The Way To Win Is Not To Lose:
Posted on:
01
Feb
2012
by James Cholmondley Farmer
Wise investors have worked out that the way to win is not to lose, says Vanguard
Nick Blake, head of retail at Vanguard, comments:
“There is no doubt that greater transparency is needed to help investors make better informed investment decisions. Transparency over fees is important but it is just one of the steps that the industry needs to take. However, trying to over simplify complexity into one argument, be that on fees or performance, may do a disservice to investors who need clearer support and guidance on a number of areas.
What are the possible benefits that investors can gain from increased transparency?
Anything which allows investors to make a better informed decision must be a good thing. To be effective, transparency has to inform better investing in three ways;
- By letting the investor understand what the cost of investing is and the impact it will have on their returns – because costs matter (see below)
- By enabling investors to shop around. Investors should be able to work out what to buy and the where to buy it
- Help the investor to spot access bias, whereby the product or service they want is restricted because of financial arrangements between the product provider and the distributor.
“So, transparency is a positive force if it enables better investing outcomes. Therefore, providers and advisers should recognise that transparency has to be delivered in a way that adds value to the end investor.
Will a ‘standard charge disclosure’ be valuable to investors?
A ‘standard charge disclosure’ would certainly improve the investor’s chances of making smarter decisions, although due to the complexity of investing, it is inevitable that one scenario will not always fairly reflect all circumstances.
Take, for example, the increasing popularity of ETFs. Many traditional platforms struggle to cope with this product, meaning more investors will look for more capable stockbroking routes to buy and hold this product. As such, traditional assumptions about ‘platform charges’ are redundant. Many investors will move to transactional charges rather than pay ongoing platform fees (built into annual fund charges) for custody.
The ‘total cost of ownership’ would be a helpful measure if it included the cost of the asset, the administration charge for holding it, and any directly associated advice cost. Total cost of ownership is not as simple as is often made out to be. Investing patterns (for example, trading regularly vs. buy and hold) and the advent of holistic planning fees (not a product sales fee/commission) make true attribution and like-for-like comparisons difficult.
The industry should work hard to provide maximum transparency such that investors and their advisors can make the most informed decisions on their personal circumstances. Increasing transparency without engaging with the end investor so they can utilise it effectively could be counter-productive.
Isn’t performance everything? Why do costs matter?
Performance is clearly important as it is the growth engine of investors’ returns. Nevertheless, performance is unpredictable. Discussions around “average” performance can be unhelpful as investors rarely experience the average. The data(1) shows that the majority of managers fail to beat their benchmark and even those that do excel do not do so with regularity.
So what can an investor rely on? Well, the one discernible investing factor known at the outset is that costs matter. Simple arithmetic demonstrates that an investor paying a total cost to invest of 2% will have lost 40% of their portfolio return over 25 years. Traditional investment marketing suggests this price is worth paying for the outperformance earned. Looking at the actual data confirms this isn’t the case.
Indeed, Morningstar, purveyor of fund ratings, confirms that the best indicator of future performance is low fees(2). They make this observation after noting that there is a direct inverse correlation between quartile investment return and high fees.
It is no wonder, therefore, that wise investors have worked out that the way to win is not to lose. This means, having earned a portfolio return, they ensure it goes into their own pocket and not into the pocket of investment managers and administrators.
So, it is incumbent on the industry to give investors the best possible information to inform their investing decisions. Transparency should be delivered with the aim of helping the buying decisions of investors and exposing biases that prevent investors having access to the best solutions. If transparency also has the affect of forcing down the ‘total cost of ownership’, this has to be good news for investors.”
Tags: IFA | investments | rdr | vanguard
