Trust Me – I`m A Financial Adviser
Published on: July 4, 2012
Categories – Financial Advice
At the risk of encouraging readers to recommend that I should get a life, I did spend a good part of last Sunday going through a fascinating report entitled, “Put the Saver First”, whose author, Michael Johnson, Research Fellow at the Centre for Policy Studies, has managed to influence a number of political decision-makers in the past.
As someone who is now into his fourth decade in financial services (and presumably, therefore, possessing diminished empathy with those not in this sector), I welcome the perspective of outsiders with no vested interests who take the time to stand back and analyse what has been happening and, perhaps more importantly, to conclude where all this may lead.
The first thing that struck me was Mr Johnson`s reluctance to pull any punches – the financial services industry is seen as being “in the Last Chance Saloon of public opinion”. He refers to his paper as, “a wake-up call to the industry” to boost its efficiency by lowering prices and enhancing transparency. Failure to do so, he claims, will inevitably lead to much greater State intervention, with transformational rather than incremental changes in attitudes towards saving once we get past 2017.
Mr Johnson`s scene-setting also makes for pretty depressing reading – including the UK`s “unsustainable” public debt position; the ageing population; Britain under a competitive assault from globalisation; slower growth and higher interest rates in the future; inter-generational strife; the prevailing political ethos of personal responsibility (“you`re on your own, folks”).
As he sees things, it is both “important to individuals….and critical to the nation to encourage savings”, failing which there will be an inevitable deterioration in our quality of life. The problem, as he eloquently puts it, is that this, “….means engaging with the financial services industry which is widely, and justifiably, distrusted….and some of which is dysfunctional”.
Strong stuff, but is it warranted? Based on some of the data provided, Michael Johnson certainly makes a strong case. For instance, the Total Expense Ratio on which investors rely to assess fund costs only captures explicit expenses, and excludes transaction costs (e.g. bid/offer spread, commission, stamp duty, front end charges, exit charges, etc.) and, as a result, “In 2010, the City extracted some £7.3 billion in implicit charges, about which investors were told…..nothing”.
However, there are remedies on offer. Exalting the industry “to put the customer at the centre of everything it does”, Mr Johnson makes 104 proposals, the most notable of which are listed below:
- Encourage the reduction of consumer debt as a form of saving.
- Include ISAs in the (NEST) auto-enrolment legislation.
- Provide early access to pension pots, say up to 25%, in given circumstances.
- Introduce Carol Vorderman`s new-style practical maths GCSE.
- End higher rate pensions tax relief, to subsidise recent Long Term Care proposals.
- Set the combined annual contribution limits for pensions and ISAs at £40,000.
- Remove the 25% tax free cash concession, replaced by a (5%) enhanced pension pot.
- Introduce 30% tax relief on contributions to children`s pensions.
- Bring in paid independent Trustees, who would be subject to a code of conduct.
- Insist on specific “opting in” on ongoing basis by customers for annual adviser fees.
- Cease all trail commission as at the end of 2012.
- Ensure fund managers return to investors at least 65% of the agreed target excess return; no fees retained for below benchmark returns, other than a small access fee.
- Introduce a Total Cost of Investing (TCI) benchmark, to include all fund deductions.
- Control fund managers` rate of portfolio turnover, in order to limit transaction costs.
A key theme of the paper is that, as over 90% of customers require less complexity and choice, the opportunity should be taken to reduce marketing costs and operational complexity to that end. In particular, attention is drawn to the merits of index-tracking, over actively-managed, funds – “Data also suggest that the probability of the average active equity fund manager outperforming the benchmark over three successive years is around 5%. Given that no one is able to accurately predict which fund managers will perform best over future decades, the suggestion is that the additional costs of active management are not justified.”
The question is whether, having had this wake-up call, the financial services industry will now turn over and go back to sleep.