Question: How many CFA charter holders does it take to change a light bulb? Answer: When you ask “how many,” are you asking for the mean, median, mode, a rolling average, variance or semi-variance to a certain population sample…?
Paralysis by analysis often seems like a viable career track in finance, especially when it comes to product development. Even here, though, history offers a pattern of what to expect. Product development usually follows one of two paths in investment management: greater innovation or lower pricing. The former of these is a margin builder, while the latter can be a margin killer. After watching the price of trading drop for decades, it wasn’t so surprising when J.P. Morgan announced that it would offer free online trading for certain investors last month, but when $2.5 trillion manager Fidelity Investments announced they were going to be offering two “free” index funds, the industry rocked on its heels. Is this the next leg down for pricing of investment management, a publicity stunt by Fidelity, or something else altogether?
Relating this, as I am wont to do, to historical events in the automotive history, I’m reminded of the down-market product disaster that Aston Martin attempted a few years back, the Cygnet. In 2011, faced with looming and more stringent EU emissions standards, Aston Martin decided the only way to comply was to market a high-volume, high-mileage micro-car that would average out with the automaker’s low-volume, low-mileage GTs. Developing an all-new car is prohibitively expensive, though, so a committee at Aston decided to license an existing eco-platform, the Toyota IQ, dress it up with leather and fancy badges, and sell it as a premium economy car. This offspring was priced at about a third of the MSRP of Aston’s other cars, but it was still three times as much as a Toyota IQ. So, was it an insanely cheap Aston Martin, or a ridiculously expensive Toyota? When Aston Martin launched the Cygnet (a name which accommodated an “ugly-duckling” appearance by suggesting it was the adolescent version of the company’s beautiful models like the DB9), their CEO stood on a mountain of product research on brand extension and projected annual sales of 4,000 units in the UK alone. Instead, Brits bought fewer than 300 baby swans over two years before Aston Martin gave up.
The big asset gatherers like Fidelity, Charles Schwab, Vanguard, and Blackstone have been creating high volume, low price investment products at an increasingly prodigious rate for years. With many index products already available at ten basis points or less, the trip to zero was a short one for Fidelity and likely one they expect to recoup in other products and services once the client relationship is secured and the assets are in-house.
Fidelity’s move was meant to look revolutionary, but it’s really revolutionary, and I don’t think it says much about where the investment management industry is going. Look no further than the progress of the robo-advisory business. I was an early subscriber to Financial Engines’s portfolio evaluation tools, but frankly lost interest in quarterly model analysis and dropped out after a couple of years. In the first ever “Robo Ranking” by Backend Benchmarking, the top-ranked robo-advisor is Vanguard’s Personal Advisor, mainly on the strength of its human advisor services that come with the algorithm in a competitively priced package. The lowest ranking robos scored poorly, in part, because of the lack of access to advisors.
The ongoing theme of the repricing of investment management is that if value can be articulated and justified, reasonable fees can be charged. There is also ample evidence that human relationships are still highly valued in the RIA space. So while investment management products are subject to a high degree of price scrutiny and competition, investment management services are largely unaffected. It’s more likely that the fees available for investment management are being reallocated, rather than being diminished in aggregate. Time will tell.
In short, I don’t know if the no-cost Fidelity products are going to go the way of the Cygnet, but I don’t think this is a Black Swan event either.