Craig Burgess runs EBI Portfolios, a firm based in the English Midlands that provides low-cost investment solutions to 85 advice firms in the UK and the rest of the world. He also has his own advice firm, Blackstone Wealth Management. In this interview he explains how, after many years of steady progress, evidence-based investing is really starting to take hold. For advisers who continue to base their value proposition on their investment expertise, he says the time has come to face reality and embrace the evidence on what is best for their clients.
What is EBI Portfolios? And what exactly do you do?
We would best be described as a Turnkey Asset Management Program (TAMP), which is originally a US concept where advisers partner with an organisation providing more than just an investment proposition, but additionally a suite of resources based around a specific investment philosophy.
You were one of the pioneers of evidence-based investing the UK. How did that come about?
I had become a semi-retired adviser. That is to say, I had delegated away most of my work and had too much time on my hands. So I decided to spend it researching how we invested clients’ money at a time when a new breed of funds were being launched in UK that were ‘passively managed’. The logic of investing via the evidence rather than arbitrary performance was compelling, but there were no road maps on how to do this and no resources to help convey it to clients or implement it efficiently.
I built 50 years of simulated data with help from Index Fund Advisors in California during 2008, and I started sharing that data with some friends to sense check. At a Voyant seminar, one of these friends asked if he could start paying me for it, another guy who I used to go to night school with asked if he could too, and then a third individual overheard the conversation and wanted in as well. With three new clients and a small cash flow I went home to tell my wife about the new business we had. From then to now we have done little marketing — it’s been mostly referrals — but we have 85 advisers working with us all over the UK and beyond, and we’re closing in on £1 billion of assets in our portfolios.
Do you think nevertheless that things are starting to change and that UK advisers who’ve put the investment piece at the centre of their value proposition in the past are realising that it’s not sustainable?
Things are starting to change, and every week we speak to a new adviser who wants to explore how to move over to an evidence-based model. But it’s hard for many advisers who focus their value proposition on their investment expertise to come to terms with the fact that they can be more highly valued by becoming an evidence-based expert rather than by picking stocks or fund managers. There will always be a cohort of advisers preferring active, but each year there will be another Arch Cru, Bernie Madoff, Euro Life, NDF and so on in some of their portfolios and more will have their epiphany.
The evidence-based approach, of course, has grown very quickly in the US in recent years, but much more slowly in the UK. Why do you think that is?
It’s a conundrum. Why do people still smoke? Why does anyone think homeopathy or astrology work? So maybe it’s the British culture that is unwilling to embrace passive. There are other factors, of course. Up until the Retail Distribution Review, index funds with no commissions were not attractive to the advising community so it was a relatively small number of us that bit the bullet and moved to fee-only to be able to use these products. It hurt our cash flow for about five years as we made the changes. I can tell you that in the offshore markets where we have relationships — Europe and the Far East, for example — advisers who want to use commission-free products are very few and far between. In many countries they still don’t disclose commissions! And of course the US had Vanguard, which became a well-known brand, and for a long time only dealt directly with the public. Most UK investors will not have heard of Vanguard — and if they have they will not know their story — and hardly anyone has heard of Dimensional. But compared to other parts of the world, evidence-based investing is growing quickly.
My experience is that many advisers are concerned about losing face. What would your message be to advisers who now accept the evidence but are worried about telling their clients that they’ve changed their minds?
We went through this, as every adviser does. I met a business development manager for a wrap platform recently who said he knew a lot of our advisers in the North of England and without a doubt they ran more assets with fewer clients and were more profitable and less stressed. Now that might just be a freak statistic, but they all had to tell their clients they had new information and they had changed their minds. Clients are being asked to move to a much lower-cost solution, with much lower risk through more diversification; our portfolios typically have more than 18,000 securities. None of our clients left. What are we supposed to do if we receive superior information if not act on it? Maybe those clients that think you should be market timing or manager selecting based on performance will leave. Personally I think that can only be a good thing; we cannot possibly be sure we can meet their expectations.
What difference do you think Vanguard’s new direct-to-consumer offering in the UK will make? And what impact will it have on the advice profession?
It’s too early to tell. Their European MD tells me they are not going to push it too hard, because it’s difficult to find enough qualified advisers to man the phones. But Vanguard’s idea of a small venture is probably still going to run to billions in assets. That said, I don’t see most of our IFA clients being interested. They typically have too many moving parts to their affairs for an online proposition, and it’s unlikely they could match the knowledge and experience contained in a long established adviser practice. But probably the biggest factor is their relationship with their adviser: they want to come and have a face-to-face meeting each year, play with the dogs, say hello to the staff and know someone cares personally about them. I’m not sure any form of robo can trump that.
Some evidence-based advisers prefer Vanguard, others Dimensional. But you use funds from both — and iShares as well. Why is that?
Adviser should take a step back and recognise that all three are first and foremost simply fund managers. When building a portfolio they need to consider funds from the whole universe which frankly will always lead you to these guys’ doors anyway for most if not all of their needs. But each has some strengths that typically the others are weak on, and choices need to be made dispassionately. You can use funds from all or any one of them. We like all three, but for very different objective reasons.
What did you make of the final FCA report on competition in asset management? Where you surprised or disappointed that it was less hard-hitting than the interim report?
I liked much of what they had to say. If it said active was marvellous and advisers should be using more of it I would be worried. But the direction of their thinking is clearly towards lower-cost, passive solutions. Is I’m neither surprised nor disappointed, really. For me it’s another endorsement for our space.
Finally, what are your predictions for asset management and for financial advice in Britain over the next 10 years or so? Are you expecting major changes?
Passively managed funds will undoubtedly grow significantly. Regardless of the high ground active managers hold with their large marketing budgets which feed the media’s promotion of the next “hot tip” funds, active funds will dwindle. DFMs will shrink, many will fold. And EBI Portfolios will have £10 billion of AUM.