I left Italy shortly after I got my first real job, say a couple of years. Up to that point, I had opened an online saving account and an online brokerage account: that was my only connection with the “banking” world. My only interaction with a physical bank was when, in between studies, I worked as a bank teller (my main regret about that experience is that I concluded it without being involved in any kind of robbery. All my colleagues at the time had at least one story to share during our lunch breaks).
As you can imagine, at the time I did not have much money to play with, so the lack of interest in the relationship was reciprocal.
Despite the not exactly booming economy, none of my friends was desperate (or fool) enough to go sell life insurance with the hope of getting a salary one day. If it was about working for free, they preferred dealing with fashion or media sectors. I must have never radiated an aura of success, considering that not even remote acquaintances ever tried to sell me the next great investment advice.
Long story short, I knew there was an entire industry built on selling high-fee investments but I never interacted with it. And then, as I said, I left.
Shortly after the Great Financial Crisis, I received a Christmas gift from a colleague, Barry Ritholtz’s book Bailout Nation. From there, I discovered his blog, and then Josh Brown, and then everyone else that joined the Ritholtz Wealth Management family. It is with Barry and Josh that I started to learn about independent financial advisory. And it made sense to me.
I “grew up” with an online broker, where I could buy whatever investment I wanted (well, before MiFID II arrived to save me and everyone else in Europe…but we will see later how effective was this regulation). Why would anyone accept advice from someone working for a specific shop, bound to sell that specific shop sausages? Why would they willingly decide to tie their hands?
15 Years Later…
First with books, then with blogs, then with podcasts, I continued to stay on top of the evolution of financial advisory…in the US. Now that I think about it, I was like someone that is passionate about basketball and only follows the NBA: sure all the best players, and most of the innovation, happens there. But the NBA is not necessarily how basketball is played around the world. As with the US financial market, the NBA has its own rules.
I was living in my own financial world, where I was able to test and apply what I was learning. My only interaction with the European financial system was when I applied for my first mortgage, but even then I was offered something better than the Americans, a 30-year floating debt (better because rates were low and going lower).
I only felt some faint disturbances in the Force:
- I had friends that were working for some Italian asset managers. With time passing, I wondered more and more who was going to buy their funds instead of Vanguard/BlackRock ones. Every year they were telling me about cuts in their bonus pools or layoffs, so I thought the end was coming, just slower than I imagined.
- I also had a friend that was working as a financial advisor for a big Italian Bank: I regularly read his newsletter and found great content. But I was surprised when one day he told me “I recommend this investment to my clients even if I do not get paid for it”. Wasn’t he paid like the advisors in the US?
Then last week I had a conversation that opened my eyes.
I found this Italian financial advisor that runs a YouTube channel and a blog full of portfolios. I will not mention his name because…I will mention other names and you never know, how and if these people will react or retaliate.
I wanted to talk with him about portfolios and I didn’t expect our conversation to turn on how financial advisory is run in Italy.
Nothing has changed in the last 20 years. I was blaming myself for having suggested my brother use a robo-advisor (Moneyfarm), something that I later realised was expensive and managed badly, but it is like bloody Vanguard compared to what the majority of Italian savers do suffer.
The Financial Advisory* industry in Italy is still dominated by banks and their army of advisors*. Advisors considered “independent” only when the bank has to pay them; the fixed salary they receive is tiny, so they have to live out of the fees they generate. Fees that are a cut of what they bring to their overlord, like multi-level marketing. They are financial advisors as much as lads selling Herbalife shit are nutritionists. Not because they are that bad (at least not everyone) but because the system is designed like this.
Can you imagine my face when the blogger told me that each of the big banks has a flagship fund that charges more than 3% / year? I could not believe it. I spent the last ten years reading about investors switching ETFs just because they found a 1 basis point cheaper alternative, how could such a fund of funds still exist? The blogger had to put it on the screen in front of me:
3% entrance fee + 3.25% fund fee + all the fees of the underlying funds, because this is a bloody fund of funds joint. 5 billion with a B of Asset Under Management! But wait, they are the “Best Brands”, even the Medallion Fund charges its investors 5 and 50 and there is still the queue outside the door. Let’s look at the fund performance before making a judgment:
The purple line is an S&P500 tracker listed in Europe and the blue line is the Mediolanum best (I just noticed I cut the X axis in the picture. The graph covers the last 10 years if I remember correctly). Ah, this graph does not consider the 3% entrance fee, by the way. Sure, the comparison is not 100% fair (a US stock index against a flexible fund) but I mean, even the Morningstar category is “Aggressive Allocation”, the fund is currently 80% stocks so…I would imagine a client would choose this product dreaming of a stock-like return with less volatility or, more realistically, a better risk-adjusted profile. This is just pure underperformance.
The fact that I cannot find a proper benchmark is by design, so that the financial advisor* can always find an excuse for the inevitable underperformance…in the remote event a client would find a way to check and ask. Without Bloomberg, is not that easy to compare the fund against other ETFs.
I took Mediolanum as an example but each financial advisory* firm has its own gems. Here is a goody from Azimut, another Italian shop:
And here is its performance against some stock indexes:
Both Mediolanum and Azimut have their own army of dedicated financial advisors* to push their sausages. And it works:
This business became crucial even for traditional banks’ P&L, vexed by a decade of negative rates that destroyed the profit margin for their, once core, mission: using deposits to provide loans. A roaring stock market delivered the best cloak to hide those ginormous fees away from their wealth management clients.
[for the pure of heart out there that might be inclined to do their homework, I work for an insurance company that “produces and sells” life insurance products. Life insurance is typically one of the best places to park funds with high fees. Where does this put me on a scale that goes from Greta to Trump? Well, I guess it depends on who is handling that scale 😉 Maybe, as a casual smoker, my values would be more aligned if I was working for Philip Morris (many cigarette companies are HQed here in Switzerland) but I can control my destiny only up to a certain point]
Thank God we have MiFID II
“MiFID II costs and charges disclosure rules require that firms give clients information on all costs and associated charges in good time before they provide the relevant service to the client. Such disclosures are referred to as ‘ex-ante’ (before the event) disclosures. Firms must give clients this information in an aggregated form and include an illustration to show the effect of costs on returns. The rules also require firms to provide regular post-sale statements of actual charges called ‘ex-post’ (after the event) disclosures“
This is coming from the FCA website, the UK regulator, just because I wanted to copy/paste something in English. You can find the same, in Italian, on the Bank of Italy website.
Either Mediolanum, Azimut & friends all have clients that do not mind underperforming the market by 3% (and counting) each year, either they told them they can still outperform while providing all the evidence of the contrary from decades of research, either…they do not follow the regulation. I let you decide which scenario is more realistic.
In exchange for this severely enforced increase in transparency, clients incumbent financial firms received many gifts from MiFID II, including:
- retail investors cannot access dangerous products like Vanguard US-listed ETFs, so the few that are also listed in Europe come with higher fees.
- Independent advisors have to disclose when they get kickbacks from products they sell; advisors working from MedioAzimut* can keep the information for themselves.
What’s the solution?
Years ago I was pretty bullish about roboadvisors; now not so much.
Retail investors that found by themselves, i.e.without any external advice, a roboadvisor they trust possess as well the competencies to realise that the fee they are going to pay does not justify the service. They are better off opening an account with a stockbroker and managing the portfolio themselves. Sooner or later, they will make the move.
Unless…yay!!!…regulation! Tax-exempt accounts like ISA in the UK come with many limitations in terms of eligible investment products and platforms. Given the constraints, a roboadvisor might still be justifiable. But this is a pretty narrow case.
All the other roboadvisor clients got there the old fashion way: because someone suggested them to. Yes, maybe they got the push from someone they never met, like an influencer. But once we introduce the human interaction part, be it a cousin or Ben Felix…we are back at square one.
The way roboadvisors approached the advisory problem reminds me of this Annie Duke post: building model portfolios of ETFs and rebalancing them regularly is not that complicated. The real issue is acquiring clients and making sure they stick with you when markets go down, all in a cost-effective way. Roboadvisors did not solve the hard side of the task at hand and here is an example of when it came to bite them.
MoneyFarm, the biggest Italian robo, drew much criticism because in March 2020 they de-risked many of their portfolios. Obviously, March 2020 turned out to be close to the bottom of that cycle and MoneyFarm sold at the worst possible moment. From an experienced investor’s point of view, this is obviously bad: if I choose a certain risk level and the associated portfolio when I join the platform, I want the advisor to provide me with that. But if you take the point of view of someone with the main goal of retaining funds on their platform, MoneyFarm action makes some sense. There is a lot of behavioural research that demonstrates how investors, especially novice ones, overstate their risk appetite. In the middle of a financial storm, with the exit just a few clicks away and no person at the gate to provide an explanation of what is going on, reassuring and reminding investors about their long-term goals, one of the few things MoneyFarm can do is limit future losses, let the storm pass and hope that better judgment prevails. It is a gamble that might pay off if the majority of investors on the platform are novices and did not panic.
Compared to traditional financial advisory*, robos have at least two additional disadvantages.
They provide more transparency and therefore are subject to more scrutiny. I know the above fact about MoneyFarm even if I am not a client. If your MedioAzimut advisor* made the same sleight of hand, you might not even notice it and the chance you would read about it on internet is zero (they would not do it because your portfolio is invested in the funds that provide them with the highest commissions: portfolio changes depend on the availability of lucrative products, not market phases ;)).
Robos have also to be transparent about their costs while financial advisors*, despite MiFID II, can claim their service is FREE. If the general population knew the real costs of free services, there would be fewer Facebook profiles and fewer free press readers. Clearly, we are not there yet.
Independent Advisory
Financial Advisory means different things to different people. The key drivers for seeking financial advisors can be retirement, starting or exiting a business, concerns about legacy and inheritance, buying a home, change in job circumstances, and being left an inheritance, among others. It is not trivial to set what services to offer, how personalised and at which costs.
In the UK, a market where independent financial advisors are already the preferred channel, even Vanguard “failed”. Despite being a well-known brand, and a brand known for its low costs, it had to close down its Personal Financial Planning business just two years after its launch. Vanguard believed it could start a price war in the UK pensions advice market when it launched a personalised retirement saving advice service to investors with a minimum of £50,000 in their portfolio for an all-in annual cost of 0.79%, which included fund fees, transaction and platform charges. I see Vanguard as the MedioAzimut model done right: they created the retirement building blocks first, low-cost ETFs, and tried to build on top of them.
Why did it fail? Vanguard was competing against other fee-transparent advisors, the playing field was level. Was it because their service, despite being very cheap, was too narrow? Or was it the confirmation that English savers reject the commission-based model, regardless of the reputation of the advocate?
When I was living in the UK, I used the Vanguard platform for my ISA. I have to admit the fact that they were offering only GBP-hedged bond funds was really annoying. I decided to go for a “trusted name” to save time in my due diligence process, it was a good solution in a time-constrained situation but most likely not the optimal one, given the very limited universe of investments available.
Why Italy is still stuck in the broken commission-based model?
One of the few resources Italy has, aside from the well-known touristic venues and culinary culture, is a large amount of savings Italians put aside in the last century. The stakes are high and so are the potential benefits to provide a better model to this wide client base.
Doing business in Italy is an admin nightmare; doing REGULATED biz in Italy is admin insanity. Good, in the D&D alignment sense, advisors are severely penalised by the commission-based model: they have to manage more assets in order to earn the same salary as evil advisors while risking that their masters would move “not-milked-enough” clients to other colleagues. They would love to shift to a fee-based model but making the jump alone is practically impossible; managing clients, admin reporting and the required tech stack is an inhuman ask for a single person. Maybe in the future, an all-encompassing tech solution would emerge, enabling such a proposition, but we are really far from that (at least this is what I understood from my mostly informal conversations; it is amazing how little I know even if I am deeply interested in the field).
Wanna-be independent advisors have to group together to share back office, reporting, marketing and the rest of non-advisory bs. Not that original, uh? In this context, a roboadvisor is not the final solution but just another instrument in a wider tech stack of tools. For example, I love what Ritholtz Wealth Management did with Betterment, a US roboadvisor. They created a partnership, called Liftoff, where clients access the best of both worlds: the interface and back-end provided by Betterment, portfolios and expert advice from RWM. All at the cost of 0.50%.
My (very limited) understanding is that Italian independent advisory firms are just starting to combine educational content, influencers (in the most positive sense of the term) and tech solutions. MoneyFarm sponsors many YouTubers but they offer 0 portfolios where an influencer has some skin in the game. More long-term accountability in these partnerships (yes…I know…) can unlock higher value for the platform, the influencer AND the client.
Meridian, with its blog InvestireConBuonSenso, seems to be one of the few who got the message; I cannot vet much of their content since the few times I tried, I had the feeling of “Oh, I already read this stuff on a US blog, pass”…but I consider it a good sign, and a good strategy if your audience does not speak English 😉 It is definitely a long-term plan, a risky one that requires years of content creation before a reader becomes a client and just the wrong post to destroy all the accumulated trust, and nonetheless the right one.
FinanceDrip deserves an honourable, last mention. One of my daughter’s favourite books is called Tyrannosaurus Drip so….it is really hard for my deranged brain to take it seriously but…you should! It is a different take on what a roboadvisor can do. It is a bit Composer (a backtesting tool for your portfolios and a database of other users’ portfolios), a bit Qapital (a saving app), a bit Raisin (a deposit marketplace), a bit of an educational blog. All stuff that I love. Their pricing strategy is also interesting because they choose to charge a fixed fee and not a % of Asset Under Management. The overall idea is to empower the user and make them independent while providing the tools to take the best possible decisions. If you look at my Seedrs portfolio, you can quickly understand that my ability to pick winners among early-stage start-ups is worse than random so…I let you draw your conclusions.
I appreciate that this post is just a collection of known problems and few, naïve at best, solutions. But if in 2023 a fund with 3% annual costs still exists, it means the problem is not that known and it is worth talking about it again (and again). Maybe MedioAzimut* clients will eventually go extinct, maybe they will evolve into crypto scam victims, maybe regulation will…ok, this is impossible, but it is worth trying to catch some clicks saying that a different, better future is possible, even in Italy.
What I am reading now:
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