by Sian Davies Cole
In this Consumer Duty age, we are having to actively think more about the value our financial planning can add to our clients, and those who have focused on driving down the cost of investing for their clients will be finding that they don’t have to change much, just write it down.
The absolute majority of the financial planning firms that we work with adopt a passive investment strategy, or at least want to but are a little nervous that it could be a fad. I therefore have a lot of experience with recommending investment solutions with a passive strategy and also putting these together by creating Centralised Investment Propositions (CIP) for firms.
Although those who believe in the ability to beat the market through analysis and action will tell you otherwise, the evidence tells us that passive versus active investing over the long term provides a better outcome for the investor. This, of course, comes with the caveat that all good financial planners believe we do not time the market and investing money is for a minimum term of five years.
Of course, there are different ways of investing with a passive strategy, and we are not talking about putting all of a client’s money into an index equity fund and leaving it there for eternity. The current way of adopting a passive investment strategy as a CIP is achieved either through putting together an in-house portfolio made up of passive funds or outsourcing to a DFM Model Portfolio Service (MPS) which offers a passive model. There will be a range of portfolios available to map to the firm’s risk-profiling process and preferences for a UK or global bias as well as others needs to be considered.
Passive investing has been around for years, although with Vanguard bringing the LifeStrategy range to the UK in 2017, we could say this was the beginning of it becoming more mainstream in the UK at least. In addition to firms adopting passive-strategy portfolios, we also see firms using the Vanguard LifeStrategy fund range as a multi-asset single-fund alternative, and it’s interesting to see that Vanguard have now launched an MPS – although with this being a new solution, we should keep it under watch for a while.
When I first came into the profession, active fund management was all that was available with a DFM providing a “bespoke” portfolio. They were charging anything from 1.00% + VAT upwards for the privilege on top of the underlying fund costs, which stood at anywhere between 1.50% and 3.00% – a far cry from where we are now. During our most recent analysis, we found that for a passive MPS, the DFM fee was an average of 0.17%, and the portfolio cost was in the range of 0.16% to 0.21% based on a shortlist of 32 propositions.
Since doing my exams, I’m not one for dedicating my time to reading about the theory of investing; however, I made an exception to read Jack Bogle’s book Stay the Course last year, as chosen by the UK Financial Planning Book Club. It was fascinating and really opened my eyes to the negative marketing campaign passive investing faced when it was first emerging, and which it continues to experience, not surprisingly, by active investment managers.
Whatever we think of Vanguard and the performance of their funds, Jack Bogle’s vision and legacy for creating an empire for investors owned by investors is world class. His focus on driving down costs and making investing accessible to everyone whilst compromising his ability to be a billionaire makes Vanguard a unique offering. In the current backdrop, where we are considering the ESG credentials of everyone we work with, this is exactly the kind of organisation that shows the rest how it can be done successfully.
Although Stay the Course can be a dry read at times, I find myself now armed with a new level of knowledge and understanding about passive investing, setting up a new retail investment fund and the profession as a whole, so I would highly recommend picking up a copy if you get the chance.
Back to driving down costs – we see that this is the way the profession is going, and rightly so. Where there is no need or benefit for an investor to pay more than 1.00% all in, we have a duty as those advising them to keep their costs down. I am, of course, talking about the cost of their investment or pension wrappers and investment portfolio rather than the cost of the advice they receive, and I believe in a world of passive investing – the alpha is in the financial planning through the addition of tax relief and use of all the available tax allowances.
If you are looking for support in putting a CIP together for your firm, please get in touch with us at email@example.com.