in passive investing in the three years since UK advisers were banned from receiving commission from fund providers for selling particular funds. in January 2013, 10% of the 100 best-selling investments on the rplan website were in passive funds; the figure is now 26%. As a result, the average annual fee charged by these top 100 funds has fallen by 22%, from 1.32% to 1.03%.
Nick Curry, director at rplan, said: “The greater transparency brought about by the RDR has certainly been a factor in fees being more competitive.”
I’m sure he’s right. Incentives matter hugely. Although, in my experience, most advisers genuinely want the best for their clients, they also need to earn a living; it’s hard not to be influenced by financial incentives on offer for recommending specific products. It’s no surprise, then, that another country in which low-cost, evidence-based investing is growing fast is the Netherlands, where commission has also been banned.
Doubtless, too, the introduction of a fiduciary principle for advisers will give a further boost to passive investing (not that it needs one) in the United States, where it’s estimated that conflicted investment advice costs the public about $17 billion a year in retirement accounts alone.
But what I do find troubling is the extent to which UK advisers are being left behind by the shift towards low-cost funds. Recent data from the insurer Zurich showed that, while retail investors are putting record amounts of money into passively managed funds, advisers continue to recommend that their clients use active funds. 95% of the cash that has recently moved into pension drawdown products on Zurich’s UK platform has been invested actively.
Why this continues to be is open to debate. It’s clear that fund managers are trying to stretch the rules on financial inducements to the limit; the FCA is rightly concerned by the way in which top-price tickets to concerts and sporting events, for example, are being offered to key decision makers at large advisory firms. I also agree with Paul Armson of Inspiring Advisers when he says that the commission system had become so deeply ingrained in the advice profession that it bred bad habits that are proving hard to break.
But whatever the reason for doing so, advisers who continue to recommend high-fee actively managed funds to the exclusion of everything else need to wake up and smell the coffee. The industry’s changing. Investors are increasingly demanding greater transparency and value for money. Firms that fail to give them what they want and need are living on borrowed time.