When the customer is always wrong


I went to listen to what the Defined Contribution experts could tell me about innovation in DC yesterday. Having listened in awe at the CFSI Fintech breakfast the previous day, I was expecting to hear about some breakthroughs in pension scheme design, investment and engagement.

“But it was Four Tops all night, and encores from stage right”

as Joe Strummer put it.

Instead of innovation I got castigation, the customer/consumer got a right earful for not engaging with the products on sale!

The keynote was given by Paul Herbert of Willis Towers Watson, I lurked at the back as I tend to make WTW nervous with a keyboard in my hand. Sure enough, my misgivings were well founded. Paul set out the case for introducing an array of complex alternative investment strategies into our DC default. Over- engineered, over-priced and over-advised, I put this presentation in the self-serving-nonsense file in my brain’s x drive.

There followed a debate between various experts on how we could get these alternative strategies into play. It was a technical discussion about platforms, permitted links and pricing. The discussion assumed that there would be somebody will to sign and pay for the “innovation” when it turned up at the door. This assumption I found puzzling. Has there ever been any demand from workplace pension investors for more diversified products at a higher price delivered using “permitted links”? I don’t think so.

Unfortunately, the young lady beside me had a fit and I missed the last part of the debate. I don’t think this was a reaction to the content.

So ended the first half.

The stupidity of the customer

I had asked Paul whether WTW or anyone else could show any demand for greater diversification of DC investment defaults into private equity, real estate, hedge funds and the like. There had not been any member research but that did not matter because members would not have been able to understand what these things were, never mind whether they were any good or not.

To my mind most trustees and even IGC members would struggle to understand the weird selection of products that could help us on our “DC journey”.

The stupidity of the customer was the theme of the second half . There is nearly always a sub-text in “financial engagement/education” discussion.

“If only we could get people to buy what we’re selling / more of what we’re selling”.

In this case the buyers were consumers who thoughtlessly invested in passive equity funds for the long term. I am one such hapless consumer and I know why I do just this. I want the returns from global equity markets and I want access at the minimum cost. I like the investment platform I use as it allows me to adjust my choice at low cost and with minimum fuss.

Apparently I would be better off buying complex products with lower levels of liquidity which would tie me into the strategies that suit me best (even if I don’t understand them).

I am well aware that I can enter into more complex arrangements where I can employ people to tactically allocate my assets, give me access to exotic investments and charge me 2% pa for the privilege. My experience of such services is that they rely – rather than the buy and hold approach required for illiquid investments- on a high degree of portfolio turnover.

As a dumb disengaged consumer, I shouldn’t really comment further, but I see a gulf between the market theory, espoused in seminars such as this, and market practice, exemplified by diversified growth funds (institutional) and discretionary fund management agreements (retail).

What is more, the cost of employing DGFs and DFMs seriously imperils my financial well-being. JP Morgan, who hosted the event and supplied the bulk of the speakers consider a gross return of 5% pa – about what you can expect from the capital markets. If you are regularly spending 2-3% pa on funds/platforms/advice then your expected return is 2-3%.

At one point we were told that the returns that most of us get (2-3%) are caused by our lack of financial engagement/empowerment/engagement. This simply isn’t the case. Read your Thomas Philippon, we have been in a 2%+ world of intermediary costs for the past 140 years.

Flawed logic

I find the causality of the financial empowerment argument fundamentally flawed.

Instead of us failing to meet our financial targets due to our financial incompetence, we fail because we trust the competence of those experts who foist complex, expensive and unintelligible product onto us.

Instead of the financial services industry asking and listening to what consumers want (lots of money in retirement), it presumes we want what it has to sell – and blames consumers if they don’t.

We will only have innovation in DC when we stop telling people want they need and start listening to what they want.

At a BDO event the day before, Stephen Tiley made the point that the most successful strategies were those were the simplest and the least managed. He pointed out that the more expensive strategies with expensive advice attached had under-performed. As members were paying for the investment complexity through the AMC and the consultancy costs in lower contribution rates, he pointed to complexity as a destroyer of value.

We continue to invest in highly expensive engagement tools (the latest being the pension dashboards) but the truth’s the dashboards have no simple solutions to point to (other than over-priced annuities).

I am for transparency. Complexity is the enemy of transparency. It is the mother of cost and cost is the enemy of value. If we want value for our money, we have to abandon complexity – especially where the buyers are clearly not up to understanding it.

The customer is not always wrong, as is proved by elections, big data shows the customer is always right. They just don’t do what you want them to do – all the time!

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in pensions. Bookmark the permalink.

2 Responses to When the customer is always wrong

  1. Phil Castle says:

    I enitely agree with you Henry. The GPP members I used to deal with wanted simple.
    The questions were:
    1. How much is my employer going to pay?
    2. How risky is the default fund?
    3. How much do I need to pay for a decent pension.
    4. What are the charges?
    5. Do I have to fill any forms in? (Becuase I don’t want to wAS THE SUBTEXT)
    If the answer to the above were all acceptable to the staff memebr and all that was needed was a signature authorising the employer to provide info from payroll and start making deductions at the agreed level, we used to get over an 85% take up. Try and get them to think anymore on it or fill in a form, and teh take up rat6e would rely on how persistantw e were in getting the forms back, which once dealing with the 1% world of stakeholder, meant things had to be smooth or take up dropped as we couldn’t afford to spend too muchtime on someone silly enough not to recognsie that a 5% matched contribution in the 1% charegs world was actually a no brainer unless you were so sking and had lots of CCJs you needed to pay loan sharks instead.
    Stakeholder and Auto enrolment didn’t need NEST, it just needed entry by default (auto enrolment). I wasted about 5 years of my life setting up stakeholder GPPs which have now all had to be replaced.

  2. Hannah Gilbert says:

    Thanks Rachel. I am on the playpen DL. I do t know where he finds the time!!

    And this is a good one so thanks for highlighting it!

    Get Outlook for iOS ________________________________

Leave a Reply