Vanguard Chairman and CEO Bill McNabb outlined four broad trends that will shape the future of the global fund industry in a speech to financial advisers at a Morningstar conference.
Bill McNabb, Vanguard Chairman and CEO.
McNabb said that changes in regulatory schemes, advisory fee structures and advice models, along with the growing demand for low-cost ETFs, 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,” said 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 advisers.”
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 advisers,” added McNabb.
McNabb argued that trust is, in many respects, an intangible concept. But he said that 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.
McNabb postulated that trust can be built and maintained by a focus on plain talk, simplicity and low cost.
On cost, McNabb said the maths is simple: The less investors pay for an investment, the more they keep. And as cost savings compound over the long term, he believes that ETFs, along with other low-cost investment products, are a wise choice for investors.
McNabb also discussed the concept of “adviser’s alpha.” Traditionally, the value proposition for many advisers has been based on their investment acumen and prospects for delivering higher returns than those of the markets. But, McNabb said, no matter how skilled the adviser, the path to better investment results may not lie with the ability to pick investments or strategies.
Instead, McNabb proposed that advisers 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.