I feared the regulator would buckle in the face of powerful industry vested interests. Pleased to see it has not.
It’s high time this murky business was sorted out.
This can only be good news for investors
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If this is, as some people suggest, the beginning of a ‘Copernican Revolution’, then every investor the length and breadth of the nation will owe a debt of gratitude to Jack Bogle who stood alone, for decades, in the fight against the powerful vested interests of the investment management industry’s ‘Ptolemys’
There’s been a lot of hot air blowing around on the subject of ‘contingent charging’ in relation to pension transfers (and especially transfers from final salary pension schemes) lately so I thought it was high time I added some of my own to the storm.
For those not in financial services, contingent charging means we (the advisers) will only charge you a fee if we recommend a particular course of action – usually the recommendation to transfer your pension from where it is now to someplace else.
The FCA has definitely tilted its lance against this form of remuneration – and I can see exactly why. They recognise that such a payment system increases the risk of biased outcomes. lf an adviser gets paid for recommending A (transfer) but not for recommending B (leave it where it is)……well, I think we can all see where some people might be led to in that scenario.
So the answer’s obvious then. Ban all contingent charging.
Well, that’s the route some people are advocating but here at Park we are an altogether more thoughtful bunch so here’s why we don’t think that’s such a neatly parcelled up little answer as some think.
For once, financial services people, let’s stop thinking about ourselves. Let’s take a step back and think about the other side of our transactions – the customers.
One thing about our customers is that they are (l think I can say ‘universally’) human beings and that means they can deliver some pretty kooky responses – not all of which are in their own best interests.
To them, contingent charging actually looks fair and reasonable – just as it does to us too……when we’re operating in another environment to our own, that is.
Think about your own typical financial transactions and you’ll see that your economic activities are littered with contingent charging.
Buying a house? Or a car? Or a television from Currys? Contingent charging. Hiring a plasterer? Stand by for some contingent charging. Can you imagine the plasterer who says ‘actually, guv, that wall doesn’t need anything, the existing plaster is fine. That’ll be sixty quid please‘.
Now there’s a tradesman who doesn’t get a good rating on Check-a-trade I bet.
Consumers are so familiar with the concept of paying money and receiving something in return that when they perceive that they have paid something and received nothing……well, they are not best pleased.
‘Ah’, you say, ‘but the customer who has been told not to transfer has received something. He’s had top quality advice’ – and I would wholeheartedly agree with you.
The trouble is, after reading an article in the Sunday Times or watching a TV programme on Channel 4 about pensions, he didn’t come to you for advice. He came because he wanted you to transfer his pension. So from his perspective, you haven’t given him anything of value at all. Yet here you stand with the brass neck to present an invoice.
You see, value is not as straightforward as some would have us believe. It is, as often as not, an abstract concept driven by the recipient’s own personal views. How else can you explain the prices paid for Prada handbags?
So, where does taking the ‘high moral ground’ on contingent charging leave us?
Well, one fairly predictable outcome is that some customers will vote with their feet and move to pastures more, shall we say, ‘accommodative of their desires’.
Now you might think ‘Well, that’s no bad thing. Who needs clients that cannot appreciate the value of impartial advice anyway?’
As individual advisers, we do enjoy the luxury of being able to adopt that view. The FCA however, should be thinking bigger picture.
What will happen to these individuals? Does anyone suppose that they will simply say ‘Oh well, if I can’t get advice on my transfer without committing to a fee – whatever the outcome – I guess I’ll just hang onto this final salary pension then’
Of course not.
They are bedazzled by sums of money which, in many cases, they will never have seen the like of. It is tantalisingly close. They can almost smell the leather on the new sports car. Give up? Not a chance.
They will scour the internet until they find someone, anyone who will deliver what they want. If they are lucky, that will be an FCA authorised firm. However, if the FCA does take the step of outlawing contingent payments, then the field will be emptied of such firms. It will only be the unauthorised who will be left standing – and then it’s ‘au revoir retirement fund’.
It’s easy to say ‘contingent charging is an evil that risks adviser bias’ and maybe it is – but before scrapping it entirely some thought ought to be given to the law of unintended consequence.
Maybe instead of an outright ban we should consider that
- it’s down to us as responsible, ethical advisers to override that bias and always ensure that, where a conflict of interest arises, it is that of our client which always prevails.
- it’s down to the regulators to identify firms where that doesn’t happen and mete out appropriately firm punishment.
- and, perhaps most importantly of all, it’s down to everyone whose living touches this business – advisers, regulators, journalists, legislators and educators – to hammer home the message that what you should we willing to pay for is advice, rather than a product.
https://www.moneymarketing.co.uk/property-funds-make-30m-cash-holdings/
Aviva stuffs around £280m of property fund assets into cash and then, when asked by reporters ‘so, how much are you making off of this’ Aviva ‘declined to comment”
In other words, we’re not telling.
I hope the regulators are asking the same questions of Aviva because it seems that this company has forgotten just whose money this really is.
This is clients investments and Aviva need to stop thinking of it like a plumply funded personal piggy-bank.
For years people like me have been small voices in the wilderness telling anyone who’d listen how the active fund management industry has been fleecing them bare.
I have gone as far as to state that active fund management is, in terms of money removed from client’s bank accounts for nothing in return, the biggest mis-selling scandal this country has ever seen. It dwarfs PPI and Pension mis-selling combined – partly because of the sums involved but mostly because of the length of time it has been allowed to continue.
Now, the FCA has released its Asset Management Market Study Interim Report and, while it’s too early to say the regulator has taken the bull by the horns, we may conclude that it has at least gone through the gate into the bull’s field.
This report makes a number of damning observations about the shameful performance of the UK investment management business but, for the purpose of this blog I am going to open with this graph.
This is showing is the effect of the charges on a specified investment return over 20 years.
The red and yellow lines (so close together they are practically the same) are what you might expect from a low cost passive fund. The purple line is the return based on the charges of a typical actively managed fund – well, the charges they tell you about anyway. Add in the ones they don’t mention and now you’re looking at the blue line as a return. As the FCA report estimates, the passive investor is looking at 44.4% more.
Of course, that’s all very well if the investment returns of the passive and active funds were identical but, as we all know, two funds will deliver different returns. So by paying a bit extra, I get the benefit of the fund manager’s expertise and that will give me better performance and outweigh those higher charges, right?
Well, not according to the FCA. To quote their report: “Overall, our evidence suggests that actively managed investments do not outperform their benchmark after costs. Funds which are available to retail investors underperform their benchmarks after costs”.
So, there you are – pay more, get less.
But Ivor, you cry, surely you have over-egged the pudding with your fallacious remarks about ‘biggest mis-selling scandal EVER’. Well, stay with me and I’ll explain why I say that.
The FCA report cites these statistics:
- the UK asset management industry is managing over one TRILLION pounds of retail investors money
- 23% of those assets are invested passively
- the average active fund annual charge is 0.90% and for passives it’s 0.15%
So, calculators out then. That’s £770,000,000,000 of money which is paying, on average, 0.75% more than it needs to – or, put another way £5,775,000,000. Now if, as the FCA suggest, actively managed funds are not giving retail investors better performance, that’s their pockets being picked to the tune of nearly six billion pounds – EVERY SINGLE YEAR!
The FCA report is only an interim report. We have to wait until next year for the final document but, already it is talking about some interesting ‘remedial measures’ that it might consider.
It remains to be seen whether they carry this through (or whether lobbying from a multi-trillion pound industry sees them halted in their tracks) but, if nothing else, it’s a start.
ps
If you want to see the full report (or if you just think I’ve made some of this up) you can find it here:
https://www.fca.org.uk/publication/market-studies/ms15-2-2-interim-report.pdf
No, it’s no ‘well-founded’ at all Nic.
It is, in fact, based on ridiculous notions of fear and ignorance (stoked handsomely by journalists, I might add). Let’s consider:
“Numbers of individuals contributing to a personal pension reached a high point of 7.6 million in 2007/08, it dropped to 5.3 million by 2011/12“.
When you effectively slash the income of the people that were selling them (which is what Stakeholder pensions did) what would you expect? Well, if you were Blair and Brown, the answer is you’d expect people to rush out and buy pensions of their own volition because they have now been made such good value. Well, that turned out okay boys, didn’t it
“investing in something they understand and feel they have some control over, regardless of the risks“
The key word in that passage is ‘feel’. People feel they have control when they are driving their car. That’s why car travel is perceived to be less worrying than air travel – where you have no control (because you have ceded it to an actual professional). We all know which mode of transport actually IS the safer though.
“Until advisers and providers start to offer safer, easy-to-understand products with low charges, the consumer boycott of personal pensions will continue“.
Pensions ARE safe (certainly compared to paintings). Charges are now obtainable that ARE (almost unbelievably) low. As for the complexity, that’s the fault of regulators and legislators – not providers or advisers.
If consumers ‘boycott’ pensions, more fool them.
I have no sympathy for people whose foolishness is of such a magnitude that they would choose to listen to sloppy, lazy journalists (Step up Channel 4 – you know what you did) than qualified professionals. As far as I am concerned, these consumers are no better than the idiots who eschew their GPs advice in favour of some wacky ‘alternative’ medicine. Those people will stay ill and these people will retire poor.
Sorry to ‘bore on’ about this but it’s exactly the kind of comments made here by Darius McDermott that…well, they just irritate me to the point where I simply cannot stay silent.
“The industry needs to focus less on costs and more on total returns” he says. Yes that’s true but since costs are known (well, they could be if managers fessed up to what they are actually are) and the other component of total returns – i.e. future investment growth – can only be guessed at with a level of accuracy which more properly belongs to the infamous ‘dart-throwing chimp’, then focusing on costs is the obvious thing to do.
So, the answer to his question “Can we stop focusing totally on charges?” has to be ‘no. not really’. Because what else is there than can reliably be used as a measure?
Oh wait. Reading on, Darius’s answer becomes clear. It’s those “lots and lots of good active fund managers who perform well after all these charges are included“. ‘Lots’ would be a stretch. ‘Lots and lots’, however, is testing my credulity to way past breaking point. Have you been reading the SPIVA reports Darius? Fund managers who are consistently good (as opposed to having a few lucky years here and there) are only slightly less rare than virgins in a maternity ward.
He goes on to suggest that “There is good active management and this continued bombardment of charges commentary is just noise“. Afraid you have transposed things there, old chap. The charges are the signal, not the noise. The ‘noise’ is, in fact, the megawatt output of the investment management industry (and those advisers who are their willing stooges) trying to sell us the idea that they can beat the markets.
Like all the best comics though, he saves the biggest laugh until last – with this gem “We can find managers who after all these fees can consistently beat the benchmark and index“
Really? Can you? Then why not arbitrage them against the index, leverage up the position to the hilt and retire to Panama – hell no, why not BUY Panama? You’d be able to afford it in a few years if what you say is true.
