It is a thread of Treating Customers Fairly, to help financial services customers understand what they buy and from who, while ensuring there is no chance of an adviser being bribed to sell certain products by overly-generous incentives.
What is it not about?
It is not about lowering costs.
Currently head of the FSA’s Conduct Business Unit, Martin Wheatley is to become the new chief executive of the Financial Conduct Authority in March next year. He is already setting out his plans to tackle incentive schemes which he describes as “driving mis-selling and leading to consumers being sold more risky products”.
Bravo! More than just bankers’ bonuses and fund manager performance fees, incentive schemes of all kinds really do need to be looked at more closely.
Pre-emptively stamping his authority, in a speech in September, he said: “We need to deal with how incentives and bonuses are used by firms across financial services to drive sales, and the knock-on effect this has on their customers.”
A report by the CBU of 22 firms “of all sizes, including high street banks, building societies, insurance companies and investment firms” concluded that “most of the incentive schemes we looked at were likely to drive people to mis-sell to meet targets and receive a bonus, and these risks were not being properly managed”.
Even this, however, is not about lowering costs…
…but the emphasis in the run-up to 1 January and RDR is all about lowering costs when an argument could be made for costs rising and the end investor being better off.
In a sweeping generalisation, the majority of UK-domiciled, open-ended, actively managed funds have an initial fee of 5% and an annual management charge of 1.5%. A transparent charging structure will allow customers to see who earns what in the chain from the product manufacturer, through its administrator (platform), and then to the customer-facing adviser – effectively, who gets what of this 1.5%.
And the real problem is…
My problem is the figure, 1.5%.
There is no particular rhyme nor reason why so many funds charge the same amount and there is a very valid argument for this figure even increasing given a fund’s underlying complexity; the skill and track record of its fund manager; their ability to manage volatility better than a peer group; its alpha generation; the scale and structure of the fund house allowing it to cross-subsidise across the range.
As Wheatley said recently, such parity in fee structure could easily be described as “misdirected competition”.
I am not arguing the case for more cost for the sake of it – nor am I arguing the case for low cost investment necessarily being the answer – but I would argue the case for value for money, from distributors and manufacturers.
I hope that any review Wheatley does put in place looks at both sides of the fence, and does so from an investor’s point of view. This is a commercial game and everyone is in it to make money – be it by a fund or wealth manager doing their own job or an investor trusting someone whose job it is to make money for them.
Transparency could be a beautiful thing, as treating customers fairly absolutely is, but it is a mistake to assume a lowering costs will directly follow.
