Click here for our coverage of the latest Morningstar Investment Conference UK in our special report: What the Experts Say, on subjects ranging from Brexit and risk management to the cost of funds and the future of advice.
Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined by Hermes Chief Executive, Saker Nusseibeh.
Hello, Saker.
Saker Nusseibeh: Hi.
Wall: So, we've just heard a really interesting talk about fees, fees across the board, fund management industry, advisors and platforms. But you're here representing the fund management industry and one of the things that was raised is the fact that the assets under management in the fund management industry have grown incredibly over the past decades but yet economies of scale have not been passed on to the investor, why is that?
Nusseibeh: I think because fund managers have made fund management a much more complex business than it needs to be. I made the point in the speech earlier that when I started we did something called “balanced”. We now do “outcomes” and “solutions” and we charge a little bit more from it, but you can take this to an extreme. It's a business.
Asset management is a business and it's partly responding to what supposedly sophisticated clients want; so you have more siloed products, they are more complex. Because they are more complex, you charge more for them, et cetera, et cetera. Now, is it justified? I don't think so. Look at the margins of the industry, I don't think it justifies the margin as a whole.
Wall: And you spoke quite candidly about the lack of trust and the lack of honesty in the industry. You told a story about once you went to a client and you had to persuade them that now there was not the right time to be in a particular product and actually, the client didn't want to take their money out. Why do you think that fund managers do not do that enough because I've never heard a story like that before?
Nusseibeh: It's because fund managers convince themselves that they're doing exactly what the client wants and the way they say it is – and you'd often hear fund managers say this – we do what it says on the tin. I gave it an analogy while going to my doctor. Now, when I go to see my doctor, I don't actually expect him to do what it says on the tin. I expect him to look after me. And even if it doesn't say so on the tin, if he thinks there's something wrong, you should tell me that something is wrong.
So, if fund managers will convince themselves that as long as they are doing what it says on the prospectus, they are okay. We at Hermes take a very different view. We take a view that actually we should be honest with our investors. So, in the case of example I gave you, we came to the conclusion we are not – we are a high alpha manager – this is not alpha; this is just beta; it's disguised. So we went back to all of our clients and said, please take it back. And they were not happy actually; they were rather upset because of course they had convinced themselves that this is skill and that's what they wanted to go through.
We're different as a fund management business. We believe sustainability means you have to bring back honesty. We have a pledge. We're the only asset management business in the world, in the world – it’s ridiculous! That has a pledge that says I'll put the interest of my clients first. I'll be transparent with everybody. I will actually look after the environment. It's extraordinary.
Wall: And what more then, do you think, fund managers should be doing, other than obviously be more like Hermes, with that commitment then to put investors first because of course the IA try to get people to sign something all along those similar values and people didn't sign it and it was a very simple statement saying I will put my investor, my client, before myself. What's gone so wrong?
Nusseibeh: I think it goes back to the thing about complexity and siloization. I think fund managers kind of need to rethink about what it is that we do for a living. If I think what I'm doing for a living is very simply delivering whatever product I'm telling you I'm delivering within the parameters of the volatility, not risk, volatility I'm telling you at, then actually all that I'm doing is I'm selling you a car pot. And if I think I'm selling you that, it's up to you to decide whether it's good or not. That's not what we should be doing.
We employ very clever people who really understand the market and they really should think why are you buying this thing from me? You're buying it because you want to retire in 30 years. Is this going to help you? Is this the right decision for you? And I again make the analogy of a doctor. If I go to a doctor and I say I want to do something to my body, I expect the doctor would say to me, this is not good for you. Please do not do it, or this is good for you, you might not like it, but it's good for you.
And that debate is not there. When we talk about the savings debate, for example, no one says to clients, by the way – and including your type of clients in the Morningstar universe, individual clients, you're saving anywhere near enough and do you understand this is not enough and don't bank on your house. Nobody cares. So, the first part of trust is to actually care.
Wall: And do you think then with caring along with transparency and honesty that trust will come? Because it's very much lacking, especially in those under 40, they think the City is a big bad evil place.
Nusseibeh: And they are quite right because the City has been a big bad evil place and this City has in 2008 resulted in a disruption to the economy. And look, we're a long way to come out of that mess that was created by the City. So, yes, the City should make an effort to try to win back trust and it can happen. It wasn't always that people trusted lawyers. Read Shakespeare where he curses all lawyers. Now, generally speaking, we trust them. It wasn't always that we trusted surgeons. Now we trust them.
They earned the trust and fund managers, in general, the City, has to earn trust. And it's important, by the way, not just because of the underlying clients only, which is the key point, but it's also important for us as a nation. The City is the heart of our economic strength. It's given us as a country power for 300 years. Unless we look after and that means make her trustworthy, sustainable, long-term, she is not going to be here serving them for the next 300 years.
Wall: Saker, thank you very much.
Nusseibeh: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
