Vanguard Chairman and CEO Bill McNabb has outlined four broad trends that will shape the future of the global fund industry in a speech to financial advisors at the Morningstar Canada Investment Conference.
McNabb (pictured) believes that changes in regulatory schemes, advisory fee structures, and advice models, along with the growing demand for low-cost exchange-traded funds, are the “four forces” that will transform the investment industry in the years to come.
These changes are being driven by investor demand. “Individual investors are smart and getting smarter,” says McNabb. “And that’s a good thing. Increasingly, they are bringing a healthy consumer mentality to their investment portfolios. They want to know what they are buying and how much they are paying for it. And they want to know that they can trust their investment advisors.”
Investor trust has deteriorated noticeably since the global financial crisis. “We cannot underestimate the importance of trust in the relationship between investors and their investment advisors,” says McNabb.
He feels that in many respects, trust is an intangible concept, but there are some very tangible and tactical things that investment professionals can do to continue to build and maintain client trust over the long term. They are embodied by three core concepts:
Plain talk: Provide greater transparency on fees, and clear and candid explanations about a fund’s objectives, holdings, and risks.
Simplicity: In an increasingly complex and crowded investment marketplace, investors are searching for products and strategies that they can understand—and that are built to last.
Lower costs: The math is simple: The less investors pay for an investment, the more they keep. And cost savings compound over the long term. Low-cost investment products such as exchange-traded funds (ETFs) can be a wise choice.
McNabb also discussed the concept of “advisor’s alpha.” Traditionally, the value proposition for many advisors has been based on their investment acumen and prospects for delivering higher returns than those of the markets. But, McNabb believes that, no matter how skilled the advisor, the path to better investment results may not lie with the ability to pick investments or strategies. Instead, advisors should consider a new value proposition based on alternative skills and expertise. That is, they have a greater probability of adding value, or alpha, through relationship-oriented services, such as providing cogent wealth management and financial planning strategies, discipline, and guidance, than by attempting to outperform the market.