Stop the Dangerous Notion That Asset Management is Commoditized
This article also appears in the Journal of Financial Planning: Practice Management Blog.
The emergence of low-cost investment solutions like robo-advisers and model marketplaces has elicited statements by earnest pundits about the “commoditization” of asset management. These well-meaning observers misunderstand the significance of what is happening in our industry and are planting the seed of a dangerous idea.
Merriam Webster defines “commoditize” as “to render a good or service widely available and interchangeable with one provided by another company.” Certainly, asset management services are widely available, but they are far from interchangeable. The suggestion that they are is harmful to planners and investors alike.
If you think asset management has been commoditized, consider these facts from the Morningstar database (I have eliminated obvious outliers):
- In the ETF Strategist category (50 percent-70 percent equity), returns for 2017 ranged from 17.44 percent to 10.33 percent—a 700-plus basis point difference.
- The 2017 returns for U.S. Value ETFs ranged from 27.11 percent to 18.7 percent—an 800-plus basis point difference.
- The 2017 returns for U.S. High Dividend ETFs ranged from 25.84 percent to 15.86 percent—a 1,000 basis point difference.
- The 2017 returns for U.S. Momentum ETFs ranged from 44.13 percent to 26.94 percent—a 1,700 basis point difference.
The size of these spreads in seemingly generic product categories show that asset management has not been commoditized. Even “passively” managed products like U.S. Value ETFs can produce a wide range of results.
The differences show up in areas other than one-year performance results. The U.S. Value ETF with the highest one-year performance had an expense ratio that was three times that of the U.S. Value ETF with the lowest performance—0.15 percent versus 0.05 percent. Do you get what you pay for? Not necessarily. The U.S. Momentum ETF with the highest performance had an expense ratio that was less than one-quarter of the expense ratio of the lowest performer—0.15 percent versus 0.64 percent.
Differences like this exist everywhere in the asset management industry. Look closely at any type or category of asset manager—active mutual funds, ETFs, SMAs or fund strategists—and you will find wide disparities in both performance and expense ratios. These products are not interchangeable. They are highly differentiated. Clearly, they are not commodities.
What we are witnessing is not the commoditization of asset management, but rather the “industrialization” of asset management services. Manual labor is being replaced by mechanized systems of mass production. Individual craftsmen are being replaced by assembly lines. We are seeing the efficient division of labor among specialists. Technology is allowing innovations in the manufacture, delivery and pricing of products and services.
Although the term “industrialization” sounds old-school in our high-tech world, it far more accurately describes the transformation we are witnessing than “commoditization.” The fact that a product is more widely available and its price is dropping does not make it a commodity.
Computers, cell phones and big-screen TVs are all more widely available and significantly cheaper than they were five years ago. But there are differences in their performance, functionality and quality. They are not interchangeable. If you think they are, ask an iPhone user to switch to a Samsung, but cover your ears first so you won’t hear their howls.
Let’s drop this dangerous notion that asset management has been commoditized. People might actually start to believe that portfolios are like bags of sugar on a grocery store shelf. They are not. Asset management is being made more accessible and less expensive than in days gone by. But caveat emptor—due diligence and thoughtfulness are still important.