Time to rethink reporting of returns
Advisers need to realise that customers would not be prepared to pay for mediocre returns, Clayton Coplestone says.
Monday, September 30th 2013, 7:39AM 
17 Comments
Everyone in the industry would need to be able to clearly articulate their value proposition, he told the Meet The Managers conference on Friday. Benchmarks were becoming irrelevant, he said, because consumers did not care if an adviser beat an index, if they returned less than they could have got at a bank. Telling a client the fact you’d lost 1% was good news because the index dropped 4% would not be acceptable, he said.
More than a quarter of United States financial advisers now report in absolute terms with no reference to benchmarks, Coplestone said. “I don’t think anyone would want to pay a premium for mediocrity going forward.”
Andrew Hall, of K2 Asset Management, said changing demographics did not just mean more grey-haired clients.
Advisers should look at the opportunities presented by global trends beyond their ageing client base. Global trends offered investment opportunities, particularly in equity markets, he said.
Themes such as the growing reach of the internet meant production houses and firms such as Disney were a good investment because their potential audience was growing hugely, he said. Other trends, such as problems with obesity, made firms such as dialysis equipment producers a good option. Even moves towards an increasing focus on health and fitness boded well for sportswear producers.
Pengana’s Ric Ronge said the outlook for resources had also noticeably improved, after a period in the sin bin. “The outlook is the best it’s been in 18 months.”
He said equities were the best way for advisers’ clients to get exposure, rather than trying to invest directly or via ETFs, which were inefficient and illiquid.
Both said clients were increasingly keen on traditional investment processes where they could understand the value they were getting.
Hall said: “The simple, vanilla approach of something like buying direct equities resonated with investors and planners. The time of overly complex products has passed.”
But Coplestone said advisers who continued to seek out lump-sum clients and ignore the younger people saving for their retirements through KiwiSaver were doing themselves a disservice. He said the savings scheme was the elephant in the room and offered huge opportunities for advisers.
“KiwiSaver will underwrite the industry.”
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Comments from our readers
On 30 September 2013 at 9:13 am John Milner said:
I agree with Brent. These are the dying gasps of a redundant attitude to investment. On 30 September 2013 at 11:28 am Forthright said:
At a recent fund manager presentation the manager was crowing about his fund beating the index 60% of the time in up markets and 80% of the time in down markets. This information to me was worse than useless, what index? What market? What returns? I dared to ask whether his fund had returned more than the corresponding listed ETF. His answer was from the fund manager excuse book page 101, “it is difficult to make a comparison due to the inefficient and illiquid nature of some ETF’s”. Translation, “our fund will never have a show of beating the equivalent ETF in any market conditions”. Therefore do as you are told and pass this information onto your clients it will bamboozle them with BS.
In my experience the only return information a client wants is the absolute return after fees and tax. Also the return, better be more than 1% over what they can get at the bank.
I don’t particularly like performance measured against patsy selected indexes. I do think it is important for the investor to know how their net performance is going against the CPI measured inflation index and that they won’t run out of money before they run out of life.
On 30 September 2013 at 11:28 am R1 said:
Well said Brent. My thoughts even before reading your comments. It is pretty clear from their assessment of what people are looking for/need as to why some people are reluctant to pay for advice. On 30 September 2013 at 8:07 pm Collin N said:
Expecting consistent outperformance from your fund or fund manager is highly unrealistic. Even the very best funds or actice managers have periods or cycles where they underperform and it is realistic to expect this. Research has shown that good active managers underperform a recognised index about 40% of the time on an annual basis and Morningstar research has shown that over a a 10 year period just about every single top quartile manager will experience a rolling 3 year 3 year period in the bottom quartile. Advisers and investors who accept these realities are likly to do much better than those that don't. On 1 October 2013 at 9:08 am Independent Observer said:
"Good news - you're only down 5% against an index that is down 10%. But at least I saved you the fees". Don't think so... On 1 October 2013 at 4:43 pm Brent Sheather said:
Independent Observer you need to understand how 99% of the world's pension funds operate. They benchmark themselves against indices so a fund manager that said “good news you’re only down 5% etc” would retain his/her mandate. Are you suggesting that most of the goodness knows how many trillions of funds which are managed are managed incorrectly and you are right? Don’t think so!
As an aside I think the retail investment world has changed in the last few years and people are becoming less and less tolerant of stupid behavior so everybody needs to get their acts together and if they don’t the market and the FMA will act.
Regards
Brent
On 1 October 2013 at 8:26 pm Anthony Edmonds said:
Independent Observer
It is worth reflecting on the concept that a client's allocation to an asset class is based on the investment characteristics of the underlying asset class itself. Accordingly it seems somewhat counter-intuitive (even odd) to then want to invest in something that behaves quite differently to the asset class that you want to invest in.
My pick is that you will argue strongly that the best outcomes for investors are the ones that you are promoting to advisers!
On 1 October 2013 at 11:21 pm Forthright said:
There is a dichotomy between investment mandates for the world’s pension funds and an individual investor, who simply wants a cash flow strategy to meet income needs and investments which will maintain capital to keep pace with inflation and not run out of capital before death.
The pension fund has made promises to present employees, present pensioners and future pensioners that funds will be available to meet their income needs now and possibly 100 years from now. To help protect the value of the pension funds’ assets, the Manager uses hedging strategies, currency exposure, swaps and other derivatives to make sure cash flow is available to meet the funds present and future liabilities and maintain the funds capital to keep pace with inflation.
The investment goals may be similar but the investment strategies to get there are not the same. The risk free rate of return of 4% - 5% per annum may be perfectly acceptable for the individual investor but the pension fund will in all probability find the risk free rate of return unacceptable and will probably be aiming for 8-9% per annum.
The commonality is who cares what the indexes did or didn’t do, what is important is that both the individual investor and pension fund achieve the goals they wanted to achieve.
On 2 October 2013 at 10:36 am Brent Sheather said:
Hi Anthony
Absolutely agree with you there. I frequently tell new clients “we are considering investing in the stockmarket on the basis that in the long run it does well therefore we will buy the market, not one stock , not two stocks, not a small cap bio-tech fund based in Qatar … we will buy the market”.
Regards
Brent Sheather
On 2 October 2013 at 10:40 am Brent Sheather said:
Hi Forthright
I don’t think there is a dichotomy at all… As you say the investment goals are exactly the same thus it’s logical that the investment strategies to get there should be exactly the same and duh… they are.
I’m thinking 40% bonds, 10% property, 50% shares. Sure managers use hedging strategies, swapps and derivatives but this is at the margin. The bottom line is the investment portfolio not the little nuances.
What’s more the risk free rate of return is in no way acceptable for retail but hopefully they are more realistic than the institutions you allude to hoping for 8 -9%.
I will tell you “who cares what the index did” and that is virtually the entire professional fund management industry, ETF providers and of course all those consultants. Every quarter they look at performance relative to the index and this gives a logical basis upon which to asses whether the manager is adding value or not. This is the standard industry model and whilst it’s not perfect it is as appropriate for mum and dad as it is for the worlds biggest pension funds.
Regards
Brent
PS I think this strategy would keep the FMA happy as well particularly if it meant low fees for the client.
On 2 October 2013 at 3:04 pm Forthright said:
@brent sheather please explain to me why an allocation of 40% bonds, 10% property, 50% shares is appropriate for an investor who wants little or no volatility and who’s cash flow and capital protection requirements can be satisfied with the risk free rate of return.
Why would you put them into volatile assets when they don’t need those levels of exposure to volatility to meet their investment goals?
The FMA is more interested in the process you use to meet the clients investment goals than what you charge. I haven’t translated any of the code standards to mean you must achieve the minimum fees possible to comply with the code.
On 2 October 2013 at 4:16 pm Brent Sheather said:
Hi Forthright
For someone who wants little or no volatility etc etc then they should leave the money in the bank, clearly. I wouldn’t put them into volatile assets if they didn’t need that type of product. But just this week I met with an 84 year old and she told me to invest having regard to her requirements and to ensure that at least part of the portfolio was inflation proofed for her 40 year old son.
Your last point is interesting because the FMA is on record as saying “forget about process we are interested in outcomes”. If the outcome is crap the FMA don’t care if you have used a 5,000 line DCF model overlaid with Monte Carlo analysis. I repeat outcomes dominate process!
In the UK the regulatory authority HAS translated doing the right thing to mean using minimum fee products. Get ready because that regime is inevitable.
Have a nice day.
On 2 October 2013 at 6:05 pm Independent Observer said:
I'd be interested to hear the FMA's view on their monitoring of process v outcomes... as I was under the impression (having read the mandate for the FMA) that they were the enforcers of the rules established by the Code Committee
This raises further questions around the validity of the FMA questionnaire for advisers... but I'll leave that one for another day
On 3 October 2013 at 3:12 pm Mac said:
Brent Sheather "In the UK the regulatory authority HAS translated doing the right thing to mean using minimum fee products.".
Rubbish (again). Identify what Financial Conduct Authority publication that provided this advice to consumers.
Also based on your view that low fee products produce the best investment results, check out the KiwiSaver results.
On 7 October 2013 at 5:55 pm Kimble said:
The benchmark is the alternative. And so benchmarks will always exist.
Absolute return funds still have a benchmark; every other absolute return fund.
Investors need to know TWO things. The first is how they are tracking towards their goal. The second is the performance of the investment choices. The first is appropriately done with CPI in mind. The second needs a good proxy for alternative choices.
On 8 October 2013 at 11:51 am Brent Sheather said:
Hi Mac
It's called the Retail Distribution Review or RDR to its friends. A major feature of the RDR is forcing advisers to look at the entire universe of products and the way the FCA is interpreting this is "tell me why you haven't recommended ETF's for this client". Coincidentally many of the most popular UK investment trusts now trade very close to NAV having traded at discounts for most of the last 100 years.
Regards Brent
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ETF’s based on benchmarks are more popular than they have ever been. … “more than a quarter of financial advisors now report in absolute terms with no reference to benchmarks”. I wonder why that is. I suspect it is because after fees they don’t beat the benchmarks, so very convenient. LOL.
Pengana says “the outlook for resources is the best it has been in 18 months”. Duh the price of BHP is up 20% from its lows so it doesn’t look like this is exactly new information, much less useful information. Pengana said “equities were the best way for advisor clients to get exposure rather than trying to invest directly or via ETFs which were inefficient and illiquid”. Ridiculous comments. But I guess if your business is selling active management you can’t let the facts get in the way of a good sales pitch.