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It’s complicated: why the investor-advisor relationship must be realigned

Wednesday 26th November 2014

By Gaspar d’Orey, CEO and co-founder of Zercatto
In news that will surprise almost no one who invests in the stock market, research from the Cass Business School at City University, London has found that UK fund management fees are skewed in the interests of fund managers. 
By analysing the performance of thousands of fund managers of varying skill levels, the study revealed that the most commonly used fee structure in the investor-fund manager relationship leaves the fund manager better off than the investor. In this arrangement, the fee is fixed as a percentage of the assets under management. Even if the fund manager’s performance falters, the investor still has to pay up. As the academics at Cass rightly point out, why is this the most common structure when it isn’t the best fit for customers’ needs?
This structure might benefit fund managers now, but it’s not a sustainable option for the future of the business. If managers don’t work in a way that will help customers, they’ll stop investing on these fee terms. The longer such outdated fund structures stay in place, the more customers will be lost to newer investment propositions and – frankly – they’ll miss out on the joys of investing in the market.
Wealth management has become an unrealistic activity for far too many people because of the unnecessary management fees associated with it. Investing isn’t a luxury, but it’s increasingly marketed in this way to shield the industry from criticism of its fee models. After all if you drive a Bugatti, you’re unlikely to quibble much about your fund manager’s fees. But so many believe that the stock market speaks an alien language and that having a good fund manager on board is the only way to navigate the market’s stormy waters. Even the best fund managers get things wrong, however. And when they do, should they really be rewarded for it?
So what’s the answer? There needs to be a shift towards a more performance centric system to ensure that investors only pay when they see returns and advisors are given an incentive to promote their client interests and perform. Only when this balance is restored can investors feel confident that their chosen adviser is on their side, working to the best of their abilities to make a profit for them both. This is exactly why my business, Zercatto, adopts a symmetric performance-based fee structure.
The fixed fee as a percentage of the assets under management structure is unsustainable, and it’s unfair to all those who want to invest but can’t afford the guidance of a fund manager. With interest rates so low this is particularly damaging, as many of those who are put off investing are missing out on great opportunities to profit. As investment professionals, I firmly believe we should be encouraging the modern-day investor to engage with the markets by offering alternatives. This is the only way we can restore faith in the wealth management sector and ensure our industry is accessible to the masses.
There’s a reason that the Cass study is called ‘Heads we win, tails you lose’. Unless the interests of the investor and the adviser are realigned, wealth management will stay out of reach for many people, totally unnecessarily. Cass’ Andrew Clare put it best: “How long can an industry ignore the best interests of its customers?”

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