The ‘disruptive innovators’ making waves in finance

The world of investment gets stranger by the day. Last week, I wrote about the bizarre world of negative interest rates in Switzerland and Denmark and about negative yields, where people pay some governments for the privilege of lending them money.

Since then, things have taken an even odder turn. Yields on bonds issued by Nestlé went negative, meaning investors have been paying more for Nestlé bonds than they know it is possible to get back in interest and capital payments.

This has prompted some analysts to suggest that, in a deflationary environment, it might soon make sense for solid companies to offer corporate bonds paying no interest at all. After all, if you have to pay to buy ‘safe’ government debt or to hold your money in a deposit account, giving your money to a blue-chip international company to use for free for a couple of years isn’t as dim-witted as it sounds.

It also makes sense to pay way more for whatever yield you can get on equities than you would have ever considered in a less financially manipulated environment. This makes it even more impossible than usual for rational analysts to forecast overall market directions. But here’s the thing: within all this madness, something is becoming more sane. That something is the structure of the financial services industry.

If you had asked a fund manager ten years ago what the charges on his fund were, the odds are he wouldn’t have known. And if you asked your commission-biased adviser, he wouldn’t have given you a straight answer. Now the former will know the full answer — not just the management fee, but the commissions, foreign exchange costs and the like.

And, in the wake of the retail distribution review, the price of advice and the price of an investment fund are no longer entangled, so your adviser should be happy to tell you too. Better still, when they do, the number will often be very significantly lower than it was a decade ago. The unbundling of commission and fund management fees means that the costs of buying any product is not just becoming more transparent, but is cheaper too.

Fund managers now charge well under 1% a year to run good funds. A few weeks ago, we heard of a new fund that will try to align the interests of investors and managers by charging nothing but a performance fee. If there’s no outperformance, there’ll be no charge. This week, Neil Woodford announced a similar charging structure for his new investment trust.

Finally, the relentless price war in the exchange-traded fund (ETF) market — which has been spilling over into the actively managed fund market — means that you can now put together a perfectly good passive portfolio and hold it on one of the online stock broker platforms for very much less than half a percent.

Buy a Vanguard tracker and you’ll pay 0.07% a year. There’ll be a platform charge on top, but the fund is practically free.

And it isn’t just costs where we are seeing more transparency.

I wrote here a few months ago about my frustration that more funds didn’t automatically reveal their ‘active share’, the number that shows you the extent to which they add value and the extent to which they simply track the index.

Already I am less frustrated. Several companies have told me they intend to add the ‘active share’ to their fact sheets. Hargreaves Lansdown has given a number for its new HL Multi Manager UK Growth Fund (a lowish 55% for those who are interested in this kind of thing).

This brings me on to the online brokers.

In 1995, I knew nothing of Hargreaves Lansdown. But in the 1990s, they started refunding the hefty initial commissions usually paid to independent financial advisors (IFAs) to investors instead.

In 2000, they introduced the Vantage service, which utterly disrupted the market for retail investment in the UK. Now, even the vaguely financially literate run their Isas and Sipps online — and it’s getting cheaper and easier to do all the time. More price cuts were announced this week.

I keep being asked why the wealth management market has not been disrupted properly. But this, I think, is one sign that it is about to be. Already if you want your money managed for you, you can go online with as little as £5,000 and get someone like Nutmeg, Wealth Horizon or to do it for 1% or less a year. Hargreaves Lansdown is to launch a discretionary service for, it says, under 2% all-in.

These prices are too high — if you’ve enough dosh, you can get a human wealth manager who will buy you lunch every Christmas for not much more than 1% — but they will be challenged as new entrants come into the online wealth management market. And that means the slightly stuck-in-its-ways wealth management sector, where it’s still possible to be charged 2.5% a year, will be pressured into better behaviour just as active funds have been pressured by the rise of ETFs.

The smaller companies specialist Unicorn Asset Management has the strongest performance of any equity fund provider in the UK over five years, achieving average outperformance of 50% across its funds, a new ranking shows.

It takes time, but competition and disruption do work. When my career began, the standard fee for every trade made by a discretionary wealth manager for a client was 1.8%. Other innovations in the past few years include peer-to-peer lending and crowdfunding. The latest innovation here is buy-to-let crowdfunding.

I am definitely not going to be doing this myself — there are far too many things that could go wrong — but I love the idea that you can go to a website such as and join a crowdfunding group to invest in a two-bedroom house in Manchester.

People constantly moan about how little disruptive innovation there is in the financial sector in the UK. But when I look around, pretty much all I see is an endlessly disrupted and fast-improving environment for the private investor. It’s been partly driven by the carrot of competition and partly by the stick of regulation. But either way, it’s a very good thing.

• This article was first published in the Financial Times.

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