Retail investors really get the thin end of the investment wedge. In general, they buy last year’s best performing asset class which then turns sour, or they ignore this year’s ‘dog’ investment which subsequently has its ‘day’. In my experience, the only time I have seen the retail investor outmanoeuvre the institutional professionals was when the Japanese started buying High Yield and Emerging Market debt in early 2009. But that was the exception rather than the rule.
Worse, however, are the fees the retail investor gets charged, the ‘products’ (as opposed to investments) they are pushed into and the ‘churn’ their trusted advisers recommend in order to extract even more fees on top of the fees that they are already paying. With interest rates at or near zero, the poor little retail investor is finding it hard to squeeze out a positive return after all the fees and charges, while bearing all the investment risk.
Fortunately, the market is changing and the retail investor is facing a more favourable investment market…mostly. Accordingly, let me highlight two trends we like and one that we absolutely hate…
1. We LIKE fee based advice. Curiously, Asian retail investors are reluctant to pay for investment advice but are quite content to suffer 4-5% investment fees that are ultimately embedded in the structures and funds that they wind up using. Avoiding a $5,000 advisory fee while paying $50,000 in product fees on a $1m portfolio just seems stupid. The practice of not charging for advice, while receiving kickbacks and trails from fund houses and wrap providers ,has all but been stamped out in the UK and Australia. Finally, truly independent fee based advisory services are coming to Asia, and Singapore in particular.
2. We LIKE Robo. Robo conjures up images of robotic car assembly plants in Japan, where faceless machines run 24/7 replicating the vehicle manufacturing process without human intervention. High quality, low cost. Robo investing, in truth, is not anything new from the investment point of view. The breakthrough is the distribution technology which substitutes the salesperson with a web-based subscription service. The investment portfolios turn out to be pretty close to those that a large institution would hold, though without the ‘alpha’ kicker and with a higher fee base. But the big innovation is the low cost ETF holdings which cut fees from the 4-5% range down to 1% or less. Less fees is more for the retail investor.
3 We HATE high frequency ‘product’. Rumour has it that some brainstrust in a large retail bank has proposed offering their clients ‘product of the day’ and even ‘product of the hour’, inspired by a cross between the Groupon and High Frequency Trading phenomena. Oh dear, where do I start?…Investing is a long term enterprise where patience is rewarded and low turnover saves transaction costs. Investing is a disciplined skill, not a ‘product’ that you might miss if you don’t get in quick. Encouraging portfolio churn is costly and, well, unethical, and, well, probably in breach of fiduciary duty. As for High Frequency Trading, it only makes money if you are on the right side of the bid-ask spread, which retail investors are not. Surely, moreover, there is a limit to the number of investment products that can be offered? This high frequency investment product idea is just wrong!