I’m not an Apple obsessive. I don’t queue outside the Apple Store at 5am to buy the latest iPhone, and I’m sorry, but £160 for a pair of ear plugs is daylight robbery. But I love my phone, my MacBook and how everything magically syncs with iCloud. It’s simple, intuitive and familiar.
So if Apple entered the asset management space and provided a digital investment solution, would I be interested? Yes, I would.
Silicon Valley’s encroachment into financial services is already happening. The Wall Street Journal recently reported that Amazon is in talks with financial institutions about launching bank accounts. A recent survey showed that 45% of its customers would be open to using Amazon as their primary account.
If there’s a business case for the likes of Amazon, Google or Facebook to shake up banking, the argument for disrupting asset management is far stronger. The Asset Management Market Study produced last year by the FCA found that UK asset managers consistently earn profits of around 36%, and even higher if you include bonuses. Profit margins in other countries are very similar. Given its scale and market reach, a firm like Apple could easily cut those margins in half and still make a killing.
So, what might Apple Asset Management look like? For a start, of course, it would have a snappier name. It would also make sense, commercially, for Apple to own its own funds. Investors, as most us ought to know by now, are better off using index funds. The cost of index funds has kept on falling, and all that’s standing in the way of a really rock-bottom price — say two or three basis points — are the index providers. Building an index isn’t rocket science; it’s surely well within its resources for Apple to create its own.
I’m not a fan of active funds. But there’s clearly a demand for them, and there’s far more potential for the likes of Apple to undercut the opposition here. Research by Morningstar has consistently demonstrated that cost is the most reliable predictor of performance; generally speaking, the cheaper the fund is, the higher the net returns will be.
So, how could Apple reduce costs and fees? The two main heads of expenditure for asset managers are marketing and staff costs. Apple, because it’s Apple, wouldn’t need to spend anything like the amount that traditional fund houses spend on PR and advertising.
As for staff costs, the evidence shows that active funds tend to produce better returns if their managers invest for the long term and keep trading to a minimum. So instead of employing full-time fund managers on a huge remuneration package, why not simply hire a consultant for, say, one week a year, to review the fund’s holdings?
Of course, successful investing entails far more than putting together, and regularly rebalancing, a low-cost, globally diversified portfolio. As Benjamin Graham famously said, “the investor’s chief problem — and even his worst enemy — is likely to be himself.”
This behavioural aspect is often seen as a major drawback with online investment solutions. It’s a view I sympathise with. Having a financial adviser to keep you on course can be very beneficial, especially when markets are in turmoil. As we saw last month, when the websites at the US robo-advisers Betterment and Wealthfront crashed during a spike in volatility, unadvised investors are at a big disadvantage.
That said, technology can also provide solutions for handling behavioural biases. I can imagine, for instance, an app that provides educational content, that gently reassures investors during periods of market turbulence, or that challenges them to reconsider before bailing out of stocks after a crash or correction.
In fact, the less that investors think about and check the portfolios the better. We already have apps designed to tackle our smartphone addiction, which, depending on our settings, send us reminders about the benefits of limiting screen time, or even lock us out. I’d like to see an investing app that works along similar lines.
Do I think a firm like Apple will disrupt asset management in the future? Yes, I do. In fact, I’d be very surprised if at least a couple of the Silicon Valley giants weren’t already planning it.