Do investment fees matter more than asset allocation?

I’m speaking at the Pension and Benefits UK Show on July 1st on whether fees matter more than value. I’m going to be arguing that, for consultants, fees matter more – because we can do something about them.

But  while total return matters most, it’s not something we can control, most return is market driven and none of our business.

 Am I right?

My friend and colleague, Emmy Labovitch (she what wrote the stuff that the FCA published this week) says that she has moved on and that the world is now about educating people to understand value rather than just stamping on fees.

I don’t get why she says this (as she just stamps on unwanted fees like cockroaches in a kitchen). I think she is a school teacher and every time I agree with her, she decides its time for the next lesson!

 Should I fight?

It may be that she will be in the audience. If no-one rises to Jonathan Stapleton’s challenge and steps into the ring against me, she may even be my opponent.

The idea of the session is to test on the audience, the debate about  where investment consultants can add value. Is it in getting a reluctant public engaged in getting asset allocation right, or is it in protecting the general public against rip-off charges and costs (as they are generally known).

Of course , being told I’m wrong by Emmy – the old school head girl, is not something that I’m having anything of. I am busy marshalling my arguments and honing my attack.

Are the numbers are with me?

So I am pretty pleased to find John Authers publishing an article in http://www.ft.com (get yourself a subscription) that shows quantitatively that the differences over 30 years between certain famous model portfolios were as nothing (in terms of member outcomes) against the impact of halving the fees in each portfolio.

Advisers advise, fund managers manage

My argument  is a simple one. Fund managers manage funds, advisers keep them honest. If advisers concentrated on keeping fund managers focussed on member outcomes by ensuring they managed costs, fund managers would do a better job.

But if advisers feel their job is to manage funds, they should become fund managers and stop managing funds.

I think we need well-advised well managed funds but I don’t think you can do both jobs at the same time without having another adviser keeping you honest.

Cost control is not the only job of an adviser

This is not me saying that an adviser should be so unambitious as to give up on the business of value altogether.

I, nor First Actuarial, are not so dumb as to dismiss the search for alpha (or even smarter beta) in the relentless assault on fees.

Clearly there are some fund managers who make sense of the markets better than others, and whether through their assessment of stocks or of sectors or of asset classes, can add value.

And pointing people to good managers and away from bad managers has to be within the adviser’s brief…

As well..

But as the chart shows, advisers who had chosen managers with low cost bases would have added more value than advisers who had chosen the right manager at the wrong price.

Which is more or less what I would argue against anyone who stood up and said the job of the investment consultant is to find the right manager or to manage portfolios of managers to get the right mix of managers and asset allocation or any more complicated role than that!

We have, collectively failed to bring the cost of intermediation down below 2%pa over the past 150 years (see blogs passim). By intermediation, I do not mean just the cost of advice, but the cost of the chain of people who interfere with the direct investment of your money- lawyers, custodians,advisers, brokers,dealers, managers etc.

I see the biggest challenge to our generation of investment consultants  is to  do better than the previous five, whether we can use technology to disinter mediate and to halve the costs within the portfolio.

But you might think differently….

So here’s the challenge to you.

  1.  Get yourself a ticket to Pension and Benefits UK 2015.
  2. If you want to challenge Tapper, get in touch with Milly Sheehan by email with the header “I want to challenge Taps”   milly.sheehan@incisivemedia.com
  3. Whether on the rostrum or from the audience, turn up to the session which is in the afternoon of July 1st (QE2 Conference Centre)
  4. Have your say and tell me that I’m wrong!
  5. Influence the audience and win the vote!

Henry Tapper

First Actuarial

More Phony Numbers–This Time on the Anticorruption Impact of Open Data

OK, I know I’m beating a dead horse. Within the last month I’ve already posted several times (see here, here, and here) about bogus anticorruption statistics, as has Rick. And I promise that after this post, I’ll move on to other topics. But I can’t help commenting on this latest release from Transparency International, criticizing the recent World Economic Forum (WEF) meeting for not explicitly addressing corruption. As its lead example, TI faults the WEF for not addressing issues like open data (and openness more generally). I’m sympathetic to TI’s policy position, but in making the case, TI asserts, “One study suggests that open data could reduce the costs of corruption by about 10 percent.”

I was curious (and, admittedly, skeptical) about yet another seemingly precise estimate of something that’s inherently hard to measure. So I clicked on the link to the “one study” that “suggests” that open data technologies would reduce the costs of corruption by 10%. This “study” is actually a report (really, an advocacy document) from an Australian consulting firm (Lateral Economics), commissioned by a philanthropic fund (the Omidyar Network) that invests in open data initiatives. How does this “study” reach its conclusion that open data could reduce the costs of corruption by 10%? I will now quote in full the entirety of the evidence and analysis supporting that conclusion:

There is now a growing body of evidence that open data plays a role in reducing corruption. Open data can reduce the extent of corruption by both reducing its private returns and making it easier to detect. Based on the evidence, we think it reasonable to suggest that the costs of corruption would be reduced by of [sic] the order of 10%. [p. xiv.]

[And again, later in the document:] To estimate the benefits of open data in reducing corruption, we begin with estimates of the costs of corruption in developed countries…. We think a reasonable contribution of open data in reducing corruption is on the order of 10%. [p. 58]

That’s it. What’s “the evidence” on which this 10% estimate is “based”? Who knows. There’s essentially no discussion, save for one anecdote (repeated several times throughout the document) about how open data helped prevent a $ 3.2 billion tax fraud in Canada in 2007–which, it should go without saying, is not actually a measure of the costs of corruption. As far as I can tell, the 10% figure is completely made up.

I’m not sure I can really come down too hard on TI for including this bogus figure in what is, after all, an advocacy-oriented press release… But really, I mean, come on. This casual invention and repetition of fabricated figures is ridiculous, embarrassing, and–as Rick warns–could come back to haunt the anticorruption movement, ultimately undermining its credibility. That TI press release could have worked just as well, and been just as persuasive in presenting the case for the importance of open data, without all the nonsense statistics thrown in just to sound impressive.

Seriously, guys, cut it out.