The European Commission’s Retail Investment Strategy emphasises the value for money, raising regulatory and business challenges, writes Bob Hendriks, CCO of ABN AMRO Investment Solutions.
Value for money: the building blocks
At first glance, value for money is a simple concept. There are two ingredients: value and money.
What is added value? This question is hard to answer and depends on the DNA of the financial institution, the value proposition and the needs of the segment that is targeted. I’ve asked financial institutions and received a range of answers, from delivering great risk-adjusted returns to tactical asset allocation and “a seamless online customer journey”.
To increase the perceived added value for the client, one needs to increase the delivered value or decrease the cost at which this is delivered, or both at the same time. Reflecting on this, the most straightforward way to influence the outcome is to look at the price.
What are the ways to reduce the price? Firstly, you can lower the price of the investment engine: either by moving towards an index-based proposition or setting up sub-advised mandates. Secondly, you can ‘scale up’ when delivering investment advice and discretionary portfolio management services. Scale can be achieved through standardisation or through the introduction of technology.
The trend to use index products to lower the cost of an investment proposition has a valid place in the market, especially for certain client segments. Other ways to drive cost efficiencies in investment portfolios include ensuring only developed markets’ exposure, avoiding more expensive asset classes and so on.
Why can price alone be a rabbit hole? Well, when investment engine fees are low, it can make advice or discretionary service fees seem relatively more expensive – leaving clients to question the cost of the ‘added value’.
The second way mentioned is to ‘scale up’. One method could be sub-advisory, which from my experience, works for both active and passive investing. The concept is that one is managing funds but delegating the management to external portfolio managers. The increased assets under management per manager help to lower the cost of managing the underlying portfolios. Importantly it gives control and transparency on risks, holdings, ESG and so on.
Setting up such a platform requires knowledge, experience, infrastructure, size and time. Other methods to achieve scale both within a sub-advisory framework or outside are ‘standardisation’ and ‘building blocks’. Standardisation allows you to deliver standard model portfolios or multi-asset fund of funds as the core of the value proposition. While cost-efficient and reduces conduct risk, this does not offer the customisation “feel” some clients like. The building block approach could be a solution here. By creating building blocks (such as an asset class or sub-asset class), you can construct bespoke portfolios, enabling efficient implementation as strategies can be rebalanced within building blocks rather than through client accounts.
The other way to achieve scale is via technology; mass customisation is the dot on the horizon.
As with all technology, the outcomes here will depend on data availability and quality. Having the correct set-up in place when thinking about capturing data points of investments in portfolios will help to deliver increased added value.
Added value
What we do know is that no matter what the added value is that is to be delivered, data and analytics play a crucial role in building a value proposition. Next to the delivery of the right outcomes in terms of risk and return, the delivery of insights to clients is key. Recently, the industry has faced multiple crises from the war in Ukraine to events related to SVB and other U.S. regional banks. The ability to quickly respond, sharing positions in portfolios and impacts upon them, is crucial in a digital age, especially for clients from the younger generations.
With the right sub-advisory set-up in place, the insights that can be delivered to clients can theoretically be endless, as all data points on underlying holdings are 100% transparent.
Examples include:
• Insights in ESG and connecting this to the client’s ‘purpose’;
• What is being done with the client’s money regarding active engagement and voting?
• Risk insights and scenario analysis;
• Portfolio activity (how actively managed is my money?)
• Portfolio holdings and/or stocks not being present.
A combination of sub-advisory, blending active and passive investing and the technology to deliver mass-customisation and more insights can help industry participants to own the ‘value for money journey’ that is fast heading our way, especially in the light new regulations such as the RIS, and also the intergenerational wealth transfer already in flux.
There is no magic bullet to deliver value for money, but looking at the separate elements in isolation might open up the risk of running down a rabbit hole that is potentially difficult to escape from.
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