The ESG-zation of the asset management industry

This is not a note on ESG investing (ESG-zation) but one in which I share my thoughts on the wider needs and implications with which financial advice should concern itself, or how the industry of investment management should improve on the delivery of what it says it wants to do.

If you have read this blog before it will be difficult for you to escape the sensation that investors who don’t know what to do with their savings will have a real problem: where to find decent advice at a reasonable price.

Robo-advisors have all the ingredients to accomplish this task – technology, reach, knowhow and scalability. Aside from the “impersonal” aspects of the managers (all on-line obviously), with a few exceptions they all charge a bundle, especially outside the US. While their clients may get better deals than with more traditional investment outfits (not exactly a high bar to beat), robo-advisors as a group still do not deliver enough of a good deal.

Having access to sound investment services is very important and not just for the two most often highlighted sections of the population: the elderly and the young. It is fundamental to the achievement of a reasonably satisfying life experience and to the management of one’s opportunities. The talent and knowledge to deliver the right service is out there but, as sometimes happens in healthcare, the drivers and motivations can cause headaches.

Most asset management groups (independent or part of a larger financial conglomerate) are built on two premises: to garner more assets and deliver a stable business. Nothing wrong with that in principle, except that in investing size rarely correlates with quality of services (i.e., returns). Furthermore, it usually requires higher pricing (to cover the costs of large organizations and, especially, their aggressive salesforces). Combine the two concepts and you can see why more and more people are moving towards passive investing, an area where size and pricing don’t clash.

That still leaves one question unanswered: how do you guide investors towards the “right” choices? How can you counsel non-millionaires in selecting what’s best for them? (The millionaires too, for that matter, but they have more fat to burn before they really get in trouble.) Because of the importance of the matter, the answer is not just about service and price, but more about what should the industry ethically do, for whom and when.

Remember how IT was a specialty job carried out by experts in the field? Today IT has become akin to an infrastructural necessity and as such it has taken on the characteristics of a utility-plus-innovation function. “Utility” in the sense that we all have a right to access it in some form (like electricity, or water), and “innovation” as in ancillary feeding of technologies or methodologies that help to better deliver the final service (like transmission cables for electricity, or purifying and filtering technologies for water).

Maybe asset management should take on similar characteristics in order to ultimately benefit more people than it currently does. Perhaps it should transform itself from a highly profitable and exclusively enriching business to one where the ethical and social dimensions become paramount.

It makes sense to me, but I’m sure this line of thinking is not exactly mainstream.
ESG-zation