The death of the managed fund

Some of you must wonder sometimes whether I enjoy being in the financial serv-ices industry. Well I do. Few other industries could be more dynamic, more suited to electronic commerce and the global economy than ours.

Some of you must wonder sometimes whether I enjoy being in the financial serv-ices industry. Well I do. Few other industries could be more dynamic, more suited to electronic commerce and the global economy than ours. At the same time, few others could be helping their customers in such an overt and positive way. It is this opportunity to do good while being in an innovative and exciting industry that stimulates me.

What upsets me is that some elements in the industry that have become success-ful, now want to protect and entrench their patch at the expense of what made this industry (and them) successful. What made them successful in the first place was satisfying their customers needs in innovative ways. Fund managers stole the industry from the life companies and banks, while financial planners stole distribution from the life agents and the accountants. The catalyst for this was superannuation.

The catalyst for change now is technology and globalisation. To this should be added more educated and more demanding customers. Consumers want and will have more choice, they will be promiscuous, and they will demand what they want, when they want it. This will have implications for advisers, but interestingly enough, for fund managers also.

Advisers will survive technology, globalisation, consumerism and commoditisation if they remember and focus on their real and only role - to give advice. Those advisers that are product floggers, transaction processors and report producers will not survive - and nor should they. The adviser that focuses on customers' needs will flourish, as proper advice cannot be commoditised or automated.

By proper advice, I do not mean as prescribed by ASIC or the FPA. I mean advice that suits the customer's needs, which is provided in a manner and a fashion that suits the customer. This may mean no long plan; the customer doing their own transactions; having a portion of their money that they play with; and fixed fees rather than asset based fees. The challenge for the adviser is to shape and provide their service to the needs of each of their clients and still be re-warded. Those that can achieve this will do very well, and have a sustainable and growing business.

The more threatened species is the fund manager. In my presentation at the 1998 FPA Convention in Cairns, I discussed whether managed funds had had their day in their sun. I asked: "Why were they conceived in the first place?" and "Do the same drivers still apply today?"

I argued that managed funds were conceived for three reasons. First, the pooling on many people's money gave each of those people access to investments otherwise beyond their reach. Second, it enabled them to spread their risk over many in-vestments with little money. Third, it gave them access to professional invest-ment advice (through the fund manager).

Also, I asked: "How far can the managed product be unbundled?" I listed: asset allocation, asset selection, asset trading, asset administration, client record keeping, client reporting and marketing.

At that time, I asked these questions from a hypothetical perspective, as I am one that likes to question everything and take nothing for granted.

In some of my earlier columns I have talked about my "continuum theory" - the accepting that something will continue because it is and has been. In this arti-cle, I decided to revisit this hypothetical, because before the end of this cal-endar year, it could be reality. There is the real possibility that the fund manager will be unbundled out of existence.

Why? Firstly, the asset roles the fund manager plays. van Eyk Research has just released some Internet-based software called "iRate". This provides an adviser with sophisticated research tools for asset allocation and asset allocation, equal to, or even better than, what some fund managers have. Secondly, elec-tronic trading will make it possible to construct and administer a broad portfo-lio with limited funds. As far as record keeping and reporting is concerned, more and more of this is being done by administration services. This leaves mar-keting.

I suggested this could be a reality by the end of this year, but will it be? In a small way yes, but there are powerful vested interests that will oppose it. Obviously, the fund managers, but also the regulators, lawyers, accountants, in-dustry bodies and even some advisers. They all have a vested interest in main-taining the status quo. But, the simple question I ask is what is in the best interests of the customer? If those with the vested interests don't respond to that properly, they won't have any vested interests to defend.

We have already had problems with managed investments, with property and mort-gage trusts, where the assets did not match the liabilities. Even for equity trusts, managers give themselves an opportunity to freeze redemptions if there is a run on a trust. Also, what about the unresolved capital gains tax issues?

However, I would argue the real issue facing managed investments is that many managers have not realised that their main competitor is not another fund man-ager, but the stock market itself. While the stock market has become very effi-cient and inexpensive for the processing of buys and sells, fund managers are still inefficient and expensive for applications and redemptions.

At the Money Management/AiC Financial Planning Solutions Summit 2000, Anthony Hunt, from Perpetual Trustees, revealed some statistics that show some managers still take more than five working days to advise confirmation of an application or redemption, while some even go out beyond 15 working days.

Which is easier for the adviser - go on to the Internet or ring the broker, place the order and have it confirmed within a few minutes. Compare this to the managed fund process, especially the paper work and delay in confirmation. No comparison.

In my "cups", I wonder why advisers put up with this, but in my sober moments, I can think of many reasons why. My continuum theory is one such reason - it has always been this way. But I think the real reasons are more obvious and incestu-ous than that. Fund managers have made an art form out of "subsidising" this industry. They have become our default government. No one does anything without asking fund managers for sponsorship, including the FPA. The fund managers pro-vide most of the technical support and they are the ones that are the most ef-fective in lobbying with the ASIC. Many advisers' businesses depend on trails. Lately, more are positioning themselves as the administration service operators. They are now trying to control distribution. They own the industry.

Hopefully, the fund managers and others have not lost their ability to be inno-vative and exciting. Listening to a number of the speakers at the Summit 2000 Conference has given me heart. Some of the speakers are challenging the status quo, even more than I have.

What does the future hold? That depends on who you are. The customer will get what they want. Whether we are part of that future depends on how we respond. If we respond by defensibly protecting the status quo, we have no future. However, if we can truly work out where we can add value, we will survive and prosper. This will be a lot easier for the adviser than the fund manager to do.