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Alan Lakey: The fatal flaws of pandering to consumers

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One of the problems with financial services is the Government and regulator’s view that the consumer must be pandered to. Any type of fecklessness can be contemplated and any sort of dubious experiment tolerated as long as it is flagged as in the interest of the consumer.

When we look back at well-intentioned initiatives, we see a clear pattern. The shrine of low charges has enjoyed many a sacrifice since the advent of the Sandler hypotheses. Stakeholder pensions appeared to offer a low-cost, flexible entry for millions of consumers who had failed to make sufficient provision for retirement.

The fatal flaw was that the low charge structure was insufficient for the provider to include a marketing allowance – commission.

This failure was despite the usual suspect providers telling all and sundry that they would be able to operate profitably if a critical mass could be achieved. Of course, the critical mass was dependant on advisers marketing them and the experiment foundered on the reasonable premise that advisers cannot operate as charities.

Which was better – millions of consumers saving through higher-charging pensions or millions less with no provision and little intention of resolving their problems? This pandering has also created the fiction that misselling continues to be prevalent in retail financial services. This despite in-depth research, regulatory surveys and investigations confirming otherwise.

By heightening the notion that misselling is rife, the regulator assisted in kickstarting the predatory claims management industry, giving it free rein to prey upon the innocent and guilty alike. This has produced a non-virtuous circle where, partly due to numerous banking fiascos, consumers believe the whole financial services industry to be corrupt and fair game for their own form of opportunism.

Allied to this is another regulatory conundrum. The theorists appear to believe that consumers are somewhat dim-witted and cannot understand information provided. However, they simultaneously promulgate the idea that these very same dim-witted consumers are capable of buying complex products online with little or no assistance.

After 25 years of unrelenting regulation, the population has lower levels of saving, lower levels of retirement income and far higher levels of personal debt.

The view that cheap is king, recently expounded by Adair Turner, exemplifies all that is wrong with regulation. Cheap can be measured so it provides an easy way for a bureaucrat who wishes to score some points but it fails to assist the consumer. 

Most advisers recognise that the consumer does not normally know best. But only in this industry does the axe fall on the middleman when things go wrong.

Alan Lakey is partner at Highclere Financial Services

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. Good article Alan

    I was always taught this basic principle; no-one values free and no-one wants cheap

  2. Value means quality at a reasonable price, but neither the government or the regulator seem prepared to accept this fundamental truth. It’s hard to imagine a more glaring example of naked hypocrisy.

  3. Good article Alan. I think that vritually all advisers know and fully understand that when it comes to financial advice and products, cheapest is rarely the best. It could be argued that it is infact woefully inadequate, but then as advisers, we are at the bottom of any list of those whose arguements are asked for and on th erare occasion it is asked for – is usally dismissed at the off. It seems that regulators and politicians alike only want to hear from those who have no axe to grind either way but generally know nothng about the way our industry works in real life.

  4. Are you seriously suggesting that regulation has caused the debt/savings crisis we are currently in???? – Maybe we should seek views on the recent inducements guidence from the queue in the basildon wonga branch?

    You mention ‘consumers’ in the title of your article yet the remainder doesnt even mention your clients?

    This just appears to be the usual moan of ‘regulation is ruining the world’ with little to no suggestions about how we can improve FS.

  5. Well done Alan on a good article (as ever, some sense from this quarter!).

    I know it sounds good and the Daily Mail and others are jumping for joy on the pension default fee rates but…. there is a big negative here. If a reputable company has a reputable skill and offering and it costs 1.5/2%pa to participate in what it does, the merit in only selecting ‘cheap’ funds which are default options with little or no management, opportunity, diversity in markets, property, commodities or whatever is cutting-off-nose-to-spite-face.

    I know it’s an extreme but one of our best ‘medium risk’ investments last year had a total expense ratio of well over 5% – a very high charge but did we care when the fund’s shares (yes, an Investment Trust) were so undervalued against the assets held so that we’ve more than doubled our clients’ money? No doubt lots of people avoided it because of its apparent costs – fools! A little bit of knowledge is a dangerous thing.

    Perhaps investors will leave all their money on a deposit account as its costs are the lowest – if that’s the sort of return they want – say 5% in TOTAL over the last five years comparing with a mere 100%+ on the FTSE100 and much more with our managed strategies because of active management decisions we took to avoid certain sectors and go overweight in others.

    Just imagine, if Key Features were introduced for cars and homes no-one would ever buy one as the costs would be far too high. That said, what’s wrong with not introducing them so the consumer can see what he is letting himself in-for? What is the difference with certain financial ‘products’ and services?

    For clients with that Trust which doubled, we’ve perhaps made all of our management fees for their whole pots over the five years in one fell swoop and no, we can’t ‘do it’ for a mere ‘0.75%pa’ – that is if they want dynamic and responsive, diversified, decision-making and for us to still be there in five years as well! And of course, we may not be able to repeat that over the next few years but at least we offer the capacity for active oversight and action in the face of circumstances evolving every day.

    PS Once the dust settles and no excuse for selling highly-commissioned, inappropriate products to anyone ever (and as happened far too often) but who will there be prepared or able to look after small investors and savers?

  6. Hi Matthew – it’s always great to interact with a fan.

    The article didn’t suggest any such thing. The point being made was that 25 years of ‘consumer enfranchisement’ has not worked and despite the best intentions of all parties we are, as a country, in a far worse position than in April 1988.

    My clients are consumers and many of them are worse off because they have been persuaded that pensions are nonsense and that buy-to-let properties are the way forward, etc.

    Until regulation achieves a balance and also achieves the outcomes that all sane people desire then I’ll continue moaning.

    Cheers.

  7. Alan, I agree that we are in a worse position than 1988 but its cant attribute that to the failure of regulation – maybe in a few cases. The big reason is due to the systematic commercialism and acceptance of debt as the norm throughout society that has got us to this position.

    Our culture is the reason people don’t save and are happy to rack up thousands on credit cards.

    FS should be the cure, not the cause. As an industry we are in the best position to inform and educate society to change their views about money management. The regulator appears to be making steps to attempt this through initiatives such as MAS. I know it’s not great and it has a long way to go but at least it’s an attempt at a solution.

  8. Great article Alan.

    I have been banging on about this for years.
    The old industrial branch business was considered, by the regulator to be too expensive for the consumer. Consequently this area was closed and we now have whole section’s of the community who have no savings, life assurance or pensions.
    The regulator thought that these people would simply go to their bank and buy a low cost ISA and pension and we all know what has happened to the bank adviser. This demonstrates how far out of touch they were and still are.

    I write this response with 25 years experience as and insurance agent (yes clubman), bank adviser, manager and now and for the last 15 years an IFA.
    People need selling to. like it or not.

  9. I think the key element missing from regulation as it is today is balance and the main reason for there being a major lack of balance is because no external body exists to impose it on the the regulator.

  10. “the experiment foundered on the reasonable premise that advisers cannot operate as charities.”

    Such a comment belies a one-dimensional analysis here. Providers lost a fortune, particularly in the Group pensions market (see ‘Polly put the kettle on’ or any provider’s embedded value write off statement). The initial commission rates in the early years of Stakeholder were hopelessly high on the foolish notion lapse rates would stay at surrender penalty type levels. With commission rates falling, many advisers moved schemes around to plug the holes in their business models leaving providers counting the cost. Some providers have been applying sticky back plastic to the holes in their boat ever since to keep indemnified commission going (AMDs spring to mind) but frankly, without someone paying the bill on exit (exit penalties or commission clawback), it doesn’t work.

    I would contend that providers bore the worst of the Stakeholder regime. The truth is that with returns falling over the late 90s and 2000s, charges had to drop too. A 2% charge when interest rates were 8-15% was one thing but when the customer is earning low or negative returns, charges are always going to come under pressure.

    What amazes me is how investment managers fees have not came under any real adviser or political pressure in recent years, only distributor and provider.

  11. @ Anonny Mouse.

    I agree – providers were woefully stupid in telling the Government that they could make prodits out of stakeholder.

    Many of us saw the impossibility of this.

    I recall one provider saying that it would only make a profit in year 13!

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