Abraham Okusanya: Give closet trackers the PPI treatment

ABRAHAM OKUSANYA is one of the most influential figures in UK financial planning. He’s the founder of the investment and retirement research firm FinalytiQ and of the annual Science of Retirement Conference. He’s also a staunch advocate of low-cost indexing and of greater transparency in the asset management industry.

In this interview, Abraham explains how the Science of Retirement Conference came about and how he expects the industry to evolve over the next few years. He also expresses the hope that closet index funds will become a major financial mis-selling scandal — bigger even than the scandal around Payment Protection Insurance.

Abraham, how did the concept of the “science of retirement” come about?

I remember sitting in a meeting a few years ago. It was 2014. I came out of the meeting and looked at my phone and there was a statement by George Osborne. “Let me be clear,” he said, “no one will have to buy annuity.” I thought, what are we going to do? Retirement had always been simple to plan — you bought an annuity. And that simple statement threw us into unchartered territory. My thinking is we really need a good, sound, evidence-based framework for how we deliver retirement planning, and hence the Science of Retirement Conference.

The phrase “science of retirement” suggests the thinking previously done on this subject had not always necessarily been scientific. Is that your view?

We are very far away from science in terms of how we deliver retirement advice. Currently, let’s just say it’s stick-one-finger-in-the-air, make-it-up-as-you-go-along retirement planning. The research has always been there. It actually started with a guy called Bill Bengen in1994. Bengen published his first paper in the Journal of Financial Planning, which is where the 4% Rule came out of. But of course the vast majority of people don’t understand it; probably only about 4% of people understand the 4% Rule. So the research has always been there and it has been built on. It’s just taken a long time to find its way through to the practice of advice.

So tell me about the Science of Retirement Conference itself.

The Science of Retirement Conference started in 2015, when we put the first one on. I think we had 70 people in the room and it has grown from there. (This year we had) just under 300 people. The idea is that we need to rely on empirical research in the delivery of advice. If a product, a service or strategy does not have a sound, robust, empirical foundation it does not have a place in our clients’ lives.

What about FinalytiQ? What exactly does it do?

FinalytiQ is essentially a small team of insane people! We do a lot of research work around investing, so with advice firms, for example, we help them create and support their investment process. We do a lot of research around retirement and that research has led us to create what we call Timeline. The Timeline app is software that advisers can use to personalise the sustainable withdrawal rate strategies for their clients, and it’s used by advisers in several different countries.

How important is it to have a financial adviser in the decumulation phase and also coming up to retirement?

I think it ’s hugely important. It is crucial that you get the best support that you can, so a good adviser who understands the risks and opportunities is just incredibly invaluable.

You have been a supporter of greater transparency in asset management. Do you feel that whole campaign is starting to achieve something?

I think something is starting to happen. I know, Robin, that you have done a lot in this space, breathing down the neck of the regulator and the media and asset managers. But something is starting to happen.

An example was when we saw the FCA announce that it was making closet index funds return some of the fees they had charged people. I wrote about this when the FCA first published their asset management report. As I said in my article, closet trackers should be given the PPI treatment.

The principle is simple. If you said to people that you were going to do something — deliver active management — then that’s what they were paying for. If you don’t deliver on it, and you’ve been hogging the index, you should pay back the fees you’ve charged them all these years. I think this is just the tip of the iceberg, and it could be very big. It could potentially be the end of asset management as we know it.

Really? Wow, that’s an extraordinary statement.

It’s already happening. The UK appears to be slightly immune from what is going on in the rest of the asset management industry. But if you look at the US and globally, there’s a lot happening. Vanguard took more money in 2016 and 2017 than all the other asset mangers combined in terms of inflows. So the shift is taking place. To me this isn’t a secular trend — a consistent, permanent trend — and it will continue.

PPI was massive, but a closet indexing scandal would make PPI look like a rounding error. Is it in a sense too big to become a mis-selling scandal?

You’re right, it’s incredibly big, but I hope it’s not too big. I hope that the asset management industry is put to the test and that regulators and investors don’t just let this go.

This is what I say to people. The asset management industry is being propped up by investors — it’s our money. But there’s also a public interest in this because somewhere around 30% of assets come in the form of tax reliefs and government pensions. We are all carrying the liabilities of public pensions. There’s public interest in this, then, and obviously investor interest, so I hope it’s not too big for us to say we’re going to get to the bottom of this.

What’s the end game here? Might we see a firm like Amazon disrupting asset management before long?

I think we already have an Amazon in asset management, and it’s the BlackRocks and Vanguards of this world. I struggle to think what technology is going to do differently to what those guys are doing. I think technology can help and we’re beginning to see things like blockchain finding their way into reporting and record keeping in the industry. But I think we already have an Amazon; it’s just not the one that everyone’s waiting for.

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