“An investment adviser is someone who keeps investing your money for you until it's all gone.” So quipped comedian Woody Allen in a famously scathing sideswipe at the US investment industry. Federal Reserve chairman Alan Greenspan was somewhat more succinct when he encapsulated all market analysis as: “A matter of opinion – full stop.”
UK IFAs have been coming to terms with this full stop in an increasingly obtuse way. To illustrate this, I want to highlight some issues with the unbundling of commission, the equally contentious debate on justifying fees for professional advice and the day-to-day work of the journeyman investment adviser struggling to select funds as he tries to chart progress for his clients.
In the spirit of obfuscation, I will start with the last point. If you want to recommend a product to a client, as opposed to a strategy, then your duty as an adviser is to pick the best one for that client using any number of acceptable measures. Several pages of coloured graphs and confusing tables later, you end up with an opinion and nothing more or less than that.
For example, when selecting an equity income fund, do you side with Neil Woodford at Invesco Perpetual and largely avoid financials? Or should you embrace a fund such as Adrian Frost's? Same sector, different views. There is a right answer, of course, but it is not determined yet. As Macmillan said: “Events, dear boy, events.”
In wrestling with these choices, many advisers (and I will bring fee-charging into my argument now) love to compare themselves with professionals such as accountants and solicitors. Some even go as far as calling themselves GPs or something similar. Yet the fact remains that our profession is different from any of these.
A doctor's role is to diagnose and cure a patient's illness. A second opinion may be asked for but there is only one correct diagnosis. Similarly, a lawyer's opinions are reinforced by statute or, ultimately, by a judge. Even accountants sooner or later are on one side or the other of the Inland Revenue. But the picture for advisers is more confused. Variety in products, funds and structures is vast and selection is increasingly all about personal experience, bias and circumstance.
This leads me seamlessly into the issue of the unbundling of commission, in particular, the pension product launched recently by Scottish Equitable.
First, I applaud courage like this. ScotEq has launched a product that is based on a sound analysis of market economics and allows balanced expense management, with higher costs early and profits later. It also works out competitive after 12 years, even against a 1 per cent contract.
Is it a good contract? Well, the commission will keep advisers happy and the charges(48 per cent RIY in year one) will keep ScotEq solvent when others may start to sweat. But I worry that this seems to make the same mistake that financial products made in the past by believing that clients will commit to saving, come what may. Unfortunately, “What if?” is synonymous with financial planning nowadays.
That said, by offering much higher commission, it represents a new approach that has merit. In trying to address the savings gap, the Government has tried lower charges and now it is trying simplification. Perhaps getting thousands of advisers financially motivated to sell pensions – at no cost to clients – is the sort of radical solution needed? Government-subsidised commission – it's a thought. Who knows, perhaps there is a new breed of adviser who has learnt the lessons and will service clients annually and reinforce the importance of maintaining contributions.
In recent editions of Money Marketing, you will have read Peter Hargreaves making points about salespeople exploiting indemnity commission at the expense of long-term servicing of clients. You will also have read Richard Jacobs giving a strong condemnation of this very product. Their criticisms were ably backed up by sound examples of problems in the recent past but, equally, they could only propose solutions based on assumptions.
Of course, we are all in the prediction and opinion business, which makes products such as the ScotEq pension a legitimate and viable one. At the very least, it is an alternative which should suit some clients and will appeal to financial advisers with 95 per cent-plus persistency on pension sales. Well, that's my opinion anyway.
Steve Buttercase is a senior adviser at M2 Financial