Personal Financial Services – is it a case of ‘blind luck’ when it comes to investing?

Few enter the business of personal financial services with the expressed purpose of enriching others. This is a problem. Opportunities abound for those with misaligned interests to obfuscate and bamboozle, facilitated by the overwhelming complexity of the product arena, a miasma of different asset classes, funds, tax wrappers and investment strategies. As for active fund management of mainstream listed assets: forget it.

Consider the performance of the 1,108 funds in the 12 major market sectors, over three successive 12-month periods (1). The long-term average is that only 38 of these funds produce top-quartile performance. Using blind luck, one would expect 17 funds to achieve this (2), so only 21 fund managers (1.9%) could legitimately claim that their success was down to skill. 120 of them delivered above-average returns, 18 fewer than would be expected using blind luck (3). The other 988 funds (90%) failed to achieve what is a modest objective, that of delivering top half performance over three consecutive years.

What does this mean for the consumer?

A high cost for a service largely built on luck. Which immediately puts up barriers between the average investor trying to decide what to do with their money and the financial advice and expertise that appears to be necessary to navigate personal financial services. Not to mention those who do take advice when 90% of funds fail to consistently achieve top half performance. So most people do nothing at all.

It is then easy to see how consumer fintech is creating huge traction in the marketplace. People who have been avoiding making a choice on where to put their money as a result of confusion and cost are now able to make informed decisions about investing and where to put their money with financial technology and artificial intelligence based on empirical evidence rather than intuition. No more barriers. 

Conclusion: no one has any idea which managers will perform in the future. Performance is a random walk that is a negative sum game because of annually recurring costs and fees. This industry is a root cause of the UK’s productive problem. We do not need 80% of it.

Sources

(1) BMO MM consistency indices, produced every 3 months

(2) As 1,108 x 25% x 25% x 25% = 17

(3) As 1,108 x 50% x 50% x 50% = 138