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How will Sandler affect IFAs?

Eight weeks into the Sandler review, it is still hard to get a grasp of what it is all about.

Ron Sandler has begun with a fairly abstract and academic question – how do you increase competition among fund managers? He is keen to improve competition not just in terms of price but also in quality by ensuring that fund managers carry out the best possible research, investigate new forms of investment and break away from the herd when necessary.

In this sense, he is very different from the Office of Fair Trading, which has traditionally focused on making products cheaper through strategies such as tracker funds, rather than improving the quality of investment management.

At first, it may sound as if this question has little relevance to IFAs. Surely, it is all about investment principles, asset allocation and demonstrating the worth of active management? But it is more than that because, when you start to think of ways of improving competition among fund managers, you have to think about how they communicate to their ultimate audience – the consumer – and that takes in everyone in between, including IFAs.

To make his work simpler, Sandler has broken down the market into what he calls a value chain. At one end of his chain are consumers, who want the optimum mix of risk and return. At the other end of the chain are fund managers, who have the means to provide that balance for their investments. The challenge is to allow consumers to put competitive pressure on fund managers to ensure they continue to innovate to provide the best service.

Sandler has identified several ways in which these competitive pressures can be brought to bear but he has also identified problems with all of them. First, he is looking at how consumers can put competitive pressures on fund managers by being more educated and buying direct. If they understand what makes a good fund manager, they can switch to follow the best fund management teams. The problem here, of course, is that more than a third of consumers struggle with basic numeracy, so understanding the finer points of asset allocation is something they are not equipped to handle.

So, if consumers cannot bring competitive pressures to bear on fund managers directly, what about IFAs? Surely, they have the expertise to make investment houses dance to the consumer&#39s tune?

But here, as well, Sandler has concerns. First, he is worried about the way IFAs choose investment managers. He believes IFAs still rely heavily on past performance alone. Of course, many IFAs use far more subtle and qualitative methods alongside past performance to judge the quality of a company&#39s investment team at any given time. But, because these methods are qualitative, they are also subjective. It is difficult to demonstrate how they work.

So, one thing that Sandler could recommend is new standards of training and competence for IFAs, focused more on investment and less on products and taxation.

Sandler&#39s other big concern when he is thinking about how IFAs can bring competitive pressures to bear on fund managers is commission. If IFAs are paid different commission levels to sell products, will this not create bias? In particular, Sandler is puzzled by the difference in commission levels for investment bonds compared with Isas.

Of course, IFAs can point to independent research showing they do not chase the highest commission. But, as long as the potential for abuse exists in theory, Sandler will be concerned about it. That is why he has already asked about alternatives for controlling the rate of commission. He is not so much interested in driving down the cost of advice as in increasing impartiality.

Sandler&#39s final concern is that, even where advisers give consumers all the guidance they need to choose the best fund manager, they do not have the ability to follow these fund managers when conditions change. Over 25 years, the quality of a fund management team is bound to fluctuate relative to others.

This means Sandler will look at the ability of consumers to switch funds both within and between products. Perceived barriers to switching, including up-front charges and some practices involving market value adjusters, will come under close scrutiny.

So, there is a simple answer to the question: “What does Sandler mean for me?” It could change the way you do your job, the way you get paid and the whole market around you.

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