Whether or not you believe in past performance as an accurate indicator of future performance, there is little doubt that misuse of the measure has been relied on to place billions of pounds of client assets.
It seems to me that we should welcome the new rules on past performance with open arms. While I can imagine some parts of the market shrinking on the back of the new rules, surely the long-term interests of the industry are best served by being straight with consumers?
Most Money Marketing readers will be familiar with the tricks used to try and show fund performance in as good a light as possible. Whether selective investment periods, questionable benchmarks or out-of-date information, no stone has been left unturned as fund houses and life offices have strived to mislead punters into their funds.
It is entirely appropriate that such techniques are outlawed and consigned to the past. So what if a corporate bond fund has outperformed the FTSE 100 index by 20 per cent if it has also underperformed its sector by 30 per cent?
In any event, one could argue that while past performance surely has some kind of role to play in investment decisions, it should certainly not be the only tool at an adviser's disposal.
We do not live in a world that allows IFAs to undertake client-level stochastic modelling to help construct portfolios that more accurately reflect the client's risk profile. Is it really appropriate to carry out such rigorous analysis to determine asset allocation down to sector level before picking up a copy of a trade rag and selecting a fund for each sector based on sometimes wild past performance claims? Aside from the scope for arithmetical manipulation, there are many other factors that can impact on the future including change of approach, change of manager, significant change of fund size and such like.
If the mass of the IFA market hopes to emerge from this period of change as professionals equipped with the knowledge and tools to deliver quality financial advice, they should begin to spend a bit more time understanding investment matters.
Many IFAs brought up on the now thankfully discredited with-profits model have little appreciation of the factors driving capital markets and have been happy to pass the investment burden on to a life company. This approach will not be sustainable going forward if IFAs are to retain margin at current levels.
Furthermore, the across-the-market performance of life office managed funds and alternatives such as funds of managers does not provide comfort. If one elects to pass the buck on such a critical part of the process, it should at least be passed with confidence.
The presentation of uniform past performance data is surely beneficial when comparing funds or managers. Being able to easily see how funds have performed over particular periods or through particular parts of the cycle might help IFAs understand how well managers are dealing with timing issues or how quickly they move from bull to bear and vice versa. Complex analysis? Yes. Time consuming? Yes. Valued added? Most certainly.
In the end, the new rules will force IFAs to learn more and to perform more thorough research than is currently the case. While this may cause difficulty for some advisers unable to make the grade, it can surely only be good news for an embattled industry trying to rebuild trust and shake off allegations of short-termism.
David Ferguson is a director of The Abacus