There was an article in FT Money a few weeks ago that I have only just got around to reading (you should see the pile of things in my office I am getting around to reading!).
It is by the billionaire founder of Fisher Investments, Ken Fisher. He explains why, as he sees it, fees in the investment management business aren’t too high. If they were, “competition would have lowered them long ago”.
Instead, says Fisher, fees on average have “barely budged at all” in the last three decades of free competition. People “buy what they like for what they are willing to pay” and clearly they are willing to pay the fees that Fisher charges.
The conclusion? There’s no problem here. No problem at all. No problem with the fees and no problem with the people who harvest those fees being worth $2.4bn. And, according to Fisher, anyone who thinks there is a problem is not just wrong, but a “Bolshevik”.
There are two problems with this. The first is with the idea that the fund management industry has, as Fisher claims, very low barriers to entry. That just isn’t so.
There may be thousands of small companies out there working to break into the big time, but the market remains hugely dominated by a very effective oligopoly of big fund management firms, who have asset gathering, and hence pricing power, start ups can only dream off.
Note, too, that the huge volume of regulation here is another whopping great barrier to entry in the business.
Most heavily regulated businesses have their prices regulated to make sure that this kind of barrier to entry doesn’t mean they get to make super profits year after year after year. That’s not the case in the fund management industry.
Punter ignorance also plays a part here: pricing has never been and still isn’t transparent to the man on the street. None of the many friends who approach me about their investments have the faintest idea how they are charged or how to compare those prices.
If they buy a car, they can check the price competition in showroom windows or online in a tick. If they want to buy a portfolio of funds themselves or via an independent financial adviser, all they can do is send me begging emails (“we just aren’t sure if this is the right price or the right thing to do – any pointers welcome!”).
If it isn’t transparent (in pounds and pence), it isn’t comparable, and it therefore doesn’t even begin to count as a fully free market from the point of view of the consumer.
Then, of course, there is the fact that even despite this semi market failure, Fisher is wrong: the cost of good fund management is being forced down by a rise in transparency – thanks to the retail distribution review (RDR) in the UK – and the pressure brought to bear by passive alternatives, something some of the UK’s top managers seem to have accepted.
Initial charges on funds have all but disappeared, and a manager launching a new fund with a fee over 1% these days would find his offering pretty coldly received by the nation’s wealth managers (Ken Fisher’s lot aside, of course).
One example: could you have got Neil Woodford for 0.75% a year five years ago? No. Can you now? Yes.