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Weekend reading: Consumers want a single “pounds and pence” number for total costs

Weekend reading

Good reads from around the Web.

The Financial Times has a weekly podcast, The FT Money Show, which is usually well worth a listen. This week’s is notable for two reasons.

Firstly, the host James Pickford is considerably scarier sounding than the usual host, Jonathan Eley.

Don’t worry – he can’t hurt you via the Internet.

Secondly, his guest Alan Miller of manager SCM Private had some interesting words on how the RDR changes to bring in transparency on charging have not really worked out.

Miller’s comments follow findings by the Financial Conduct Authority this week that most financial service providers are still not being clear about charges. (No surprise to anyone who has tried to find the cheapest online broker).

As The Guardian reported:

The FCA found 73% of firms had failed to provide the required information on the cost of advice.

For example, 58% failed to give customers clear, upfront general information on how much their advice might cost, while more than a third either failed to provide a clear explanation of the service they offer in return for an ongoing fee, or failed to properly outline the customer’s cancellation rights.

In his response, Miller comments that:

“The problem is that even if [the firms] have followed the rules, they need to add up not just their costs in a transparent and understandable way, but also all the other costs.

So even if they were following the FCA rules, it would still be meaningless to the consumer, because the consumer has to add their cost to all the other layers of cost to have a proper understanding of how much their paying from beginning to end. […]

The whole industry has been allowed by the regulator to put in totally misleading adverts that focus on the annual management charge, so the consumer thinks that’s the fee.

So whereas it used to be a 1.5% annual management fee, [it’s now] 0.75%. The consumer thinks ‘that’s brilliant, I’ve saved half the fee’.

But it turns out they haven’t saved half the fee. In fact we’ve worked out the total cost has actually gone up by nearly a third.”

Miller lists all the various fees and charges that are very familiar to dedicated Monevator readers.

He believes RDR has simply increased the confusion:

“Typically 70-80% of the British public want to have it in one number. The FSA thought that transparency meant having lots of different numbers. But actually that’s jut confused things even more.

So the so-called transparency – which we’ve now found out that people don’t even follow anyway – is about as opaque as you can get. […]

We have wealth managers who have privately said to us they don’t understand the charges, so what hope have the clients got?”

His solution is that there should be further “revolution”, to give consumers one number, adding up all the layers, and delivered “in pounds and pence.”

Miller says such new rules are coming from Europe and will be in force in the UK by 2017. That’s the first I’ve heard of this, so I’d be interested to hear from anyone who knows more.

Test their transparency

Miller is a co-founder of the True and Fair Campaign, which calls for more transparency and simpler fee structures.

He suggests you download the campaign’s template questionnaire to send to your service providers, to see if they can tell you exactly what you’re paying.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: LED bulbs are getting ever cheaper, which is rare good news for the environment (provided you don’t then stuff your house full of them, as many high-end interior designers do). The Telegraph has a case study showing how switching to LED saves £240 a year, or £150 if you include the cost of the bulbs.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • Most private investors have no idea what they’re doing – Market Watch
  • Passive investment, active ownership [Search result]FT.com
  • Swedroe: Quality works on emerging market stocks, too – ETF.com

Active investing

  • Should you have invested your pension in a Lamborghini? – ThisIsMoney
  • Warren Buffett’s diminishing Alpha – New York Times
  • The tech stocks rout: What does it mean? – Telegraph
  • Are stalling UK housebuilding shares a buy? – ThisIsMoney

Other stuff worth reading

  • Is the UK property rise sustainable? [Search result]FT
  • Quite right! Inheritance tax is a fair tax on the living [Search result]FT
  • The UK Mortgage Market Review may curb high loans – Guardian
  • “I made £100,000 from Costa Coffee Sharesave scheme” – Telegraph
  • Does the new renewable heat incentive add up to profit? – Guardian
  • The slumps that shaped modern finance [Snazzy!]The Economist

Book of the week: 79p — that’s all it will cost you to buy the latest book from legendary investing writer William Bernstein, provided you have a Kindle. His boiled down take on investing for young people, If You Can: How Millennials Can Get Rich Slowly is aimed at a US audience but most of this stuff transcends nationality. Or you could opt for his all-time classic, The Four Pillars of Investing.

Like these links? Subscribe to get them every week!

  1. Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.” []

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{ 9 comments… add one }
  • 1 John Kingham April 12, 2014, 12:09 pm

    Thanks for the mention old bean. Your link to the FT article on passive investing, active ownership is appreciated. It’s a subject I’ve been diving into for a while.

    Interestingly enough, it may be that the giant pension funds become stewards of the world (or at least, those bits that the capitalist system has an impact on).

    So even if the governments of the world are too slow to put the brakes on climate change and a myriad of other sustainability issues, the associated financial risk means that pension funds are at last taking their fiduciary duty seriously, i.e. looking beyond a myopic focus on returns from each company individually and looking at the system as a whole instead.

  • 2 L April 12, 2014, 12:54 pm

    I really enjoyed this from Mr Housel this week


  • 3 Learner April 12, 2014, 11:25 pm

    That “spirited rant” on housing is quite a thing.

  • 4 dearieme April 13, 2014, 1:54 pm

    How complete are the charges figures for ETFs? Do they too obscure the cost of trading and whatnot?

  • 5 Rob April 13, 2014, 3:37 pm

    Passive investing with active ownership is timely as we are going through the process of voting right now. Several things stand out.
    Everyone gets a bonus whatever the company does.
    Most of the bonuses are paid in shares. While the dilution is not large, typically 1% a year, over the course of an investors ownership it could mean that 30 or 40% is transferred from ordinary shareholders, those that have paid in after tax cash, to executives awarded them for doing their job.
    That rather makes the issue of a few bps in TER look irrelevant.

  • 6 dearieme April 13, 2014, 10:05 pm

    “typically 1% a year”: which is rather a lot if the yield on the shares is, say, 3% p.a.

  • 7 The Investor April 14, 2014, 10:11 am

    @dearieme — Dilution is an issue, but I don’t think a comparison with the dividend yield tells us anything useful really. If shares trading at £1 and paying a 5p dividend were diluted by 1%, then the dividend yield would fall from 5% to 4.95%.

    It’s more a long-term issue for owners earnings overall. (i.e. Profits retained, paid out, used for buybacks etc). A company like eBay is an example of a company where systemic dilution has not helped shareholders’ returns — a seemingly large buyback program really just holds back the ongoing dilution from employees options, and the shares it has been buying back have tended not to be cheap, too, if not outrageously expensive given its prospects/business moat.

  • 8 Rob April 14, 2014, 10:19 am

    Indeed. To get a full measure of executive compensation you need to include the cash the company spends on share buybacks. which roughly neutralises the dilution effect.

  • 9 BeatTheSeasons April 15, 2014, 10:14 am

    Re your question about the European rules – is this the MiFID II?

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