DIY investment – a crisis in the making?

October 11, 2013 5:38 pm

DIY investment – a crisis in the making?

By David Oakley, Investment Correspondent

It was nearly seven years in the making. It has been the dominant theme in the retail asset management industry for much of the past few years. Now, the effects of the retail distribution review are being felt by the people it is meant to safeguard: consumers. For most of them, RDR was just another obscure rule change. Survey after survey found that, ahead of its implementation on December 31 2012, few ordinary investors had even heard of it. At a recent presentation to analysts, Hargreaves Lansdown noted that just one in a thousand customer service calls relates to the rule change. But RDR could yet transform the way people invest and save for their retirement or their children’s education.Already, RDR has resulted in a big drop in the number of independent financial advisers, cut margins for asset managers and left regulators with what some think is a ticking time-bomb: the rise of the DIY investor.

Sir Callum McCarthy, the man responsible for first laying the groundwork for RDR when he was chairman of the Financial Services Authority, the forerunner to the Financial Conduct Authority, was aware of these pitfalls when he, in effect, launched the initiative in a speech to pension trustees at Gleneagles in September 2006.

And it remains a big concern of regulators, asset managers and financial advisers as the reforms start to bite, seven years on.

The first stage of RDR, adopted in January, forced asset managers and financial advisers to dispense with the commissions paid by the former to the latter, often hidden from investors, and instead clearly outline their charges for managing money and giving advice. Financial advisers are also now subject to tougher qualifications. The second stage of the reform, which will be enacted next April, will force platforms, or investment supermarkets, to make their fees more transparent too.

Such concerns over RDR are not restricted to regulators and asset managers in the UK as other countries, such as Germany, France, Italy and some of the more advanced Asian nations, are closely following developments in Britain. The Dutch are introducing similar reforms to the UK.

Jasper Berens, head of UK funds at JPMorgan Asset Management, says: “The new regulations have made consumers more aware of the advice they get, which is a good thing. But there are some who think it is more cost effective to make their investments themselves, without help.”

Patrick Connolly, a certified financial planner at independent financial adviser Chase de Vere, agrees: “You can’t really argue with more transparency over fees and better qualifications for advisers. But it does mean that, as people realise they are paying for advice, they may think they are better off without it, which can be a problem.”

According to data consultancy The Platforum, 31 per cent of retail investors now say they never take financial advice, compared with 26 per cent two years ago. Within that number, some will be hobbyist investors who are financially secure and can afford to play the markets. But others will be people who previously delegated their financial planning to advisers who have little experience of, or interest in, managing their own investment affairs. It is those people that regulators and asset managers are increasingly concerned about.

Fewer but better

The number of financial advisers has also fallen sharply in response to the RDR reforms, plunging to 32,690, according to the FCA. This compares with 41,000 two years ago, says the Association of Professional Financial Advisers, although the latest FCA data show numbers have risen slightly since January. To put this number into context, there are seven times more car mechanics in the UK, at 218,590, six times more housebuilders at 187,400 and nearly four times more plumbers at 107,000 than financial advisers, according to data from the Office for National Statistics and the Institute of the Motor Industry.

Hugh Mullen, managing director, UK at Fidelity Worldwide Investment, says: “Most people would not dream of repairing their own car or fixing their own plumbing, yet more people are deciding against financial advice to save on fees.”

Fidelity, in conjunction with the Cass Business School, published a report earlier this year that warned millions of people could fall into what they called the “guidance gap” because of RDR. These are people who are left without professional financial help in the post-RDR world, yet need it badly – because they have experience of, or interest in, managing their own financial affairs.

Mr Berens says: “A financial adviser can take you down many more avenues. The biggest pitfall for many investors is getting the asset allocation right for the period of their life. A young person can afford to have a majority of their portfolio in equities and take the risk of losses as they have more time to recoup them before they retire or decide to cash them in. An older person nearing retirement should have safer bonds, cutting down on risks as they do not have the luxury of time should the market turn against them.”

The big get bigger

There are other potential negative unintended consequences too. Some asset managers fear that, faced with a bewildering choice of investment products, less experienced investors will just opt for the cheapest fund or the most recognisable name. This will concentrate more business into the hands of the biggest groups, such as the world’s largest manager of money, US giant BlackRock, and leading UK companies, such as M&G, Invesco Perpetual and Standard Life Investments.

Such concentration of assets is already a feature of the market. The top five fund providers in the UK took £20bn in gross retail sales in the first half of this year. This is not necessarily a bad thing, but there are concerns that this concentration in flows will hinder competition and force smaller groups to fold or merge with their bigger rivals. In the European market, for example, the top five asset management groups have more than 50 per cent of market share by sales, underlining the high barriers to entry for any new investment managers with interesting strategies hoping to break into the industry.

Another factor that could lead to more concentration of assets is the shift in pricing power from providers to distributors. The biggest platforms or online investment supermarkets, such as Hargreaves Lansdown, with about a third of the market, have formidable marketing muscle and can generate significant inflows into funds. Asset managers fear they will be under constant pressure to cut their fees as these large distributors use their scale to preserve their own margins – at the expense of the investment groups.

Ian Gorham, chief executive of Hargreaves, which will announce its new fees next month as part of the RDR reforms, insists: “We promote the best funds, which should deliver superior overall investment performance. A lot of time and research goes into that choice. It is not just about the fees a fund manager charges, but fees are rightly part of the equation when choosing the funds we promote.”


Asset management charges are certainly coming down already – several companies have already moved to “clean” share classes. Last month, Standard Life introduced a new, discounted share class, the so-called super clean share class, which cuts asset management fees to as low as 0.6 percentage points.

Falling annual management charges at active funds are also stirring up the age-old debate over active versus passive fund management. Passive funds, which deliver broadly the same performance as the broader index they track, have grown nearly threefold in the UK over the past five years, according to the Investment Management Association. A big attraction has been their lower management charges, which put more pressure on the active fund manager to deliver better returns.

But the latest research by Morningstar challenges the convention that passives are cheaper. Mark Till, head of UK personal investing at Fidelity Worldwide Investment, says: “The difference in fees is often only negligible. It is more important to find a fund that will perform than a fund that is cheap. A good fund at slightly higher prices will always offer a better return after charges for an investor than a fund with lower fees but where the stocks crash.”

Better information

Investors certainly have more resources at their disposal to help them make such decisions. Fidelity’s FundsNetwork website offers investors help with research, guidance on products, such as self-invested personal pensions and individual saving accounts, while Hargreaves Lansdown offers a vast array of funds and information to help people choose the best assets.

Maarten Slenderbroek, distribution and strategy director at Jupiter Fund Management, says: “For the savvy investor, there are a lot more places where you can get good, free advice, much better than a few years ago.” He adds that super clean share classes, with lower fees, are likely to become the norm over the next few years.

Mr Till says RDR has brought more attention to the debate around fees and performance of both asset managers and financial advisers, making people more aware of the importance of choosing the right assets and funds. Others point out that taking advice is no guarantee of better investing; after all, great minds in the City invested heavily in subprime mortgages and dotcom stocks.

But, despite all the discussions between regulators and asset managers, consultations with politicians and research notes from analysts since Sir Callum first raised his worries over the retail market in his Gleneagles speech, the dangers for the DIY investor hang over the reforms.

Most people would not dream of trying to build their own house or repair their own car. They would use a trained professional. Shouldn’t the same apply when it comes to taking financial advice about some of the most important decisions in a person’s life? It is a question that hovers, unanswered, over the UK investment market.


Britain leads the way

It is not just the UK that is embracing reforms to help consumers find better investment deals.

The Netherlands, Denmark and Australia are introducing similar regulations to the UK’s retail distribution review, which makes fees for financial advice and charges by fund managers more transparent.

The Dutch, in particular, are forging ahead with bans on commission payments or inducements, which are already in force for mortgages and life insurance policies sold by banks, to asset management products from January 2014.

The crackdown on commissions is because these kind of payments are not always clearly outlined to the customer, who in some cases think they are being offered the service free of charge.

In some respects, the Dutch have gone further than the UK as their ban on inducements will include institutional investors as well as retail investors.

Other countries are likely to follow, with pressure building in Germany, France, Italy and some of the advanced Asian economies to introduce greater transparency over fees for retail investors.

The German financial regulator, BaFin, has started the process by encouraging more fee-based independent advice, rather than commissions, although there are worries that reforms will hit the asset management industry, cutting margins and resulting in job cuts.

In France and Italy too, regulators are looking at shaking up the way advice is given to retail customers, while politicians in Taiwan and Singapore are following the debate closely. However, reforms may take different shapes in various countries. For example, in France and Taiwan, financial advice is largely offered by banks.

In the Netherlands, the banks account for more than 90 per cent of fund distribution. It is, therefore, the banks that are taking the lead by forcing asset managers to review the way they charge customers, with share classes that strip out commission payments. Italy, on the other hand, has a similar tradition to the UK, with a strong community of independent financial advisers.

In the US, regulators are introducing changes. The Securities and Exchange Commission is improving standards of financial advisers and proposing changes to mutual, or retail, fund distribution fees. However, Britain is considered the country to watch because of its extensive financial adviser sector and development of online investment supermarkets, or platforms, which also come under the remit of RDR.

These have grown sharply in the UK in the past 10 years, with groups such asHargreaves Lansdown, the biggest, expanding its business more than tenfold over that period.

It is on platforms where the debate is arguably the most intense over the level of fees. Some asset managers are convinced that Hargreaves and other large online players will use their muscle to put pressure on investment groups to cut fees so the platforms can retain their margins.

Jasper Berens, head of UK funds at JPMorgan Asset Management, says: “The UK’s RDR is going further than any other regulator in terms of scope and in governing how investors receive and consume financial advice. Other countries are mainly looking to the UK to see how RDR unfolds and whether it can improve services to consumers.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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