You may remember a few months ago I took aim at the practice of charging investment fees based on a percentage of assets. This, I suggested, was a complete racket entirely unjustified by the cost base.
The good news is that at least some in the investment industry seem to be getting the message. Back in March, the huge US broker platform Charles Schawb announced a big change to its fee structure. Under its new pricing model, Schwab Intelligent Portfolios Premium will charge a flat $30 monthly fee after a one-time $300 fee instead of 0.28% of assets, starting April 1.
Users get access to a mixture of 53 exchange-traded funds (ETFs) from Schwab and other asset managers, and subscribers will receive a 'comprehensive financial plan with a customized roadmap and unlimited one-to-one guidance from a certified financial planner professional'.
This month and closer to home, Interactive Investor unveiled what it described as a Netflix model of charging – though I think Spotify is a better exemplar based on our family consumption patterns.
The online investment platform announced three 'Service Plans to suit different needs, with as many accounts as investors want under one Service Plan'. Put simply, from 1 June if you choose one of the plans – which range from £9.99 per month to £19.99 a month in cost – you get a range of free trades plus reduced costs for additional trades.
Interactive Investor also says that each service plan will give investors back a free credit of £7.99 a month. Sipps will continue to feature an additional monthly fee of £10 per month.
When will funds follow suit?
This monthly charge model is clearly the ‘new thing’ which will, I hope, reshape the whole investment industry. Only a few days ago asset manager Octopus conducted a survey of 275 financial advisers and found 77% believed the UK would move to a subscription fee model instead of an asset based charge. And about time to.
But we all still wait the really big change – asset managers moving to this system. Financials services researcher Jeremey Grime of Charlton Illingworth suggests that 'If this model becomes the norm for financial advice I find myself wondering when it may arrive in the fund management space too.
'It would decimate the super profits of some fund managers who run large global funds while potentially lowering the barriers to entry for small funds. Which would move the landscape in favour of niche products away from large cap product.' Quite. Sadly, I see no evidence of this change just yet but hope springs eternal.
But I do see another competitive challenge emerging in the investment space and this one comes from an unlikely source: banks.
Now I won’t bore Citywire readers with my obsession about digital only outfits such as Starling and Monzo, suffice to say that if one sector deserved a proper upending that sector is banking. For far too long the big banks have all collectively screwed us over with sub standard products and excessive charges. And as for small and medium-sized business banking… I could wax lyrical for hours on that particular vexed subject.
The good news is that change is coming and the likes of Starling and Monzo are now providing fantastic products that are every bit as good as the high street banks, and I speak as a veteran Starling user who also maintains other mainstream bank accounts.
This weekend The Sunday Times reported though that Monzo is readying a form of cheap (or even free) funds supermarket which might look and feel a bit like Hargreaves Lansdown for millennials. This makes sense not least because rival fintech unicorn Revolut has long been rumoured to be readying its own super cheap investment platform based around cheap (or free) ETFs.
I’m sure that wizened and experienced Citywire readers will react with a shrug of the shoulders to these grand plans but I would cordially suggest that they aren’t the real target market for this new disruption. These new business models are aimed at the main, mass market of savers.
I’d argue that when it comes to investment platforms there are in effect four prevailing disruptive business models. The first is using the internet to run investment platforms that provide a community and lots of content to enable cheap funds and share dealing (the Hargreaves and AJ Bell model).
Next up we have the zero-price model which is currently being used by Freetrade in the UK and Robin Hood in the US. This is a radical solution but not entirely proven in business terms.
There’s also the pure technology solution, using great interfaces and clever algorithms to provide a better investment experience (the Nutmeg, Scaleable and Exo model). Last but by no means least there’s the tried and tested model of mass-market change, bank distribution channels.
Digital banks could prove the catalyst
Most ordinary folk aren’t that excited about investment but have to save. That money conveniently accumulates in a bank account. Banks with a real understanding for technology such as Barclays have tried – and failed in my opinion – to harness this grim reality by offering upgraded online investment products.
Call it the dreaded tech cross sell. 'You trust us as a bank (?) so why not buy our investment services?' Now the good news is that banks are by and large hated as much as they are trusted and they are also slow moving beasts who frequently couldn’t organise a five-a-side football game even if they tried.
So the bank distribution model for investment, the dominant one in continental Europe, hasn’t really taken off here. Thank God. But outfits such as Monzo and Starling are trusted and are capable of moving quickly.
Once they start to offer us investment solutions then we could see very rapid disruption – and we’d see whole new segments of the population start getting interested in investment. That would in turn encourage the existing players to up the ante and I would wager that would force the likes of Hargreaves Lansdown to change their pricing model to this Netflix model. Then all we’d need is for said digital platforms to launch funds with new pricing models and the transformation would be complete.
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