For many years, the financial services industry has held out “independent financial advice” as a brand of best practice. This logo has been touted a kite-mark.
It saddens me to say it, but the IFA badge appears to the public no more than a flag of convenience, a devalued brand, sullied by the opportunism of some advisers and those who depend on them for distribution.
The funds we are asked to invest in are chosen for us by advisers and we pay them to exert a duty of care. But when I see the funds within the model portfolios offered by many financial advisers I question whether the funds have been chose on a value for money basis or for another reason. Let me ask you a question.
What is the difference between a closet tracker and a tracker?
The technical answer is “fees” and the practical answer is a transfer of your savings from your account to the accounts of fund managers and those who recommend them. In America, where the load/no-load system operates, you are aware when a fund manager is paying your money to a third party, in the UK, where wrappers and platforms stand between the investor and his/her money, nothing is so obvious.
The practice of closet-tracking, exposed by the European Securities and Market Association yesterday, is rife. ESMA reckon 5-15% of retail equity funds could be closet-tracking, charging high fees for nothing but higher profits for the manager and big kick-backs for the adviser/platform manager and wrapper.
Where there is no value , but plenty of money, the “independent” financial adviser should be waving the offside flag. Some do, Gina and Alan Miller have been at the fore is quoted in the FT as saying that if you
“buy a Ferrari, you do not expect to find a Fiat engine under the bonnet”
A transparency task force?
Today there is a “symposium” (no less) going on at Newcastle University’s London campus, looking at the transparency of the fund management industry. I was asked to comment yesterday on how transparency should be framed to the outside world.
I could only give the answer the FCA have given us – we need to know what value is, what money is paid and we need to work out if we get value for our money.
The idea of a transparency task force (TTF) is to recruit a body of people who are genuinely independent of the problems associated with opacity (the opposite of transparency). In my book the transparency task force should be recruiting those who hold independence as more than a flag of convenience.
My worry, and I am a big fan of convenor Andy Agethangelou, is that those who represent TTF are utterly conflicted by the need to make money from funds and deliver value for the punters.
I sit on the transaction costs & charges team and here is a cut of my fellow team members
Without singling out individuals, not one of these jobs isn’t dependent on the gathering and retention of assets. Some of the positions represent the interests of fund managers, some platform managers, some advisers running their own funds and some trade bodes tasked with maintaining the status quo.
Can we genuinely expect such people to drive transaction costs and charges (a euphemism for the “money” we pay for fund management), to the minimum? Can we even expect them to want clarity?
Independence is as independence does
There are people on the same list who I consider independent and no doubt the convenors will argue that we cannot have change without the consent of those being asked to clean up their act.
But I cannot see how we will ever have a market driven solution without it being led by those who are genuinely independent of the fund management industry. Since the fund managers and platform managers and wrap managers control the price, they cannot be independent arbiters of value for money.
Whatever happened to the moral supremacy of the independent financial advisor?
The TTF has very little representation from IFAs. There are occasional voices representing the consumer and the odd enlightened “eminence grise” but only a handful of practitioners who might genuinely be held up for selling “advice” rather than “funds under advice”.
Like woodworm in a wooden boat’s keel, once advice is charged for within the price of a fund, it seems virtually impossible for an adviser to let conflicts spread. The result is the fabric of the enterprise is so conflicted that it renders the vehicle unfit for purpose.
Vertical integration is the woodworm destroying the integrity of independent financial advice and commission is only a more transparent manifestation of the practices operated by those offering Diversified Fund Management, Model Portfolios, Fiduciary Management, Managed Defaults , Fund Platforms and Vertically Integrated Master Trusts.
There is nothing intrinsically wrong with any of these concepts – as variants on fund management – but there is something rotten in the state of advice, when it needs to collect its fees through the managers and platforms it seeks to advise on.
A Flag of Convenience
I am one of the “journalists” being asked to sum up the activities of the day. I would like to think I will be an independent journalist (this blog does not take advertising)!
I won’t be at the bulk of the conference as I will be in Warrington this morning helping accountants and payroll understand workplace pensions.
I do not fly “independence” as flag of convenience, it is the product that Pension PlayPen and First Actuarial sells to its customers and cannot be sullied -lest it loses its value.
I think there is a premium in honesty that is the bulk of the “value of independence” and that premium is lost when advisers act as and for fund managers. Advisers are agents of those they advise, our customers are those that pay the fees. When we collect the fees from fund managers, we must take down the flag of independence.
One way to shake up the committees and working parties of the usual suspects would be to insist on customer reps, at least three, not a token one, on each:
eg AMNT to provide member trustees for pensions groups; trade unions for groups affecting employees (ie board seats, as they have in other parts of Europe); UK Shareholders Association for groups affecting shareholders and/or bondholders.
The separation of advice from product selling has not happened as RDR intended, and whilst we may be seeing the cost of investments falling, advisers are mopping up the savings by increasing their fees to 1%, because that number is a safe haven for the masses. Until consumers are properly educated as to what may be considered fair pricing they will not vote with their feet and shy away from the ” commission cowboys” who are alive and well and prospering under the badge of independence.
I have seen examples of clients asking for advice on a range of issues, only to be sold a pension or ISA transfer without any demonstrable need in order to generate income, whilst their planning needs are totally ignored. Effectively these advisers are restricted in both terms of ability and distribution, and have no right to call themselves independent. Often the question is asked, ” if I sell this product how do I get paid?”, thus the link is never broken.
Vertical integration is a prime example of having the whole cake and eating it, generating fees up to 3% of an investment per annum, whilst providing little value to the end customer. They are simply packaged up and sold on to the next predator. Greed is human nature, there needs to be considerable evolution before anything changes.
Henry. Well said but it is hard to get the buy side to stand up. Where are the Pension funds and other investors.