The AITC sees the Sandler review as the most significant opportunity since the Gower report in the 1980s to change the shape of the retail investment market for the better.
There can be no doubt that the consumer has often been poorly served by our industry. Lack of knowledge combined with opaque products and a distribution structure replete with conflicts of interest has led to scandal after scandal.
Our proposals for change to the benefit of the consumer rest on three planks:
1: Consumer education to correct the information asymmetry that makes people more likely to buy unsuitable or unnecessarily expensive products. Success in this objective will, ironically, most likely increase the number of products purchased.
2: Retention of polarisation and raising standards of advice. The introduction of multi-ties would have the opposite effect to that intended. While it is claimed that multi-ties will increase competition, the claimants misunderstand the nature of the competition in the market. Competition is not by and large taking place for individual consumers but for distribution. Increase competition for distribution and the costs of distribution will rise, leading to a rise in costs together with a fall in standards.
This is not an attractive scenario and there is a close parallel from the late 1980s when the Financial Services Act 1987 was being introduced. Then, while the new regime was in its preparatory stages, the OFT ruled the maximum commissions agreement to be anti-competitive.
It was argued that more efficient providers ought to be able to take advantage of their lowcost bases by paying higher commission and the agreement was scrapped.
Of course, nobody could afford to be left behind, efficient or not, and the result was a significant rise in commission across the board, leading to a big increase in charges and product opacity.
Furthermore the only type of advice worth having is independent. While we recognise that the way in which the independent advice sector has wor-ked in practice has been far from perfect, the solution is not to kill it but to breathe new life into it. We propose that:
a: Standards of training and competence for advisers be raised and monitoring be increased.
b: Product providers be compelled to sell products direct to the public at the same price (net of all commission as that which they sell through IFAs). This would make it essential for IFAs to demonstrate to their clients that their advice adds value commensurate with the additional costs incurred. At present, this is not the case.
For example, if I do my own research and choose a unit trust, the cheapest way to buy it is to go to a discount broker and IFA who will place the deal with the manufacturer on an execution-only basis. The IFA will rebate perhaps all the initial charge and live off the 0.5 per cent a year renewal commission.
But why can I not benefit from a 0.5 per cent cut in annual charge if I go direct? Why am I forced to pay for an IFA not to give me advice just to get back the initial charge?
Most people would benefit from good, independent adv-ice. In tandem with good consumer education, they will understand this fact. It will then be up to the IFA to demonstrate to their prospective client that they are worth paying for. In our view, this would be the single biggest step that could be taken to force up standards.
3: Level the playing field. Inv-estment trusts are excellent long-term investment vehicles and should play a major part in the building of funds for provident provision by individuals. Yet there are a number of legal and tax issues which mean that investment trusts do not compete on a level playing field. We recommend that these distortions be removed.
Consumers need our products and they deserve value-for-money, transparent products. They also deserve high quality independent advice.
Daniel Godfrey is director general of the AITC