This is always good, I imagine that this more as Vanguard’s ongoing efforts to reduce the cost of their funds though, rather than competition but I could be wrong.
We are rapidly moving towards a world where beta returns will be free, and we will pay fees only for micro-services such as ISA wrappers, or for more specialist services where alpha is sought.
I agree. With large firms that have the scale they can reposition themselves and look for opportunities where they can generate revenue from the assets held and not have to charge the customer. In turn this will force other fund houses to create unique propositions which are alpha seeking or thematic in some way.
We have been in this “fee war” for a while and it’s less of a war and more a limbo competition about how low can you go, some providers haven’t reduced their fees claiming they have a better process, others claim active management is the way to go and thus retrain a premium fee (looking at you investment trusts.) However, I like the customer standard it is creating and pressure it puts on the industry.
If I think of a world where investing is second nature and as common as a bank account (which sadly not everyone has a bank account today) this is where I can see the large tech conglomerates stepping in.
For years there has been a fear of the FAANG entering the financial space, (maybe less so with Netflix) and we have seen moves such as payment processing, loans in developing nations, currency replacements, even credit cards. However, the investment part of finance hasn’t seen a lot of direct threat yet.
When everyone can achieve beta and even offer it as a “free” service, and it becomes a game of scale and efficiency, that is when the threat from the FAANG and the major corporations of tomorrow will become very real.
It’s also exciting to think that will be the alpha generating solutions of tomorrow. I am seeing a lot of FinTech firms which are recreating old ideas in a digital modern world and having great success. Does this mean we will see the rise of investment clubs over investment managers, already on this forum we have highlighted one or two which has appeared recently, looking to profit from the collective conscious. Maybe we will see an increase in thematic buckets, or even more exposure to riskier early stage companies to try and achieve alpha (just look at the impact P2P has had on financing.)
All in all, I am a very big fan of Vanguard’s approach with these index trackers, they are challenging the fund provider industry and creating some very uncomfortable questions for other fund providers. It’s such an exciting time to be part of FinTech, what will happen in a down market, how will the public react, can you drive the price so low you generate returns for your customers over and above just tracking the index (see this happen once or twice already.)
So many questions!