Nic Cicutti: Advisers woefully unprepared for next financial crisis

Nic cicuttiWhat has the industry learned from the 2008 crash? Probably not much at all

Anyone watching or reading the news over the last couple of weeks will not have failed to spot the odd story or two about the 2008 financial crash. This being the tenth anniversary of the event, the media has been taking a look back.

The idea, presumably, is to commemorate that experience and ask whether lessons have been learnt from it. I hope readers of Money Marketing will not mind if I offer my own minor recollections on that period, culled largely from what I was writing at the time in this publication.

The first thing that occurs to me from reading back over the tens of thousands of words from that period, is a sense of detachment between what was happening in our daily lives and what was being played out on our TV screens and in the pages of newspapers.

During the day, we all went about our normal lives. In the evening, we would come home and watch BBC reports where Robert Peston tortured the English language on his way to telling us about the collapse first of Northern Rock, then Bear Stearns, before finally Lehman Brothers and then most of the UK banking system.

Sure, for those concerned with making life-and-death financial decisions involving tens, hundreds or even billions of pounds, these were seminal days.

But my own cache of columns and emails from that period shows a huge dislocation between the minutiae of my own and advisers’ quotidian activities and the vast, frightening events taking place in the background.

For example, in March 2008, I wrote about the contribution to financial services of former FSA executive Christine Farnish, who had joined Barclays Bank in some meaningless role in order to “continue to delight customers”.

The extent of customers’ “delight” became apparent when an undercover BBC reporter at a Barclays call centre in Sunderland revealed epic misselling of products to its account holders. Farnish was then wheeled out to tell us this was “not in any way representative of the way in which Barclays does business”. Er, sorry Christine, it was – as the subsequent Libor and other product misselling scandals at Barclays demonstrated in spades.

In April 2008, I was writing about a 28-page paper from Aifa called Restoring Trust in Financial Services: Build on that which works. The theme of this slim document, both size-wise and in terms of intellectual heft, was entirely self-congratulatory.

Page after page used graphs from a so-called financial services “Trust Index”, claiming that IFAs stood head and shoulders above the rest of the industry. In fact, the figures were infinitely more nuanced. Not that anyone noticed – or really cared.

In May 2008, I was writing about Aviva’s proposed £80m name change from Norwich Union, a re-branding exercise I felt was pointless then and still do today. I also wrote about some meaningless statistics from Aviva/Norwich Union, when it declared the number of registered IFAs would fall to 10,000 from 21,000 by 2013 in the wake of the RDR. The report argued that a failure to comply with the RDR’s demand for greater professional standards from IFAs would leave a vast swathe of 2.7 million middle-market “orphan clients” just itching to be serviced by Aviva salespeople. What happened to that prediction?

In June 2008, I chaired a session at a conference on the RDR . Speakers included incoming Personal Finance Society chief executive Fay Goddard. Goddard raised the issue of the Thoresen Review of financial advice for those at risk from the consequences of poor financial decision-making. She pointed out that it needed a properly funded high-quality generic advice service to underpin it. Instead, we got the Money Advice Service.

During September, when Lehman Brothers collapsed, I found myself engaged in a spat with former trade body activist Alan Lakey over a Court of Appeal ruling against a firm of advisers, Heather Moor  & Edgecombe.

The ruling upheld the Financial Ombudsman Service’s decision to order HME to pay one of its clients £100,000 compensation over the mis-transfer of an occupational pension into an S32 scheme.

The ruling was a detailed and devastating rebuttal of HME’s attempt to prove that the FOS’s decision had been wrong – not that it stopped Lakey from portraying it as a campaign of persecution against a plucky little firm of Wiltshire IFAs.

The point of all these stories is not to argue that the financial crisis was having no effect on IFAs’ thinking or decision-making at the time. Other columns I wrote clearly referenced what was happening and its impact on advisers. We know house prices collapsed by up to 20 per cent during this period. Jobs were lost and many lives changed forever.

But looking back, I am struck by how many of us were so caught up in our daily routines that we failed to truly appreciate the seismic nature of what was engulfing us. It probably means that, when it comes to absorbing lessons from what happened 10 years ago, we probably have not learnt anything much at all. God help us next time round.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 13 comments at the moment, we would love to hear your opinion too.

  1. I get panic calls from clients wanting to know what to do with their investment before we crash out of the EU. There is real fear and inertia sweeping the country but you wouldn’t think so listening to the politicians and the media.

  2. Maybe I’m missing something, but those examples are not the actions of advisers, but the actions of the hangers-on, the inept decision makers and the rest of the circus that follows around (and naturally gets funded by) advisers.

    I’m quite sure there was a ‘disconnect’ in those circles, but let’s find one time, ever, when that was not the case.

    As for advisers now, how would you suggest they prepare? Go and hide under the bed? Advise all their clients to buy gold and live on an island?

    Firstly we don’t know when it will happen. You don’t, I don’t and only blind idealogues and egomaniacs think they do. It could be tomorrow, it could be 10 years time.

    It wasn’t so long ago we were being told to prepare for cataclysms on the equity markets if a) Trump won he election and b) we voted to leave the EU. What happened? The markets rose to record levels. I’m glad I didn’t prepare by scaring everyone into cash.

    We have one system and it’s too complex to second guess. For all its flaws we have to place trust in it. If you don’t, pretty soon you won’t get out of bed in the morning.

    Is it going to happen? Almost certainly. When? No idea. What can you do about it? Zip.

    • I am reminded of the definition of an economist.

      “Someone who can tell you economically exactly what is going to happen over the next 5 years and afterward can tell you exactly why it didn’t.”

      Quite often as Warren Buffett once said

      “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future”.

      This is never truer than today with predictions of catastrophe and nirvana from the usual suspects on both sides of every debate where the statements reflect their own beliefs not necessarily the world’s destiny.

      This is not a criticism of economists (oh ok it is, a little) but the variables are so large and the black swan events by their nature so unpredictable that short term forecasts which are absolutely certain are impossible.

      Over the next 10 to 20 years I have a similar optimism to Mr Buffett for whom long term investment is the key to future wealth. Good well run companies will continue to make good money and overall economically we will continue to progress to higher living standards (albeit with the odd pause from time to time).

      This will provide investors with increasing wealth over the longer term and as advisers we will be with our clients through thick and thin.

      We cannot by their very nature predict recessions or unexpected severe market events, however we can position people on the right course by ensuring they keep more of their funds by legally paying as little taxation as possible and allocate their funds to vehicles to invest in assets in a logical and sensible manner. We can also stop them making short term mistakes based upon emotion rather than logic. That is our job.

  3. I tend to agree with you Nic, however you make a lot of sweeping statements which is hardly fair and misleading.

    I know there were many of us prepared for the short comings of 2008, some I spoke to even foretold it !

    You say we will all be woefully prepared for the next crisis, I fear its already upon us, you end with, God (which ever one you kneel before) to help us, I do believe, if there is a God (highly doubtful)he or she is not going to worrying themselves over our little slice of hell ?

    Preparation is a fantastic thing, and one should not be looking to the sky for it ?

  4. My recollection of events at that time include two client phone calls asking if their savings in Lloyds Bank were safe (one of them had a total of £10,0000 on deposit) and absolutely no panic at all from any client with an investment portfolio. They were in it for the long-term, and knew that portfolio values could go down as well as up.

    For most of us in the advisory world our “daily routine” then as now is explaining and managing degrees of risk and not trying to control things we know we can’t control, such as investment returns and the world’s markets.

  5. Lessons have been learned, trust nobody. The little people like us would have had no idea of the level of corporate greed and corruption in the banking world, and cannot predict how the electorate will vote, given the Trump and Brexit scenarios.

    What we can do is protect client interests and plan securely for their short term needs, longer term we have to hope that the natural order of things will prevail, as I said to clients during the Credit Crunch, only governments and central banks can sort this mess out so there is no point worrying about things that we cannot influence.

  6. The ‘next’ crisis is already here – it’s called Brexit. And some of us have actually tried to prepare as best we can.

  7. Nic, I think your examples are a perfect illustration of the lesson from the last crisis and the one before that, namely, “Keep calm and carry on”.

    Probably the best advice all round…

    • My thoughts too. Economies move in cycles (we’ve all seen those circular diagrams) and periodic downturns are just part of the landscape. They cannot be avoided and countless studies have shown that picking just the right time to switch into safe asset classes with a view to switching back just before things start to recover cannot be done. It’s called timing the market and virtually no one ever manages to do it successfully. By the time it becomes apparent that things are picking up, you’ve missed the boat to the tune of 10 or more per cent. The only successful strategy (which has certainly worked for me) is to take the long view and keep investing on a monthly basis through the bad times as well as the good.

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