By: Phil Kernen
Is investment management a commodity?
More and more financial advisors make this claim, pointing to the proliferation of index mutual funds (MF) and exchange-traded funds (ETF) designed to replicate market exposures at a progressively compressed cost. Building a low-cost investment portfolio has become more accessible than ever for investors.
The challenge for such advisors is not one of commoditization. Instead, it is the lack of differentiation. Too many advisors feel they have no way to offer value because investment management is hard work that requires technology and time to develop relevant skill sets, obtain credentials, and conduct investment research. They are unwilling or unable to commit the resources or believe they could be better spent serving existing clients and looking for new ones.
So they address the problem. Some use inexpensive passive investment vehicles or outsource the responsibility to a third party. Others choose to utilize pre-packaged model portfolios constructed with MFs and ETFs created by other investment managers. They then highlight how they add value elsewhere through advisory services around financial, tax, or estate planning, industries that typically charge by the hour. The upshot is that with the investment management contracted elsewhere, none of these investment approaches allow for differentiation.
Clients end up with an advisor presenting investment management as a commodity yet charging fees like an investment manager based on assets under management. This lack of recognition serves clients poorly, diminishing the value of work required to make prudent and well-informed portfolio management decisions. Charging fees on services seen as offering little or no worth rather than value-added planning services risks decoupling costs from added value.
What has become commoditized to some advisors now serves as a differentiator for us. We devote resources to needed technology and substantial time to acquire requisite skill sets, conduct investment research, and earn credentials. Three team members have earned, and two team members are currently pursuing, the globally recognized Chartered Financial Analyst designation for investment professionals.
Investment management is not a commodity. Commodities are basic goods and widely used materials that are not meaningfully different from each other. Consider a unit of wheat or a barrel of oil. Differences exist within these two markets, but if two buyers ask for delivery of a certain kind on a specific day, they will receive the same thing. Also, services are not commodities. Selecting the cheapest painter won’t deliver equal talent, training, experience, responsiveness, and value. Like financial planning, tax planning, and estate planning, investment management is a professional service offered with varying degrees of quality. Where quality is a differentiator, commoditization cannot occur.
Investment portfolios are like fingerprints, no two are exactly alike. Due to the associated inputs, two financial advisory firms will never give you the same investment management output. It makes a big difference what products and strategies you use and how you combine them in a portfolio. Even automated robo-advisors that use the cheapest products available will have different results. Too many variables are required in their decision-making to expect otherwise. There are more MFs and ETFs from which to choose than publicly traded stocks. Given the myriad options and the multiple ways to allocate assets, earning the same returns would be impossible.
Investment management is an essential factor in the success of any financial plan. It is hard work, and not every advisor is a good investment manager. Ensure the advisory fees paid are equal to the value provided.
Disclosure: This is for informational purposes only and any reference to a specific type of security does not constitute a recommendation to buy or sell that security. The reader should not assume that an investment in the security identified or described, was or will, be profitable. For a complete list of disclosures, please click https://mitchcap.com/disclosure/