The Importance of Investment Adviser Value Proposition

Few would argue that the financial advice industry is undergoing one of its most significant periods of change since its inception. Old business models are dying and new ones are being created.

As is the case with any industry going through transition, industry participants are re-evaluating their service models and their value proposition(s). For financial advisers this is particularly true when it comes to their investment offering.

Here, advisers are facing a number of competing forces. Firstly, the heightened compliance burden across the industry is driving advisers to look at how they can better streamline their investment service offerings, with efficiency and scalability being key considerations. Secondly, Best Interest Duties have resulted in a significant increase in the focus on the “all in” costs to clients. While some may argue that this heightened focus on costs comes at the expense of other benefits, it cannot be ignored. Finally, and most importantly, there is the ever present desire from the majority of advisers to continue to do the best by their clients.

One key outcome has been the shift by advisers towards the use of ETF’s. As most advisers know, ETF’s provide cost effective exposure to underlying asset classes via a listed vehicle that is liquid and easy to access. They are also a perceived antidote to underperformance, with most ETF’s simply tracking a benchmark index.

While ETF’s are an almost essential part of a cost effective diversified portfolio these days, the shift towards completely “passive” portfolios constructed solely of ETF’s does come with some significant trade-offs. Below we talk through some of the considerations:

• Adviser Value Proposition – As advised investment portfolios across the industry become more homogenous, so too do the benefits to clients. For example, an advice firm may have created a superior risk assessment process, or an adviser may know her client’s core needs much better than her competitors. But can they truly demonstrate they have provided additional value when the resulting portfolios look identical to their competitors across the industry at every risk level? Differentiation for differentiations sake is never an optimal outcome. Conversely however, a one-size-fits-all across an entire industry is rarely an optimal outcome either.
• The commoditisation of portfolios – Along with a lack of differentiation, comes the commoditisation of portfolios, which limits the ability of advisers to tailor their advice to their client base. It also ultimately results in disruption. In other countries ETF providers are already growing their direct-to-consumer offerings. This is now starting to happen here. The chart below shows the growth of direct-to-consumer “robo” offerings in the US:

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Source: CB Insights

• There will always be a degree of subjectivity in constructing diversified portfolios – While the catch-cry “just buy an ETF” is increasingly heard on social media, it is not a panacea to all the risks that come with active management. This is because there is no generally accepted index for multi-asset class portfolios. So even the process of selecting/weighting ETF’s themselves is an active management decision. Hence investing in a highly commoditised or standardised ETF-only offering still comes with the risk of underperformance vs alternative offerings.

In summary, advisers need to take into account a number of factors when constructing an investment value proposition. Generally speaking, ETF’s are a valuable tool and are likely to form a key component. However, for advisers that want to create a client centric service offering, some deeper thought is required.