Yesterday , I wrote a blog about “ownership” and how we cede ownership of our retirement savings – often to ill-effect. You can read that blog here.
This follows up on that thinking and looks at a specific issue that arises when you give up the management of your pension . I’m talking about how you measure if you are getting value for money from your agents.
This series of blogs is inspired by a meeting with Alan and Gina Miller last week. They are mentioned several times in this blog, but I should say at outset that their work on “True and Fair” value and money assessments , has excited and driven my interest in VFM from 2013. They have been campaigning for good for a lot longer (and more effectively) than I have!
Why is the supply chain so complicated?
If you look at this diagram (by the FCA), you can see how agents were employed pre RDR to manage our personal pension.
And here is how things are today
As you can see, just looking at the number of boxes, the RDR has made it harder for us to analyse value for money by disaggregating the bundled service provided by the Provider (including the reward of the adviser by commission). In the lower box, you can see that in an attempt to move people to “self investment”, we have introduced a variety of new players into the value chain.
This has allowed what I refer to elsewhere as “fractional scamming”, where each participant takes what in isolation might seem a reasonable fee, but collectively – is an unreasonable fee. The obvious example is the famous one used by Active Wealth Management in Port Talbot which involved Celtic introducing to them, and they introducing Vega, Newscape, Gallium and a range of underlying managers introduced by Vega (the DFM).
Each of the participants featured in the second diagram fully disclosed their costs and charges, but the true cost of the asset management will depend on understanding the costs of investment within the DFM. These costs include not just the underlying transactional costs of each manager employed by Vega, but the costs incurred by Vega in moving money between managers. As a DFM, Vega should be disclosing these costs (since Jan 3rd) as part of MIFID II.
How can we tell whether we’re getting value for money?
I mentioned yesterday that the key to everything , in the transfer of ownership to an agent, is trust.
Where is the trusted party in this value chain – who is the principal agent on whom the investor can rely?
The obvious candidate is the advisor, who can tell you (the policyholder) to move away from one agent to another if he/she feels VFM is not forthcoming. If you have an adviser who is trustworthy, then he should be able to give a VFM assessment on all parts of the chain and you should be able to judge the VFM you are getting from the adviser on the quality of this assessment.
There are a number of reasons why this is very difficult
- Many advisers are vertically integrated with other parts of the supply chain. They may also be discretionary fund managers and could be being paid by a number of participants in the value chain. Clearly this gives rise to a conflict of interest, how can you give a bad score to yourself, or to someone who is paying you?
- Since the value chain is so complex, it is likely that the adviser will not be on top of all the costs and performance numbers of parts he is not directly involved in, he himself will have to take it on trust that what he is being fed is accurate
- There being so little supervision of the reporting (especially when we get to the granularity of MIFID II) that it’s quite possible the numbers that do feed through are total junk.
- So far, reporting has been to the standards of disclosure seen fit by the providers (though this is changing). This has been particularly frustrating to advisers trying to compare one service with another.
All this adds up to one big fat problem, which is that there is no way that a consumer can really see if they have value for money or not.
It also adds up to good advisers, good DFM managers and good asset managers being abused by bad ones. Some DFMs appear to be bypassing MIFID II altogether, some are reporting selectively, we have some evidence that reporting is being done in different ways- sometimes to hilarious results.
Speaking with Alan and Gina Miller last week, they told me that one of their bond managers was reporting 200 bps of transaction costs on one fund. After lengthy education on how to report “slippage”, this turned out to be around 50bps (still a very high figure). What was so outrageous was that this internationally famous fund manager, didn’t know what it was doing – AND NEITHER DID ANY OTHER INVESTOR.
The reporting of Alan and Gina is world renowned. Their “true and fair” campaign has nudged along Government to ensure MIFID II, Priips and latterly the IDWG, provide fund and asset managers with a way to report consistently. Is it any wonder that both are incandescent with rage that MIFID II is being ignored, bungled, or sabotaged (depending on the depth of your conspiracy theory)!
Until we have a way of ensuring the numbers are accurate and fully disclosed , we have no way of measuring value for money – and that goes for accurate performance reporting as much as cost and charge reporting.
Can advisers be trusted?
Most can – all should be! However there is no easy way to assess the competence of your adviser unless there is an external correlative. If an adviser chooses to charge a lot to provide advice on your investments – this is not in itself a problem. I recently paid a huge amount to sit on the Orient Express when I could have flown from Venice to London for less than 10%. I consider the Orient Express value for my money and paying 1% + of your assets for advice might equally be Vfm.
But – and this is why the Millers are right to be angry – where the adviser is failing to pick up on something as simple as accounting errors in cost reporting – and obviously many have – then there should be censure and disclosure.
It is not just from the Millers, everyone I meet responsible for analysing MIFID II reporting has tales to tell. While the world is falling over itself to be GDPR compliant, MIFID II reporting is being ignored.
This is why I am keen to establish a single way of reporting Vfm on all funds, whether retail or institutional and to continue that analysis to the platform costs and indeed all the contract charges that surround the delivery of the investment outcome.
At present I have no plans to provide a VFM score on the advice , but I do believe that an external correlative (of the kind I hope Pension PlayPen will provide), will allow people to make that judgement.
For that to happen , there needs to be an integrity in the scoring system that we can only aspire to at present.
But I do believe that with regulatory tailwinds and with the adoption of new technology, it will be possible to get the right number on most products. Where it is not possible, I suspect that this will be identified as a deficiency in the product – and a marketing problem for the provider.
Ironically, the provision of factual information is not deemed advice. Provided VFM scoring is restricted to quantitative assessment, it can provide the external correlative on funds , platforms and policies that is needed to check the validity of your adviser’s advice.
Should advisers welcome this new level of scrutiny?
Independent Financial Advisers are now earning on average £93,000 pa. They are as a class of professionals, highly paid. They need to be assessed by professional standards and the scrutiny must itself have professional integrity,
The least satisfactory aspect of working with an IFA, is that the IFA is simply not subject to this scrutiny. We have to make blind assessments which are too often based on factors we know to be weak (personal bias’). While I am prepared to pay huge amounts for a once in a lifetime train journey, I won’t be commuting on the Orient Express. Similarly, an IFA who is retained for life must show cost-effectiveness in a different way to one off “project” value.
Alan and Gina are pioneering a standard of disclosure that must be adopted if we are able to judge funds and platforms and contracts. As DFM managers they are also advisers and I am able to judge them on an equivalent basis. They practice what they preach .
If IFAs want to be seen by me in the same way I see the Millers, let them show the same standards of care. The Millers set the benchmark – may others follow.
Henry. Two things. Not sure I would describe Alan and Gina as advisers or even wealth managers. They do not provide financial advice. Their firm is a “discretionary” fund manager. Secondly, the breakdown as illustrated by the FCA above post RDR has led to costs being driven down at the front end; previously life companies were the source of packaged products and had high levels of costs. Since RDR their influence (and sustainability) has waned considerably as platform providers have been able to expand upon the service they provide.