No-frills financial services

Having recently got my second jab (Pfizer if you’re asking) I decided to venture into a supermarket. Now, given how often I go on about it, many of you probably know I need to follow a gluten-free (GF) diet. So good old M&S is my supermarket of choice; it caters extremely well for my niche dietary requirements.

A ready-sliced gluten-free bloomer loaf is £2.40. It has 6 slices. I buy it because it tastes of...well, bread. A lot of other GF bread tastes like something Amazon uses to package books. I’ve come to terms with it though: niche needs are expensive, especially if you want quality as well.

Niche requests in financial services are no different. If our needs are simple, do we need to pay 3 to 5% in annual fees or large one-off payments? If they are complex, then maybe the answer is yes – you could gain more value than the cost in either better returns or savings from sensible tax planning.

The UK financial services industry remains very fragmented, with many different types of firm in the customer value chain: asset managers, wealth managers, financial advisers and platforms. In the US often one company provides all of these services for an eye-wateringly low total cost, often sub-1%, offering simple advice and passive investment solutions. Pile it high and sell it cheap. We have tended to be more reluctant to embrace this model in the UK. Hargreaves Lansdown and St James’s Place are probably closest to a fully integrated model, but costs haven’t been hammered down as much as across the Atlantic. For a while it looked likely that UK retail banks might be big players like their counterparts in the US, but time and time again they have failed to find a successful formula.

Now comes Vanguard, attempting to bring a version of the US model here. The Ryanair of wealth management perhaps? Harsh, probably; however, its low-cost, commoditised option could really help fix the UK’s yawning ‘advice gap’.

This gap between the people who need advice and those who have the capacity to give it has been growing in recent years. Surveys have shown most IFAs routinely have to turn away clients because the case sizes don’t make the relationship viable. So Vanguard’s one-size fits all approach to capture the non-advised is probably a good thing. It won’t be right for everyone, of course. Instead it should be a cheap and cheerful option for people with smaller pots and straightforward goals and circumstances that don’t justify more nuanced advice. It doesn’t mean that Vanguard will stop at the smaller case sizes though!

So, who should be worried by this new disruptor? Well, every link in the value chain. Asset managers such as Schroders and Fidelity have launched their own platforms, Hargreaves has an asset management and advice business, and Charles Stanley is a platform and wealth management business.

In the US, fees don’t have to be unbundled, so a provider can cross subsidise services, something that you cannot do here in the UK. That does provide some cover. It is odd that greater regulation has resulted in a potentially more costly solution to the customer. Or is it?

So what are the potential market implications of Vanguard’s move and how are we thinking about this from an investment standpoint? There will no doubt be renewed pressure on fees at all links in the value chain. Platform fees will likely fall. They have been remarkably resilient for years at a time when asset managers and wealth managers have been under pressure. Advice fees may also come under pressure. And, of course, fintech is adding fuel to the fires of change spreading across the industry.

This is all likely to mean more consolidation as advice and investment becomes more commoditised. We could see more firms attempting, either organically or by acquisition, to provide a one-stop shop, advice to execution, to rival Vanguard, Hargreaves and others. We are likely to see more M&A activity in the listed space over the next year or two through good strategic thinking or just plain ole panic. As always execution risk is high as a recent high profile merger has proven.

This will leave niche, or bespoke as our corner of the world calls it, and premium services. I do believe there will still be room for specialist holistic advice and active management, both personal and mutual, but all will have to prove their worth. In fact we could see less pressure on fees in this area as those who can truly demonstrate value should be able to reverse, or at least stall, the ‘race to the bottom’ that we have seen over the last decade as everything was priced is if it were commoditised. Some funds/services should be more expensive than others – just like any other sector.

Those of us trying to make the equivalent of the six-sliced GF bloomer need to be on our game.

Image by David Coombs.