Fee-for-service driving passive investments

A change in adviser remuneration structure is causing a structural shift in asset allocation away from active products towards more passive products such as exchange traded funds (ETFs) and passive funds, according to Fidelity Investment Managers.

This is being done to bring costs to balance the new fees now being charged by financial advisers so they can justify the level of fees being charged, a situation that has already been seen in the UK, according to Fidelity managing director Gerard Doherty.

“Fidelity is largely an active house. We’ve always had a strong belief that active can add value over time but we are seeing that pressure on active management,” Doherty said.

A greater weight of flows into passive products could potentially create opportunities for an active manager to exploit, but if there is a big shift of money away from active managers, that raises questions over whether all active managers will be able to survive to take advantage, he said.

“It also calls into question the merits of cap weighted indexes. If you see a higher volume of money going into index management, and it’s sort of self feeding, there are lots of people thinking about how to benchmark performance, and are cap weighted indexes the best way to do it or are fundamental indexes better,” he said.