What caught my eye this week.
I haven’t written much about the Financial Conduct Authority’s new-ish Consumer Duty standard, beyond including a few links here over the past 18 months.
Consumer Duty has been hailed by some as the biggest overhaul of financial services in 30 years. But to this jaded inexpert outsider – and skim-reader – it has mostly come across as either stuff you’d think a regulator would be regulating already, or else an open-ended mandate to change the playing field as it goes along.
However this story in the Financial Times this week was pretty notable:
The UK Financial Conduct Authority has ordered asset managers to justify the fees charged on their funds, adding to the pressure firms are already facing from the rising popularity of cheap passive trackers.
The regulator on Thursday said a review of authorised fund managers showed that tensions between profitability concerns and assessments of funds’ value for money were influencing how much to charge clients.
The rise of passive investing in recent years has spurred competition within the industry, forcing some funds to reduce their fees and sparking a wave of consolidations as asset managers battle to cut costs to maintain their margins.
However, despite the reduction, the regulator has sought to reform the way fees are calculated, arguing that some asset managers are still failing to provide good value for clients facing high charges.
Active fund managers having to prove their funds are worth the money?
I imagine the industry has already drafted its initial reaction:
Given that all but the most incurious investors know there’s now abundant evidence that the majority of retail funds underperform their benchmarks, you almost wonder what the FCA is thinking here.
Does it want to blow up the golden goose that funds it?
If the regulator was just going after fund marketing, then perhaps the active fund industry would have a chance.
A start-up index fund manager used to tell me it was hard to compete with actives via advertising because he wasn’t allowed to cite positive performance comparisons in marketing. I have no idea if it was that simple. But certainly I noticed afterwards that active fund adverts focussed more on ships sailing over choppy waters or cartoons of Victorian-style adventurers hunting profits in the jungle than on citing any market-beating statistics. For obvious reasons, in the majority of cases, you’d have to think.
In any event, the FT headline reads: “FCA tells UK asset managers to prove they offer value for money”.
And this, frankly, seems an insurmountable challenge, on an industry-wide basis.
Cruise whiner
I’m not saying fund managers are evil or that beating the market at a portfolio level is all-important for every investor or that no active fund has ever outperformed for decades.
None of that is true.
But it’s a stone-cold fact that most active funds lag their passive equivalents, over the long-term.
So on the face of it, fund managers are just not going to be able to prove that most funds ‘offer value for money’. At least not whenever there’s a cheaper index fund equivalent available.
Hence, as characters used to say in 1990s sitcoms to make sure you noticed a plot twist …
…this should be interesting.
It’d be good to hear from any readers – or industry insiders – who’ve delved deeply into the Consumer Duty standard in the comments below.
Have a great weekend!
From Monevator
Our updated guide to help you find the best broker – Monevator
FIRE-side chat: coasting it – Monevator
From the archive-ator: How to future proof your kids’ financial future – Monevator
News
Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.
Four of Britain’s biggest lenders cut rates on fixed mortgage deals… – Guardian
…then two more follow the next day [Price war?] – Guardian
Survey finds top earners postponing retirement after pension changes – This Is Money
Retailer Wilko has gone into administration – Which
PayPal launches PYUSD stablecoin backed by the US dollar – The Verge
China’s economy has tipped into deflation – Semafor
Arrests made after hundreds gather on Oxford Street for TikTok robbery bid – Guardian
Study: housing costs make households in UK much poorer than in US – Guardian
The all-important US consumer is sitting on a ton of home equity – Tker
Products and services
Recognise Bank launches Best Buy two-year savings fix paying 6.1% – This Is Money
Premium Bond prize rate boosted to 4.65%; other NS&I rates rise too – Which
Open a SIPP with Interactive Investor and claim £100 to £3,000 in cashback. Terms apply – Interactive Investor
Disney+ price changes: will you pay more? – Be Clever With Your Cash
That ‘ultimate mystery’ holiday is unlikely to deliver Barbados for £99 – This Is Money
Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine
Newly renovated homes, in pictures – Guardian
Comment and opinion
Is a market cap index easy or hard to beat? – Behavioural Investment
What can we learn from Britain’s £11m pension saver? [Search result] – FT
Why the secretly rich need to create a ‘trust fund job’ – Financial Samurai
Wealth versus income… – Rational Walk
…and portfolios versus paycheques – Of Dollars and Data
Even when the market goes up it still goes down – A Wealth of Common Sense
Are AUM fees headed for extinction? – Investment News
Lump sum – Indeedably
The performance impact of making predictions – Klement on Investing
Coordination when retirement is for two – Humble Dollar
Finding your ‘enough’ [Podcast] – Morningstar
Space telescopes and investing failure points – Validea
Bad news on the brain: how we’re wired for pessimism – Fast Company
With equity risk premiums, caveat emptor! [Nerdy, educational] – Musings on Markets
Investing meets US politics mini-special
The partisan portfolio divide – Klement on Investing
Are Republicans or Democrats better for the stock market? – Retirement Researcher
Naughty corner: Active antics
Holder or investor? – Humble Dollar
What makes a great investor – Charlie Bilello
Does adding dividend stocks to a portfolio improve performance? – Morningstar
AKRE capital: compounding with concentrated portfolios [Podcast] – AWOCS
The principle-agent problem in modern finance – CFA Institute
Kindle book bargains
Factfulness: Ten Reasons We’re Wrong About The World by Hans Rosling – £0.99 on Kindle
How to Avoid a Climate Disaster by Bill Gates – £1.99 on Kindle
Doughnut Economics by Kate Raworth – £0.99 on Kindle
Trillions [Inventing the Index Fund] by Robin Wigglesworth – £0.99 on Kindle
Environmental factors
The practicalities of Net Zero – A Long Time In Finance
The Australian town where people live underground – BBC
Fiji turns to underwater sculptures to restore its bleached reefs – Guardian
Blackrock’s backlash signals a reckoning for ESG ETFs – ETF.com
The summer everyone saw the sharks – Slate
Off our beat
The short, spectacular life of that viral room-temperature superconductivity claim – Science
Why a room temperature superconductor is [if we ever see one] a big deal – Vox
How to make cities safe – Unchartered Territories
The hidden harms of CPR [Tough read] – The New Yorker
How the pandemic messed with our perception of time – Vox
The problem with portion sizes – Which
He visited 195 countries without flying and it nearly broke him – SMH
Networking is so 1980s – Summation [h/t Abnormal Returns]
Suspicious package: expert level humble bragging at airport security – Slate
And finally…
“Sensible, passively-managed, low-cost portfolios are now the norm, rather than the outliers they were in 2006. I remember debating its merits around that time at an industry conference and sensing that the audience seemed to think I had come from Mars!”
– Tim Hale, Smarter Investing: 4th Edition
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I’ve observed “trust fund jobs” for decades but mrs Neverland and I tend to call them “inheritpreneurs”
The number one activity for inheritpreneurs is cafes, restaurants and shops as you can hire staff to do all the work and buy in all the inputs made by someone else but still show up occasionally to boss people around and pose as a thrusting capitalist
My favourite inheritpreneur story was the only child of European old money who decided he wanted to be a baker and spent several hundred thousand kitting out a state of the art bakery
However baking involves getting up at 4 am so after a few months he hired a baker who was shortly after fired for being lazy …
I really scratched my head about that trust fund job article. Firstly on a basic WTF? You are not your job, and the world is full of interesting wrinkles to learn about. But while the need didn’t apply to me, it seemed to apply to enough others. I even know one of Neverland’s bakers, though to be fair he earned his wedge in part-selling a business. But why the hell he would do that given the hours and low return and significant initial capex beats the hell out of me.
> Being a consultant is another classic trust fund job.
Yeah, the cynical Ermine heart has always thought that. I hear the word consultant and if I see grey hair I think ‘disguised unemployed’, particularly after the GFC.
I still think it’s a tragic waste of human self-development and individuation that so many people, when faced with the question ‘you could do anything you want because your basics are now paid for, so what will it be?’ come up with the answer “work” but each to their own. Your schooldays former self had no trouble filling the long summer holidays, but the skill seems to atrophy with age 😉
I’m not convinced the arguments about value for money are that clear cut. If I was an active fund manager, I would argue that I was providing a service that my clients wanted, which involved a huge amount of highly skilled labour – and hence it was a service that rightly costs a lot of money. Whether or not it’s sensible for someone to want that service is another matter entirely.
To use an analogy, imagine two grass cutting companies. One uses powered lawnmowers that are very effective at cutting grass evenly and quickly, and charges £10 to cut a small lawn. The other markets itself as offering a unique ‘hand cut by scissors’ service, which charges only £20 for a small lawn, even though the labour involved is twenty times greater. You could certainly question why anyone would want their lawn cut by hand, but could you argue that the service represented poor value for money?
I think the lines between the service and the outcome are perhaps blurred for investment funds, because the service is delivering a financial outcome.
Tried posting a comment just now but it seems to have disappeared into the ether. Should I take it personally?
I worked for the FCA for several years and specialised in financial regulatory law for many years after than, though on the other hand I left private practice over a year ago and the company I work for is out of scope for the consumer duty, so I haven’t focused on it. But my 2p-worth:
My initial reaction was like yours @TI – it isn’t obvious what the duty to “act to deliver good outcomes for retail customers” adds to the existing duties to “treat customers fairly” or act “in accordance with the best interests” of clients. But it’s clear that both the FCA and the FS industry are treating it very seriously indeed, and as creating a genuine sea change. The focus is now all about outcomes rather than processes, disclosures etc. (the FCA had, to be fair, moved in this direction some years ago, especially when regulating banks).
Most notably and relevant to the FT article and active management fees, there is now a lot of language around “fair value”. The FCA used to have a very clear line that it wasn’t a price regulator, which sometimes led to odd results. PPI is a good example – it was fundamentally a bad product because it was hugely overpriced, but the FCA couldn’t attack that directly so the focus was all on eligibility and the selling process – they got there in the end but it was a very tortuous process.
It seems that the FCA will be much more willing to directly intervene on pricing, probably not by directing firms what they can and can’t charge, but by asking challenging questions on how firms can justify what they charge, does it really represent a good outcome for the customer etc. I can’t help but think the FCA is opening a can of worms, but it will be fascinating to see how this plays out, not least in the context of active asset management.
@ Dave S same here!
@all — I might have to make this comment situation the subject of next week’s Weekend Reading so people stop taking it personally.
Basically for some reason — possibly the introduction of the comment editing option — the spam filter has become more sensitive, and every fourth or fifth comment is getting routed into spam.
So 2-3 times a day I’m having to set aside 5-10 minutes to trawl through loads of spam ad comments for — literally – Florida land deals, sex aids, sex with minors, short exclamations of acclaim linking to ambulance chaser sites, and much more more awful can’t-unsee it stuff to boot.
For every 50-100 of these I find a real comment that I’m re-excavating out of the soup.
I’m hoping this will be patched away soon (because it’s really a lousy gig) but it hasn’t yet.
Don’t want reader comments being wasted though, so will have to keep at it.
In short: don’t take it personally. People have come up with conspiracy theories about why their comment hasn’t appeared even! But this is the reason. 🙂
Cheers!
@Dave S
Whilst travelling in India (2017 or 2018) I did see a lady cutting the grass with scissors! – or it could have been Nepal.
The tough building labouring (carrying bricks etc) jobs also seemed to be females.
I think the FCA is going in the wrong direction if it’s looking to regulate “value for money”.
When someone pays for a product or service, the implicit assumption is that they value the product or service more than the money, otherwise the trade makes no sense.
Value is in the eye of the beholder, so assessing “value for money” is meaningless. Would I pay £100 for a pair of trainers? No, because £100 to me has more value than a pair of trainers. But someone else might gladly pay that £100 because they value exactly the same trainers more highly than I do.
In my inexpert opinion, the FCA should focus on clarity and transparency of both product and pricing, so that buyers are reasonably informed of what they’re buying and how much they’ll pay, and then work on the assumption that adults are capable of assessing what they value and what they don’t.
Obviously, some cases are more complicated. Mid-contract above-inflation price rises (e.g. mobile phone contracts) are somewhat dodgy because you don’t know what inflation will be halfway through the contract, so you don’t know how much you’ll pay, but you can’t cancel either! In that case, the regulator should perhaps ban inescapable mid-contract price rises.
Let’s not forget that regulators are largely to blame for the UK’s broken energy market, thanks to regulatory changes that tried to lower energy prices by encouraging new entrants with unsustainable business models. The end result was Bulb and many others going bust and ordinary punters being charged with a levy to clean up the mess.
Regulators are also largely to blame for the fact that so many middle-income families don’t pay for financial advice anymore, because “hidden” fees were banned and replaced with up-front fees that nobody wants to pay!
I’m not anti-regulation by any stretch of the imagination, but I am against poorly thought-out regulation that creates significant unintended consequences. Whether squeezing the living daylights out of active managers has that effect or not (i.e. the consequences of most assets being invested passively with no one at the wheel), we’ll have to wait and see.
Apologies for the rant/long comment.
Skewness, kurtosis (i.e. Bessembinder again) & fees deliver the triple whammy to mainstream (retail OEIC/UT) active management (especially having regard to the mean v median outcome issue).
Whether it’s looking at 20 years of SPIVA:
https://www.evidenceinvestor.com/eight-key-takeaways-from-20-years-of-spiva-data/
or reading academic studies (too many research papers to cite here, but one result sticking out is that only 1.7% of active managers outperformed their index over long periods before fees, and just 0.6% after costs); the evidence is in, and it’s overwhelming. Passive has beaten the average retail, actively managed open ended fund across all categories.
That said, inertia is high. Older investors seemed very attached to the cult of the star manager. In 15 years of reading this most marvelous site (Monevator’s either taught me all that I know on investment, or has been the jump off point for other research), I’ve tried to persuade my Mum (who handles my parents’ finances) to go for trackers over active funds, but to no avail. Keep getting same, ‘but how will trackers protect in a downturn’ riposte. No matter what I say to try to show active does worse in market draw downs, the message just doesn’t land. So I figure that there is still a good couple of decades yet to go for active management, just from the Boomers, whilst the YOLO segment of Millennials and Gen Z might provide it with some further future fodder.
The Behavioural Investment piece in links is fascinating here. The monkeys throwing darts simulator does show that simple cap weight trackers should be easier to beat, and that it can’t just be down to fees that they aren’t, as the Equal Weight comparison demonstrates.
But the data is what it is. It might be down to a market regime change, with small & mid cap leadership passing to large caps; and, if so, then that change could be either a cyclic or a structural one (i.e., for the latter, monopoly capitalism wins out, with the creation of enduring digital mega moats).
Further or in the alternative, it could be the result of an inherent skewness and kurtosis of the market.
Finally, it might just be down to chance. Not everything has a reason.
Of course, some active strategies do win. Just not stock picking. Factors get a hard time, but despite long periods of lagging market cap indices, the evidence for abnormal returns in the Fama-French model and beyond is still pretty good. Value and Momentum seem to stand up reasonably well. Low Vol, Liquidity, Size and Quality are a murkier picture.
I don’t deny here @ZX’s point (in other threads) that, for a select few UHNWs, there’s a tiny handful of elite hedge funds (typically closed to outside investors, save for some former employees) delivering risk adjusted returns that just can’t be matched elsewhere. But, as Ray Dalio put it for hedge funds generally, there’s 8,000 planes in the air and at most 100 decent pilots flying them. And, after allowing for their high fees, I dare say that the number of hedge funds worldwide that are actually worth investing in are probably very substantially fewer than 100 now.
Must admit I hadn’t even heard of the FCA’s Consumer Duty standard. Partially, that must stem from spending a number of years at a fund with only internal money. Probably, even at the new shop, it will have no professional impact on a portfolio manager like myself. We are a long way from retail.
Honestly, though, I have no idea what the FCA means when they talk about “value for money” or “fair value”. This comes across as more nebulous bumf from the masters of such material. There are so many metrics by which you can define these concepts as to render these sort of things meaningless.
As a consumer, the trend with financial regulation since 2008 is that the retail customer must be protected. I don’t see how any of this has or will protect anyone. Moreover, I didn’t ask to be protected. All it achieves is fundamentally reducing my choice to invest exactly as I please. Service providers, terrified by being caught foul of subjective FCA regs, just stop me utilizing a number of their products.
If nothing else, can the FCA please make it possible to opt out of all this sort of unnecessary regulation. I can see the impact of their regulation in the lower returns my ISA and SIPPs make vs. my offshore investments. Not everyone wants their “simple” products. Not everyone is the simpleton they assume we are.
@ZX #10: have a look at the thousands (literally) of pages of guidance for firms which the FCA has on its website. How a small provider is meant to correctly follow, interpret, apply and keep up with it all being constantly updated is beyond me. An awfully lot of it reads as being rather imprecise principles, instead of clear rules based.
I used to have a professional dog in this fight, as I was a company Director for a prominent wealth manager. So the comments on this topical post are fascinating.
I can see arguments both in favour and against what the FCA is up to with its Consumer Duty changes.
In favour of what the FCA’s doing, on the other hand, I think the FCA understands all too well that in the world of investments “you get what you don’t pay for”. It understands that there are billions if not trillions of UK consumers’ assets being siphoned off in unjustified fees. And for all its efforts to create a competitive environment in which excesses would be competed away, consumer behaviour just won’t play ball. The St James Place keeps growing, ffs. So the FCA is going to do something about it, to ensure better outcomes for the masses.
Against what the FCA is doing, I certainly empathise with John Kingman’s argument, that the FCA should avoid regulating prices.
It’s a competitive market, and provided consumer-facing material is transparent, promotions are within the rules, etc, then caveat emptor.
Exhibit 1: Thousands of people similar to Time Like Infinity’s mum. Should she be able to choose a ‘premium’ solution, or should the FCA choose its price?
Exhibit 2: Hargreaves Lansdown – where most of its users “think it does a good job and would recommend it — but they know it’s pricey.” according to Boring Money’s Mackay.
https://www.telegraph.co.uk/investing/shares/hargreaves-lansdown-funds-fees-features-compare-aj-bell/
Exhibit 3: Vanguard entered the UK market with low cost advice, couldn’t make it work, and pulled out. Price isn’t everything.
As numerous commenters have observed, there are real dangers from unforeseen consequences.
At the limit, a truly low cost offering can’t readily afford spending on advertising/marketing. A world with no advertising/marketing would have less consumer choice and switching, I believe.
The trend of passive investing is the trend to (economies of) scale. And the Americans have more scale. So the FCA may simply be tilting the playing field in favour of the Americans. There is a trade off between good outcomes for UK consumers and good outcomes for UK plc.
And as Kingham also noted, regulators (exhibit 4: Bulb) have a habit of trying to fully protect consumers from supplier failure. This eliminates moral hazard. As the energy sector has shown, focusing everything on price is too simplistic; consumers should be encouraged to think about financial stability, ethics, etc too.
How this plays out will be fascinating. I can see the FCA saving consumers thousands of pounds, each. But I can see the UK FS sector taking a hit, and UK GDP and UK tax-funded services hurt too.
Apropos the FS “trust fund job” piece: https://www.nytimes.com/2023/08/11/magazine/marriage-trust-fund-ethics.html
Just “sit on some boards” (!)
“Your schooldays former self had no trouble filling the long summer holidays”
Indeed. I worked.
@former FCA Director/wealth manager #13: thanks for sharing perspectives from both regulatory & asset management side.
There’s a wide range in the extent of the overcharging going on out there; and not all ills weight equally in their unfairness, lack of justification and consequences.
I don’t want to defend HL, as their basic platform fee of 0.45% p.a. is clearly too high (witness their sometime 65-70% profit margin); but one can’t really put HL into the same space here as SJP who, to quote a recent DT review of their charges: “St James’s Place charges a fee of 4.5pc for initial advice and then a recurring 0.5pc fee for ongoing advice. On top of these advice fees, you will then pay separate initial and ongoing product fees for your investment, as well as any transaction charges.” Such fees are, quite frankly, rather shocking. These products are at least somewhat commoditiesable, and could (perhaps should) be delivered as trackers from 0.1% to 0.25% p.a. in ETF form. There shouldn’t be any upfront or ongoing percentage advice fee (just a fixed fee of a few hundred, based upon say a couple of hours work at £150 p.h.) to recommend a balanced tracker portfolio. All the other charges are just nonsense.
Again I don’t want to defend HL here, but their 0.45% p.a. platform fee comes down to 0.25% p.a. for the whole amount invested if you’ve got over £250k with them and you simply tell them that you’ll go elsewhere unless they reduce it. 0.25% p.a. is still too high for a largely website delivered execution only service IMO, but there is the fee lacunae with HL for ETF and IT only portfolios where they cap their platform fees at £200 p.a. for a SIPP, at £45 p.a. for an ISA and nowt for a GIA. Contrastingly, even saintly Vanguard only capped their 0.15% p.a. platform fee at £375 p.a., so upto £130 p.a. more than an ETF and/or IT only HL SIPP, ISA and GIA portfolio.
My hope is the FCA focusses enforcement and compliance onto the most impactful and egregious situations, measured by numbers adversely affected and by the extent of the unjustifiable fees. But, in return for more vigorous policing of financial services, the FCA guidance has got to be made more straightforward. Keeping up with the FCA handbook and guidance looks to be a full time job for a team of financial professionals, which imposes formidable costs on local IFAs likely to be passed on indirectly to the consumer. And just having more rules and woolly principles doesn’t necessarily make for either more comprehensive or better compliance.
It seems like I’m not the only one that is both sceptical and concerned about these moves. I’ll confess I’m not particularly close to the FCA’s Consumer Duty move. I am, however, closer to the Value for Money (VFM) proposals in the pensions world. Needless to say, the government response is disappointingly vague in lots of key areas. Likewise, I perceive a large risk of VFM being whatever the government / regulator at the time thinks it might be, only for it to no doubt change at the top of the hat. The Mansion House statements and subsequent publications contained several large screeching U-turns which I’m still struggling to get to the grips with.
@TDM — You write:
“Likewise, I perceive a large risk of VFM being whatever the government / regulator at the time thinks it might be, only for it to no doubt change at the top of the hat.”
Indeed, as I alluded to in my article a lot of the new standard comes across like this for me. And whilst I’m not here to go to bat for active fund managers, who if nothing else can afford their own lobbyists on the back of their enormous take rate, I do have some sympathy that it’s hard to ensure you’re shooting vaguely between the goal posts when the goal posts keep moving.
Agree with @John Kingham, our former director reader, and others that transparency and clear pricing is a first order of business.
Interestingly I’ve been having a back and forth with a platform about our broker table, and they’re all but saying “we don’t want the data simplified down that way because it is too clear and transparent”. (They are not quite saying that, they are arguing they are beautiful snowflakes who can’t be reduced to crude column comparisons. I’m arguing that’s exactly what we’re trying to do, imperfectly but as best we can).
Re: this push and @ZX Spectrum’s comments, I’m also reminded of a previous round of regulator changes (unbundling) that pretty much wiped out 90% of institutional research for anything but the largest FTSE listed firms.
Unintended consequences abound with this stuff. As I wrote in my article, given that a literal reading of what the FCA is suggesting here would result in 80%+ of retail equity funds being wound up tomorrow (and the City shrinking accordingly) then I wonder what the end game is?
If they want lower fees or performance related fees and then ‘value for money’ becomes ‘good value for paying people to try to beat the market even accepting most won’t’ then it would probably be better to mandate that directly.
Am soon to look into the Consumer Duty. Not easy because articles are extremely long (likely reflecting the ambit). My initial impression matches c-strong (5). The existing FCA rules are already wide ranging- treating customers fairly etc. One analogy may be the GDPR. Much had been UK law already in the prior DPA but the GDPR went further and caused organisations to take data protection much more seriously and raised awareness.
So as with new statutes, which consolidate and extend prior ones (another imperfect analogy being the Equality Act), it will change the practical reach and effect. On three levels: 1) firms having to audit compliance, including current business practices, 2) changes to the FCA approach and 3) giving consumers extra complaint arguments. Problem with 3) is they go to the FOS. Reporting a regulated firm to the FCA isn’t useful unless they have many similar notifications. My experience of the FOS isn’t positive, and they ignore regulatory/FCA rule book compliance points, as their staff aren’t trained. But I’d recommend anyone submitting a complaint to a regulated firm to highlight any arguable Consumer Duty failures. It’s new territory for everyone.
I also have a dim view of regulators in the UK. Whether in energy, water, the Equality and Human Rights Commission, Health & Safety Executive, the ICO, passenger air transport/holidays etc, they tend to be of only limited effectiveness. They’re often reactive after the event. Have limited resources. The problems we have in the UK are largely not an absence of regulation, it’s a lack of enforcement. Which is partly limited resources for regulators (ditto the Police) and partly political attitudes to appropriate levels of regulation. Sometimes you could litigate, but litigation often needs legal representation, is expensive, time consuming and carries its own risks. These days one of the most effective ways to challenge an “unfair” practice is through political campaigning, consumer newspaper columns/tv programs or go fund me litigation/group actions where appropriate.
@TLI. Does anyone actually pay the sticker prices for places like SJP? I tend toward the idea it gets discounted massively. Take investment (life) bonds. SJP says they charge 200bp. I pay 45bp with JPM PB. I don’t know anyone who pays more than 65bp with any provider. You haggle.
The problem with FCA (or FSA/SFA regulation prior to that) is the FCA always leaves the interpretation of their vague guidance to the service providers. Not only does that show a total absence of responsibility on their part but it selects against the consumer. The conservative service provider reads the regs, takes legal counsel, is terrified by the potential liability and exits that product. The shyster reads the same guidance, doesn’t bother or care about legal liabilities, and carries on exactly as before. We saw this in P2P lending. It ended up a total cesspit.
The costs also destroy smaller service providers. We’ve seen it with both sole/boutique IFAs and with the minimum sizes required for fund startups. It kills choice and innovation. I don’t want a world where it’s Blackrock or Vanguard. I don’t want their systemic risk or that they increasingly take risks I didn’t ask them to take with my money for their profit.
Just finished implementing Phase 1 of The Consumer Duty (CD) and in the process of defining the scope for Phase 2. While I agree there is a lot of needless regulation and much which could be rolled back – my view is that this and the Senior Management Certification Regime (SMCR) are the better of the regulations which have been put in place…although I don’t work in Fund Management.
In implementing a principle based approach the regulator is making firms think about whether the product and services they offer are good for their customer, priced fairly, can be understood by the customer, and are backed by an effective service.
Making firms think about this, and developing evidence and data that support their decisions, means we are all having to think carefully about the end to end products and services we’re providing.
The recent guidance from the regulator talks about examples of “Good Practise” and “Areas for Improvement”. I think this will have the effect of nudging firms to take a long hard look and then make changes in support of customers. As everyone is watching what everyone else is doing, I think we will see some firms starting to adjust practices in favour of the consumer.
Given the regulations are principle based, firms are going to have to justify the decisions we’ve made and SMCR means we’re all accountable at a company and individual level.
Totally agreed on the fair pricing and transparency – firms have had to go through a pricing review, as well as testing customer comms to see if real customers find them easy to understand, and everyone should have done a “sludge practises” review to determine if customers can easily switch product at the end. All of these will have a positive impact for customers.
I think any firm which took TCF seriously or had a (genuine) customer at the heart of what we do philosophy will find implementing the CD fairly straight forward. That’s been my experience having just got to the end of the main implementation.
I can’t say how this will apply across to other parts of FS – I can imagine there will have been a lot of head scratching in the Fund Management space trying to determine if a product which costs more but delivers below market results can be shown to be fair value. So it’ll be interesting to see how it plays out.
Totally agreed on the unintended consequences – there is always that risk, and there is likely to be more guidance and more nudging going on as firms develop the Duty further and as it becomes embedded in business as usual. But from my perspective I think so far it will have a positive impact for customers where they are making some of the most impactful financial decisions they’ll ever make.
@JK #9: “consequences of most assets being invested passively with no one at the wheel” & @TI #18: “would result in 80%+ of retail equity funds being wound up tomorrow”.
1. Active has such a huge AUM lead over passive, both here and globally, that I can’t see transition to full passive supremacy taking less than a couple of decades.
2. In 2008, 4 years pre RDR, HL was listing fewer than 2,000 active funds. Now it’s nearly 4,000. We’re drowning in ‘choice’. Less would not be necessarily be worse. Nor will the rise of passive inevitably mean fewer active funds per se.
3. More assets into passive may well lead to a more efficient market overall, as it both removes two sources of negative alpha (i.e. the DIY retail punters and the so so active retail funds) for the smart money run by ZX’s hedge fund colleagues to exploit, and also because the smarter money then left in the active game should produce better price discovery. See this piece:
https://www.philosophicaleconomics.com/2016/05/passive/
Of course, no one can know what would actually happen, but I’m not going to start panicking just yet if a load of higher fee, underperforming active funds do start to disappear.
@Dean #19 & @ZX #20 have hit the nail on the head. It’s the enforcement of existing rules and having clear, comprehensible and easy to apply rules which matter.
If we could solve the world’s problems simply by making more rules then we should be living in a utopia by now, what with 50-100 enactments and 2,000 SIs every year. The FCA already has both the powers and the rulebook that it needs. As @Dean rightly says, what it has lacked is the will and resources to use them, as with the other regulators and the police in their areas of responsibility.
As @ZX #20 fears, we may, perhaps, eventually end up with just BlackRock and Vanguard, with 95% of globally invested assets in their mega AUM, ultra cheap trackers (although, if this happens, then I would not be surprised if it took until 2100).
Even then though, there would still be 5% left in the actively run hedge funds (but perhaps fewer than 100 enduring high performance ones, and mostly managing their own money, rather than clients). Those remaining active funds will, in effect, continue to efficiently set asset prices in competition with each other.
I don’t think that, in practice, such a world would actually be too bad, if it ever comes to pass.
@ZXSpectrum
Some people do pay. Years ago SJP / a couple of particular advisors there was suggested to me by my employer as somewhere to look at following a promotion and material (to me) salary increase. For whatever reason (can’t recall exactly but I think uncertainty over how much they’d end up taking plus how tied in I’d be if I wanted to leave) I opted to go with the other recommendation (Saunderson House). That may have been a good comparative decision (I hope) but still, … Overall Saunderson House ended up charging 1%-1.5% all in per year across the best part of the decade I was with them. I didn’t bargain and I’m not sure I could have. I eventually left as I was unhappy with the total fees I was paying and I’d stumbled across Monevator and got sort of convinced I could maybe do it myself . But, I know quite a few who use SJP, SH and the like without seeing discounts and I’m pretty sure I’d be amongst them but for finding this site.
I knew nothing about investing – my parents had never had anything to invest (frugal and saving for a rainy day was as good as it got) and my job has nothing to do with investing. University didn’t expose me to it in a way that was practical enough for me to think it was something I could do. I’m sure I could have researched better, found Monevator earlier etc., but I didn’t and I don’t think it was laziness or stupidity (well maybe a bit of stupidity!). I had no clue where to start (or that you could start) by yourself and I was either looking at investing amounts that were too small to be relevant to anyone but me (early career years) or too big (in my world) for me to feel anywhere near comfortable “gambling” on the stock market. So, I punted and went for the reassuringly nice chaps who charged me lots. Hopefully it all works out in the end …
@ZXSpectrum
“Does anyone actually pay the sticker prices for places like SJP? I tend toward the idea it gets discounted massively.”
A remarkably naive comment.
Anyone who reads the personal finance section of a weekend broadsheet (hell even the Daily Mail) with any regularity will see a pasty faced slightly overweight family of petit bourgeis doing the sad/outraged face in their living rom accompanied by an article about them being systematically ripped off by a wealth manager like SJP they didn’t need and couldn’t afford
@David. So you paid too much for a service. To me that just isn’t an issue that needs to be regulated. As long as Saunderson House were transparent and upfront about their pricing, I don’t see an issue. Nobody forced you to buy their service. Yes, you might have been ignorant or lazy (you didn’t put them into competition say) but that’s on you. When I started investing 25 years ago, most brokers had a 5% upfront charge. Yet I never paid it. It was always something that was magically waived if I asked.
It’s no different to me hiring any tradesperson. I probably get ripped off. On a refurb of a bathroom or something, I will get a number of quotes and I will try to haggle them down but I still probably get ripped off. On a small issue, I just get the usual guy in and he’s probably overcharging. My laziness though is how he makes that extra bit of margin. Yet, I’m not seeing much regulation of plumbers going on. It’s even the same for me buying a piece of tech. If I want a new bog standard monitor I can lift one straight of the Dell website for the RRP. Or I can wait a few weeks for the inevitable “sale” and pay 60% of RRP. It’s my choice. Dell hasn’t done anything wrong if I’m dumb enough to pay RRP.
It’s just seems we are moving further and further away from capitalism. It’s vital that people are able to win AND lose. Those that are faster, harder working, better salespeople or smarter need to able to monetize that edge. We can’t regulate to protect those on the other side who are slower, ignorant, or lazy. The alternative is everyone ends up being “average”. We can regulate against service providers lying or hiding charges. Doing bad things with client’s money. That’s enough.
“Fair value” is also an odd term of phrase for a financial regulator to use for a service. The FCA wouldn’t expect market-makers to offer their service at “fair value”. They’d expect a spread to fair value. The service can’t make money trading at fair value. It implies no margin.
Firstly, massive respect and admiration to @David #23 for sharing so candidly. You didn’t do anything lazy/stupid in trusting in your employer’s recommendations of SH and SJP. I’m afraid that I disagree with @ZX on this one.
Finance services should be a fiduciary role right across the board. Not just the basic product suitability and no conflict of interest criterion. If you handle someone’s money for them, or are paid to advise them as a financial pro, then – in my book – that makes you a fiduciary. Same as a Solicitor handling client monies. The obligation is 100% on the firm/advisor to make sure that their client both fully understands and is happy to proceed with all the charges, including understanding their impact on investment performance.
So, let’s not turn this one around and then blame the victims of misleading, excessive and hidden and disguised charges.
For decades now, it’s been one series of appalling financial sector scandals after another: BCCI, endowment mortgage misselling, Equitable Life, PPI, the credit crunch, LIBOR fixing, etc. God only knows what we haven’t yet found out about. And then there’s all the more edge-case stuff, like closet trackers and the somewhat dodgy marketing of absolute return funds.
The financial sector says that it wants a free market right up until the moment that it goes pear shaped, and then, all of a sudden, it’s the state’s role to try and bail it out. Privatised profits, socialised costs. Moral hazard with hypocrisy and self interest dressed up as economics. 100% of the upside, but none of the down: unlike for the sector’s clients and customers and, ultimately, for society at large.
We’re very luck to have had someone like Bogel, who turned Vanguard into a not for profit, and who successfully pioneered index tracking. Whilst, when you dig right down into the weeds of it all, it does have some non trivial flaws to it, overall it still remains a strategy that, over the long term, has notably outperformed 90% to 99% of active funds.
And it’s a straightforward, transparent, low cost and low maintenance approach which people can stick with over their whole investing lifetime.
I am not surprised that it’s an approach which the financial sector first ignored and then disparaged.
Like, I guess, thousands of other readers, before I first found Monevator (in 2008, in my case), and then began building up my confidence (both in myself, and in what it was saying over the next several years); I knew nowt to speak of about investment. That lack of knowledge led me to make several serious mistakes, especially ones of omission. I bailed out of stocks just after Bear Stearns in March 2008, but then found that I couldn’t bring myself to buy back in at ever higher prices until 2013. Had Monevator existed several years before I first found it (and it didn’t), and had I read it from such a hypothetical earlier starting date, then I probably wouldn’t have made such a mistake (one which has now cost me £100,000s in foregone returns). Instead, I would have already understood and internalised the discipline of buy and hold. Monevator has been my investment equivalent of MSE. It fills an educational gap left by a financial sector which, frankly, is quite happy not to have informed consumers. More profit for them, even though it’s your money that they’re taking the risk with, and then getting paid their AUM related fees out of, regardless of the outcomes.
@former Director of FCA… #13
> Exhibit 2: Hargreaves Lansdown
It’s a dirty job but someone has to do it. Someone has to stick up for HL so I’ll be that patsy 😉
As TLI #16 mentioned HL cap their fees on shares at £45. I annually shift ETFs bought in Vanguard’s ISA as an ISA xfer to HL ISA for specifically that reason, because Vanguard’s cap of £375 is too darn much IMO. I needed an ISA supplier FSCS independent of iWeb to gain some 1+1 resilience against supplier failure though I would still eat a big haircut on the FSCS limit on each,
I also accumulate my lousy annual £2880 SIPP contrib into HL as they don’t charge for cash in a SIPP.
HL have their uses, though I dread that £45 cap being fiddled with. Perhaps they are TI #18’s beautiful snowflakes for all I know. Big enough to make a hige noise if they go down, possibly too big to fail.
I sort of hear ZXSpectrum48k’s line on fiddling with the market. Every time the FCA has fiddled with things I have taken a hit (RDR meant I had to get out of funds or pay to buy/hold them, some other meddling meant avoiding platform fees got harder, etc). But I wouldn’t really know where to start to qualify a platform’s stability. I favour platforms that are big fish with the parent firm listed on the FTSE100 to specifically try and get some too big to fail insurance as backup.
Hello let me flag first of all I am an investment manager.
Can you prove value on your own portfolio? I think you fellows are saying active funds should show ‘better than passives’… but that’s not strong enough. We should take the ‘did we make the best the markets offered’, i.e. the Markowitz efficient frontier. As a proxy, the Asset Risk Consultants’ PCI indices have been close. They’re free, public. So let me ask you. Of the portfolio you are are running personally are you getting the best of world markets? According to research, no, most of us are not, by 2% p.a.. That’s not a reason to buy active funds, but it is a reason to doubt the style of passive funds with static asset allocation. In 20 years, we all might look back and say ‘”ah, the ETF thing after climate change and the effect to slow world GDP, it was pretty obvious that investing in everything was not going to work. Funds were convenient, sure. But all of them were expensive, if you added the disclosed and undisclosed costs. And as for this weird belief that a static asset allocation will work? Hah. Yeh it worked, for the baby boomers. Nobody seemed to figure it would not work if the world economy was in trouble.”
@TLI. This isn’t about index tracking or the broader financial services industry.
This is about whether we need to regulate prices. If you regulate what a fund charges, what next? Rent caps on property? Food price caps. Energy price caps? Oh sorry we already did that. Are you going to regulate against £100k+ Range Rover Sports since compared to a second hand Honda CRV, they are not at “fair value” given they are both SUVs that get you from A to B. People spend too much on pointless goods and services all the time. It drives our economy. We don’t need to regulate this. This can be left to the market.
If somebody really wants to go to SJP and pay 2% a year for an investment (life bond) rather than say 50bp, because SJP have a nice office, take them for lunch, blow sunshine up their bottom and this all makes the client feel special, then is that really an issue that needs to be regulated against? I don’t see any misleading or hidden charges. It’s right there on the website.
As an aside on bail outs. Yes the 2008 bailouts were wrong but they are hardly unusual. Govt has bailed out utilities endlessly. Bailed out the defence sector for decades. The govt bailed out the UK households in 2020/21. They called it furlough. The govt bailed them out again with energy price caps. All these bail outs are wrong. They all socialise losses. We have a “bailout” culture that just needs to stop.
@all — Great discussion, cheers, interesting to hear from insiders looking through this stuff too.
In terms of victim blaming or personal responsibility or whatnot, I think there’s a disconnect in all this between what people seeking a financial service *need* to do and what they *think* they need to do.
The people going to an expensive wealth manager invariably believe they are doing the right and smart thing. In as much as they know they are paying a higher fee, they think that’s because they are getting a better service / (probably think) an ultimately higher return.
I have 3-4 friends over the years who I’ve tried to migrate away from expensive high-touch services they really didn’t need (not HNW etc) towards a cheaper @TA style tracker / low-cost platform approach. Singularly unsuccessful, and they have me, a financial blogger, explaining the case in person to them! So the average person…
I agree almost anyone can learn these things — we all did after all, either in our private time or as part of a professional pursuit — but how much education is it sensible to *require*? I don’t expect to have to learn about oncology before I see my doctor about a suspicious bump.
With all that said though I probably do lean more towards transparency and having a market where anyone can buy what they like — provided they know what they are buying — rather than regulating these products out of retail investors’ hands. At least let the ‘sophisticated investor’ type self-cert prevail, although I guess anything enabled under that banner needs a critical mass to fly.
@ZX #28: But the way in which the FCA are doing this isn’t price capping, and I’m not saying that provider prices should be regulated prescriptively.
I am saying though that finance is not just another good or service like, say, using a gardener or buying consumer goods.
Rather, it’s about handling client monies and advising people in relation to their own funds.
Solicitors, accountants, and IPs/receivers each, rightly, have imposed upon them by both statute and by their regulators non-delegatable fiduciary responsibilities to their clients or to creditors. IMO there should be no free pass on this for other professionals who are in essentially comparable positions of responsibility.
If it’s not in the interests of the client, then the financial services provider should also be under an obligation tell the client that; and this will include both the provider’s fees/charges and their product range.
If a solicitor encouraged a client to litigate a dispute because they could make more fees from that when it was more in the client’s interest to settle or otherwise avoid litigation, then they’d be guilty of professional misconduct (obviously, if they explain everything and, despite the clear advice to the client not to litigate, the client still wants to go ahead with proceedings, then that’s another matter).
But the principle of always acting in the client’s best interests and of treating client interests and funds with at least the same level of care as you would for your own should be universal for professionals who handle client funds and/or who advise clients professionally.
On the bail out front, this gets into politics and philosophical preferences. I think it is fair to point out though that, in practice, many market libertarians suddenly discover the benefits of state intervention the moment that their own financial resources are on the line. Just look at the US tech billionaire class lining up to loudly assert earlier this year that SVB absolutely had to bailed out and that it was ridiculous to hold them to the FDIC $250k per account limit. I think that the hypocrisy of it all does make the wider public question things, and that’s no bad thing IMO.
Furlough and energy caps really aren’t in the same space conceptually. Gov’s world-wide required their citizens to stay at home and not to go into their workplaces. In effect, people were being required not to earn their living. So, of course there had to some sort of assistance to households. As for energy caps, again it’s the wider societal impacts and the involuntary aspect. No UK household asked Russia to flagrantly breach international law and to brutally invade its neighbour. So why (morally) shouldn’t households here get help from HMG with the fallout? I’m not impugning arguments against such assistance which are based upon practical / affordability considerations. Rather, I’m identifying an ethical difference in kind between bailing out the creditors and shareholders of certain private companies on the one hand and, on the other, policy interventions like furlough and the energy cap.
Referencing many posts above.
I think the issue with retail financial services has often been that people approach it piecemeal or late in life and then lack the confidence to assert themselves or handle their own affairs.
I know my own parents probably paid more than they needed to over the years to an outfit for setting up their retirement portfolio (indeed they said more proactive peers had all moved on to other advice or self management) but I guess they had a certain comfort in the “expert” (really a salesman with a nice suit) advising them and without that handholding potentially would have been worse off by simply investing in savings accounts and cash ISAs alone..
And it’s only really in the last 10-15 years that the lower fee automated model portfolio outfits have really got going for those that still want things recommended and low need to make decisions.
So for every financial sophisticate negotiating on basis points there’ll be a whole bunch of people with different potentially non numerate backgrounds saying “1.5% seems fair” without the longhand of the calculation. At least FCA moves now force more things to be spelt out explictly even if people won’t read them or, increasingly as they age, have too much inertia to act on them.
@ZX
No complaints from me (well not in the way you maybe seem to be thinking per your response). Yep, I paid too much for a service – which wasn’t particularly or at least only what my post was about. I was responding to the question from you as to whether anyone pays sticker price – yes they do. (And I did try and get the fees reduced, they didn’t budge on what they wanted to charge, I left.)
They (SJP and Saunderson House etc.) can charge what they like. I chose to pay and “knew” at least roughly what the numbers would look like in any given year. So, not their problem / fault. And I don’t really think the FCA or anyone else should be fiddling with what they and their ilk charge as long as they are clear about it (though that includes any tie in costs).
What I didn’t have a scooby about was alternative paths that might be available. It’s tricky though – if I go to a Dr I expect them to tell me that they are or aren’t the right person to help me (best go see a specialist in X because your pain at Y isn’t really caused by Y). If I go to a plumber I don’t really expect him to send me to someone who can do a better (or cheaper) job – though if I need some work done on the boiler and that’s not their thing I’d expect them to let me know (and some plumbers are willing to say they’re not the best person for the job – which is why you keep them as your go to).
Where does a financial advisor sit here – they don’t need to send me to someone cheaper and defining better is awkward. The bit I find hard though is that there really is no-one (websites like this aside) that will point out that you don’t need a financial advisor and do so in an actionable way. People looking for one are (almost by definition) worrying about their finances and trying to work out how to do something sensible and not wanting to loose it all or get ripped off. What counts as ripped off is defined differently by different people and some may be perfectly happy with 1.5% annual charges etc. But if they don’t know there is an alternative (which IS different – you don’t get the nice chaps to reassure you all is well every year etc.) and how to access that / those alternatives if you decide it is for you I don’t think a proper choice has been made. Even once you find there is an alternative it takes a fair leap of faith (well it did for me) to jump and much thought about whether the alternative might be right for you.
So, for me, it comes back to provision of information and education. The first is straight-forward (well, not really, but this site does it well) and while I can see why financial advisers don’t provide information it would be good if there was some way to make it very accessible (more accessible than just sites like this – for every site like this and book promoting passive investing etc. there is another selling their own religion and often a course to show you how along-side. Education is probably harder – even once you have the information you need to be able digest it. And, can’t force people to learn about something either. Besides, maybe they prefer to pay the 1.5% so they don’t have learn.
No solution. Just saying I (think I) agree that the advisers’ fees shouldn’t necessarily be regulated but that there are other things that would perhaps help justify the advisers say people had chosen to pay those fee eyes wide open. Would it be unfair to advisers to require them to provide (prior to signing anyone up) some clear pro forma based type 2 page document that sets out (a) their 2/5/10 year returns (on an average portfolio – they all have them or can create them from what they actually have clients in) versus a very simple vanilla, investable (as in with the components clearly identified), 60 global equity /40 Govt bonds portfolio (even just pick a standard Vanguard 60/40 lifestrategy – not to promote Vanguard, though it likely would) along with (b) contact details / website details for the 5 or so largest DIY brokers with (c) a line saying that if you want to investigate alternatives here is some relevant information. NEVER going to happen mind you (and there’s probably some good reason it shouldn’t) but interesting to see how many people choosing financial advisers with fully disclosed costs would still opt for the easy route and use the adviser v’s starting to dig into the info on the alternative provided. At least it would be clearer that they knew both the price they were paying and had access to information that there are other ways of doing things with different price tags (and very different service levels).
I will add an anecdote about an experience I had last year. I attended an online seminar on retirement planning at which Firm X were presenting. They offered a no obligation follow up “chat” with one of their financial planners, not surprisingly as it was an obvious marketing activity for them. They asked me in advance if I had any specific areas I wanted to talk about to which I emailed a few bullets. The junior planner obviously felt a bit outside his comfort zone and roped in his boss. Who was then arrogantly dismissive of what little I’d disclosed of my own portfolio and on no basis declared I was underdiversified and then challenged me as to what I wanted from them. OK he maybe sensed I wasn’t an easy sale and was a bit annoyed that he’d been roped in but with that attitude it seemed to me that they can be pretty ruthless in qualifying pushovers and don’t really care about leaving others with the bargepole rule.
The finance industry (investment industry) and people working in it (active traders) often can’t accept they are very often vastly overpaid for underperforming. This is not the same as saying they cannot offer value, they can, and many do. The value proposition simply can’t be false claims or the implied aim (deception) of financial growth better than obtainable elsewhere, as it’s almost at the point now where even the slimy marketing professionals and CEO’s of fund management firms are having to acknowledge the reality that most active funds after fees are not the wisest way for most investors to grow their wealth *if that is their only aim*.
The ‘value’ active managers can and should be offering is in areas such as themed investments. The ‘value’ in active is things like only investing in certain areas, industries, or avoiding companies with certain features, basically when it can be justified the aim is NOT purely overall financial growth. I would argue there is even value in paying above index fees for services that include minimal but personal tax advice e.g. A good friend of mine earning more than me had no idea of the concept of using pensions and such to reduce tax so he recovered his personal allowance; he just needed to see an example of recovered tax/NI by additional pension contributions before realising additional payments to pensions are a good idea. That was not even advice, just the question “why are you paying all that tax and only minimal pension contributions?” with pointers to various calculators.
‘Value’ does not always need to be about paying the least money to make the most money after fees. Indeed, as much as people like to hate on HL, as above, and their 0.45% platform fees, a person thinking about pension options outside their employers could do a lot worse than reading the HL SIPP articles and using their calculators and, shock horror, even paying the 0.45% fee to HL; as a large main player, this is, arguably, part of their ‘value’ – a naive starter investor looking for a SIPP typing into google and ending up at HL with their 0.45% fee will still likely do much better overall in retirement with a basic SIPP, than making minimal pension contributions and nothing else over their lifetime. I don’t like 0.45% fees but I use their active savings as the slightly reduced interest comes with the benefit (‘value’) of not having paperwork/KYC to get very high rates – the ‘value’ to me is zero admin, even if I get ever so slightly worse rates.
At the point where the aim is *only* portfolio/financial gain, active managers, who, after fees, have underperformed the market they are operating in, should be judged accordingly. If your ‘value’ or claim to justify your position is to provide maximal returns for your investors with no fancy themes or objectives that would make returns not the only outcome measure you are working towards, then you should be judged, remunerated, and potentially made redundant based on your success in achieving that objective.
There are few other industries where immediately recent bad performance can almost be washed away and ignored by saying give me another 5-10 years (“investing is for long term, it will turn around” or “our strategy will revover when situation X arises”), nor does long term bad performance for the majority of people working in most industries become acceptable (underperforming an index). Truth be told, the active investing industry is in need of a massive shake up, and the focus needs to be on areas they can deliver true value in aspects they can demonstrate that value has been delivered. These areas do exist and have massive room to develop further, it just isn’t in the area of growing your clients wealth overall, as for the majority of nonsophisticated investors, a ‘star managers fund’ is not the best way to grow their wealth based on outcomes we have available to us today.
You just need to listen to some ‘top’ fund managers and their refusal to answer questions about contradictions in their policies/comms. and decisions e.g. (ARKK) who is constantly going on about her fund being positioned for companies with long term growth potential – the funds churn of selling companies is so great the idea that she is picking long term winners to hold for the next 5-10 years is practically unbelievable at this point.
Similarly, the lack of ownership when active funds get shuttered due to combinations of failures of decisions and governance is disgraceful. Neil Woodford talking as if it was not his fault and he just needed more time to turn the fund around – the money in his fund belonged to the investors and the fact they wanted it out is not an excuse for the failings of that manager. If it was not for the fact equities, on average, go up, the world would have woken up long before now about the ‘value’ offered by many active fund managers when *value is perceived solely through the lense of wealth growth*.
The sad truth is that even in retail banking no one will do ANYTHING unless a regulator explicitly forces it, or unless it’s a situation where someone senior may go to prison, as most things in favour of the customer put the business at a massive competitive disadvantage if you are the only one doing it. Consumer duty already is demonstrating my above point – the handbook/guide has an explicit example of NOT increasing savings rates for long standing customers when rates for new customers are higher as bad practice and not in line with consumer duty, it’s an explicit example in the guide, yet banks are interpreting this as “we need to make sure customers are made aware of their options” – NO, it’s quite clear, why would the long standing customer with lower rate account, but all other terms identical need to even have a choice? – they clearly have only gains to make from the higher rate, the fact their account is called internetsaver3 at 1.5% and the customer applying today has internetsaver4 at 5% is irrelevant. But yet, my colleages from previous employer are telling me, as expected, banks are dancing around the issue (“we need to make sure customers know their options”) and short of being forced to give a minimal floor rate, the changes trying to be brought about by consumer duty will not happen quickly unless the regulator actually forces it explicitly.
I have more sympathy for fund management in terms of consumer duty as the product involves inherent risk and ‘value’ is less clear cut, whereas with negligible risk products such as low value personal cash savings, it is quite reasonable to be asking banks why is their ‘loyalty saver account issue 1’ paying less than 2% when the identical product with identical terms other than the rate and name incremented to “loyalty saver 2”, opened today, paying 5%.
Active fund management has an important place in value discovery in specific areas etc, and there is real value to be added, but if the goal of a fund is simply to maximise customer wealth via wide investing decisions or the product gives the illusion of such, most active managers are failing.
To conclude though, I believe consumer duty is too soon for investment funds, as the industry needs a more fundamental clean up. It is somewhat ironic that if the FCA simply required active fund managers to state clearly (YES/NO) on their fund sheets whether the fund aims to maximise income growth over a specified period/market, and if NO, i.e. growth is not the primary aim, to state where the funds value lies, then most of the problems go away. The issue today is most investors think they are investing in a fund with a manager that is looking to maximise their resultant wealth and better than the market, so if that is the aim, fine, such funds (stated as YES) can be subsequently compared against the market after fees and held to account. Those whose value lies elsewhere (NO) can be judged accordingly based on whatever their value claim is. This deception in aims is the root cause of a lot of issues.
[Addendum to #31 (which should have said it was in reply to #29, and not to #28, apols)] Some parts of the financial sector are already closely regulated on price, e.g. under the Consumer Credit Act 1974 and some retail banking services. Whether that’s good, bad or indifferent, it’s not a novelty within financial services.
@Private Client Manager #28: good points on static asset allocations, but IIRC tactical asset allocation models have done somewhat poorly compared to plain vanilla market cap trackers in recent years, much like factor investing (of which I am otherwise mostly supportive).
@BBBobbins #34: your experience here resonates. Invited to an online seminar by a prominent IFA platform and asked to submit questions in advance. Asked a few searching ones and heard nothing more.
@Random Coder #35: All excellent points well made. Just picking up on Woodford if I may; I feel for everyone who lost money in that debacle, but at least it has given a textbook case of how spectacularly badly and quickly active fund management and oversight can go awry. Because it was an omnishambolic mess, it arguably holds lessons for everyone. The FCA caught asleep at the wheel, again. What were Link up to? HL starstruck, and unable to see what was before their eyes until almost the very moment the funds were suspended. As for Woodford himself; listening to no one and totally out of his depth in deeply unfamiliar, unlisted fledgling businesses, and with far more investor money to spend than productive opportunities to spend it on. Overpaying and choosing dud after dud. The crazy decision to mix illiquid unlisted entities with his main equity fund holdings, rather than keep them in WPCT where they should all always have been. The bizarre episode of moving unlisted companies to Guernsey-based The International Stock Exchange. And so it goes on. Layer after layer of incompetence, hubris and complacency. The whole sorry episode should be taught to every future cohort joining active fund management. There were systematic and personal failings aplenty to learn from.
@TLI. I think you are expecting way too much of people at places like SJP or HL. @David probably has it right in the sense that it’s a debate about whether those in finance are “doctors” or “plumbers”. My view is that most are “plumbers”. If they are the wrong person for the job, they should tell me. They should be open about what needs to be done to solve the problem and transparent with pricing. I don’t expect them to tell me that their mate would do it for half the price.
In fact, I don’t really think the type of people at places like SJP are analogous to “plumbers”. They are brokers or salespeople. In that sense, I think a better approximation is a car salesperson. Their job is to print deals for commission. They don’t want a client who is going to leave nothing on the table by driving a hard bargain. They want a decent margin. Nor do they want a tyre-kicker who talks a good game but never pulls the trigger. Expecting these to be “doctors” is too high a standard.
I’d also say you have a rather rosy view on how the legal profession or insolvency types operate. They are even better at extracting money and leaving their clients with nothing. Talk to investors in fintech platforms about how their recovery value went to zero once the IPs got involved in the wind-down of the platform. Sorry, but finance has no monopoly on shysters, fraud, gross mismanagement. For every finance example, I can pick a utility company, tech company etc that has done the same to their investors. We need to get back to “caveat emptor” rather than trying to regulate the unregulatable. People who want to do bad things in finance, will do bad things.
Meanwhile I just want to be able to invest my money the way I want to without FCA interference. They believe that my child’s JISA can be invested in an S&P tracker from Blackrock but not in Millennium. Because the S&P tracker is less “risky”. That’s just a nonsense and shows how little they understand about risk – market risk or operational risk. The FCA’s track record is terrible. I mean they were the SFA when I started, then the FSA, now the FCA. Each name change just an attempt to bury the failures of their prior incarnation.
@ZX. Now we’re getting to the kernel of the issue:
1. What is the financial sector for?
2. Who should it benefit?
3. What responsibilities does it have, to whom, to what standard, and in what circumstances?
Reasonable people can, and do, differ in their views on this. Some say it’s fine if people in financial services are treated as though they’re basically all just sales persons and intermediaries. Others hold that people in the sector should instead be treated like technical specialists: either like highly regulated ones, similar to doctors or solicitors, if they think that they should have special obligations; or like less regulated ones, like plumbers, if they don’t (although, even plumbers still have to follow the building reg’s). Doctors and solicitors have, of course, to put their patients’ and their clients’ interests over and above their own. Personally, that’s how I think it should be for financial pros.
Leaving opinions aside for a moment, there have been a terrifying number of scandals and controversies concerning the financial sector in the recent decades, some of which were listed in my earlier post (to which one can add, if you include accounting as part of the wider financial sector: WorldCom, Enron, Tyco, Lehman Bro’s, Madoff, Polly Peck, Wirecard, Tesco, Autonomy, 1MDB etc).
How will the public ever be persuaded to trust the financial sector and go out and get financial advice where needed, or be persuaded to use active funds (which for the most part I wouldn’t recommend myself, but here I’m looking at this solely from the perspective of UK active fund management surviving) if they do not first see clear and powerful evidence that the sector really has cleaned up its act.
Having the standards of salespeople is not going to get the sector to that place of trust which it needs for its own self interest. And not having the public’s trust could prove an existential risk to large parts of the sector in the not so long run.
The analogies are troublesome as fund management is in a strange place. The issue with the analogies above is the patient/doctor relationship usually is clear to both parties. One expects the other to sort the issue and certainly to do no new harm. The other side really should be fixing the issue, doing no harm and meeting targets which in a private system might include getting paid fairly. The car salesman is similar but the salesman is more about the profits and the buyer knows this (hence the stereotype car salesman, which has some negative connotations), but in such cases everyone is usually clear of the relationship.
All these types of relationships are accepted and work because the parties all understand their position and role. Fund management is missing this in many cases, does the fund manager really think they are providing the best wealth creation route for their clients or are they operating primarily about profit and in most cases accepting, at least in retrospect, that the client would have been better off with the low cost tracker? The issue is what is assumed on both sides – I am confident most fund managers mean well and understand a tracker might be better overall for many of their clients if wealth growth is the primary aim. I worry though that the clients/investors think they are buying a product where they believe they are likely to do better than the market. It is subtle thing.
No one has any real issues with a gold ETF/ETC going down as most people undertsand the role of such is not primarily growth. Similarly, when other specific themed funds move in line with the theme, no one really is complaining or challenging the ‘value’ or suggesting foul play. The issue is when they believe they have bought into a fund designed to mainly preserve and grow wealth, and they get one of the 80-90% of those funds that underperform the no brain track the equivalent market approach.
Further, the analogy breaks down if you believe harm can/is done by bad fund management as most doctors and other professionals do harm only by genuine accidents/mistakes, it is not normal for 80%+ of an industry to retrospectively caused harm (again, if using pure wealth outcomes as the measure).
I don’t view fund management as a bad industry with bad players on the whole. I view it as an industry that needs clarification around its aims and what people understand its purpose to be, and think it needs much stronger accountability in place, but that is only possible once everyone is on the same page and clear on what a fund manager is claiming to deliver with their fund.
The above is why I think consumer duty is too soon for active fund management, it needs more root and branch work first.
@TLI. Just think we have to agree to disagree. I don’t expect some duty of care when I deal with someone in finance. These are just counterparties. They are bidding/offering something at a certain price. I don’t have to trade with any of them. I expect honesty and transparency but not for them to do me any favours or have a duty of care. The same as most private sector transactions I do for most services/products I buy.
I’m a PC gamer and an analogy for me would be choosing a new gaming PC. I could buy from Dell a top of the end £4k type system. Yet 5 mins of research will tell anyone that it’s too expensive and badly built. Really sub-optimal by any metric. Nonetheless, it will still do the job. Dell are not lying about the specs. Are we going to regulate Dell to tell people that they need to go to PC Specialist and buy a much better system? Plus some people actually like Dell gaming systems for some unknown reason! That is just the same as many active funds. I don’t see a need to intervene. Let the market decide.
You see all of finance as a cesspit but, after 25 years in finance, I don’t find people are better or worse than in any other aspect of life. I have more trust issues myself with doctors, nurses and teachers than Goldman Sachs salespeople … and that’s a low bar! The issue really is that when it’s about money, people get far hotter and more bothered. Your view is more that you want finance to be more like a utility, providing at service at only a very marginal profit. This is what regulators said they wanted after 2008. As we’ve seen with our privatized utilities that doesn’t work out.
Frankly, I don’t see any evidence that additional regulation post 2008 has improved outcomes. The FCA completely missed the cesspit of P2P or various types of “secured” bonds. They were told yet ignored it because they didn’t want to curtail “innovation”. Allowing a P2P platform to take 30% from a borrower and give the lender 12% is “innovation”. Yet an active fund manager asking for 1% needs to be regulated more heavily? It’s so inconsistent.
My summary: the only thing that needs to be regulated more is the FCA!
@ZX: I suspect there’s a fair bit we would, or at least might, agree upon.
I think that we both agree with @Dean #19 that regulators in several areas, not just finance (but including it), are FAPP not performing as required; and also with @John Kingham #9 that value often is in eye of the beholder.
We might (perhaps) agree that yet more guidance (especially of the woolly sort) is no substitute for clear rules plus credible enforcement.
On the fundamental, even philosophical, question of what finance is for, and what ethical codes should guide its conduct and the nature of its relationships: a counter party framework seems to me to be one which is closer to that expoused by Jeremy Iron’s character, Mr Tuld, in the famous boardroom scene in Margin Call, whereas I lean more towards the character Sam’s approach that if you don’t treat clients and customers like you would wish to be treated yourself, then it will come back:
https://youtu.be/Hhy7JUinlu0
Sam: “You will never sell anything to any of those people ever again”
Tuld: “I understand”
I don’t know about anybody else but I’m having real difficulty signing in to Monevator as a (Maven) member. When I click on the sign in link, it opens up an update page – clicking on this doesn’t do anything and I’m still not signed in. Very frustrating.
@sirsteve — I haven’t heard of that from anyone before! Will send you an email so we can try to resolve this.
If anyone else has seen this difficulty please let me know, either here or via the comment form above. Cheers!
Could try a page refresh @sirsteve #43. About half time signing in, sign in page shows as successful and goes back to site but which then shows signed out until I refresh the page by pulling down on the screen using finger causing website to start reloading. When it completes reload, it now shows as signed in. Suspect it’s a network connectivity or bandwidth issue.
I have had the same issue as @sirsteve
I ended up logging in via an older email.
Further in defense of HL:
They have the best platform for doing small family wealth management. By that I mean consolidating pensions from previous employers in a SIPP (it’s horrifying how many people can’t answer how much their pension is worth!), running a small ISA/LISA/JISA, etc. Their option to “link accounts” allows me to manage my in laws accounts without sharing the password, which is extremely convenient. Their charges are not bad (0£ per fund trade costs do matter when people invest £200 per month), and consolidating from an OEIC to an ETF every few years avoids the fund fees.
The addition of a savings account comparison platform (Active savings) with easy comparison shopping under the same login is also very useful (and a benefit family members actually understood themselves), letting my family have one “banking institution” and a second “investment/saving institution”, avoiding credential overflow and achieving a decent result.
I have a feeling HL are going to get into EIS/SEIS in the next few years…
Yes, iWeb is cheaper by miles in the long run if you’re investing more, or are organized enough to batch purchases ever few months. But they don’t have savings accounts, cash ISAs, JISAs and account access delegation. Who else has the same variety? AJ Bell seems to have similar full service – not sure if they have account access delegation. Barclays – their charges are much higher, and I’ve yet to figure out whether they offer a LISA or not. HSBC has a bizarre separation of two different S&S ISAs, one for their own funds, second for shares. Don’t seem to have LISAs or JISAs.
I’m too lazy/scared of stories about S&S ISA transfers going at glacial pace/wrong to copy eremine and build my S&S ISA in Vanguard or HL before transferring it to iWeb on a yearly schedule.