Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 86

Our industry has a problem

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”  Upton Sinclair, Author and Journalist (1878-1968)     

Towers Watson is a global consulting company with over 14,000 associates. A few months ago, they published the results of a survey which had some worrying conclusions. The publication was called ‘Our industry has a problem: the investment industry has been built by the intermediaries for the intermediaries’.

(My interview with the author of the report, Tim Hodgson, appears in the next article in Cuffelinks).

It is worth reading the full report as it is only a few pages, but here are some highlights. To many Australians involved in the superannuation industry with fiduciary obligations of acting as a trustee, the results will be disturbing.

Is the industry for the intermediaries or the end investors?

In the survey, the first statement (which is repeated in the poll on our website) was:

GH1 Chart1 311014

GH1 Chart1 311014

These are the responses from 212 employees in UK- and US-based asset management organisations. Amazingly, a minority of only 42% agreed that the investment industry is designed to help the end customers. This low level of agreement is a terrible indictment on the perceptions of certain people in the US and UK, and let’s hope it would be much higher in Australia. As Towers Watson says, other surveys show financial services is the least trusted industry (for example, the 2014 Edelman Trust Barometer), suggesting the end saver knows what the industry thinks of them.

In searching for the reasons the industry has a problem, Towers Watson also asked whether too much effort is spent searching for alpha (performance above the market), and only 18% agreed with this, with 14% neutral.

Then an interesting question followed that is not often discussed by the industry:

GH1 Chart2 311014So 28% agreed the industry does not put effort into improving market returns (not alpha), with a large 38% neutral. That leaves only 35% who disagreed.

This is worth pondering. How could the industry improve market returns (this is not a question on market outperformance)? After all, this is what sustainability and fiduciary responsibilities are supposed to achieve. Some ways to improve market returns include ensuring as much of the market return goes to end investors as possible rather than intermediaries, minimising other leakages such as transaction costs, and greater constructive engagement with corporate management (which might in turn include reducing excessive compensation of executives).


The other reason for the industry’s problems is short-termism, which is value destructive because it leads to higher costs and over-reaction to noise. According to New York Stock Exchange data, the average equity holding period has fallen from 100 months in 1960 to 6 months now.

GH1 Chart3 311014GH1 Chart4 311014A surprising 79% of responses said there is too much short-termism, but blamed the asset owners (not the asset managers). This might be managers on the receiving end of being fired after a period of poor performance. But it’s interesting to see such a high proportion criticise short-termism, when the daily reporting of prices and immediate market responses is endemic in the industry.


Towers Watson makes a chunk of its living from the investment management business, and yet it reports this most critical and damning of positions:

“In our opinion, the value proposition that customers need is well-structured, fairly priced, and honestly and skilfully delivered investment outcomes. We believe the industry is falling short on all of these aspirations.”

It is not due to one problem. Asset managers work for themselves not their end customers, there’s too much focus on alpha and not enough on improving market returns, and the industry is obsessed with short-termism. We have a lot to answer for while we pay ourselves so well.


Graham Hand was General Manager, Capital Markets at Commonwealth Bank; Deputy Treasurer at State Bank of NSW; Managing Director Treasury at NatWest Markets and General Manager, Funding & Alliances at Colonial First State.


Summary of LIC performance over a solid year

Choosing managers should not ignore tax impact


Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

Coles no longer happy with the status quo

It used to be Down, Down for prices but the new status quo is Down Down for emissions. Until now, the realm of ESG has been mainly fund managers as 'responsible investors', but companies are now pushing credentials.

Latest Updates


The 'Contrast Principle' used by super fund test failures

Rather than compare results against APRA's benchmark, large super funds which failed the YFYS performance test are using another measure such as a CPI+ target, with more favourable results to show their members.


RBA switched rate priority on house prices versus jobs

RBA Governor, Philip Lowe, says that surging house prices are not as important as full employment, but a previous Governor, Glenn Stevens, had other priorities, putting the "elevated level of house prices" first.

Investment strategies

Disruptive innovation and the Tesla valuation debate

Two prominent fund managers with strongly opposing views and techniques. Cathie Wood thinks Tesla is going to US$3,000, Rob Arnott says it's already a bubble at US$750. They debate valuing growth and disruption.


4 key materials for batteries and 9 companies that will benefit

Four key materials are required for battery production as we head towards 30X the number of electric cars. It opens exciting opportunities for Australian companies as the country aims to become a regional hub.


Why valuation multiples fail in an exponential world

Estimating the value of a company based on a multiple of earnings is a common investment analysis technique, but it is often useless. Multiples do a poor job of valuing the best growth businesses, like Microsoft.


Five value chains driving the ‘transition winners’

The ability to adapt to change makes a company more likely to sustain today’s profitability. There are five value chains plus a focus on cashflow and asset growth that the 'transition winners' are adopting.


Halving super drawdowns helps wealthy retirees most

At the start of COVID, the Government allowed early access to super, but in a strange twist, others were permitted to leave money in tax-advantaged super for another year. It helped the wealthy and should not be repeated.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.