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Investment view – Brian Tora

“So, apart from that, Mrs Lincoln, how did you enjoy the play?” This clearly apocryphal question resonates with the attitude of those asking IFAs what they think of the impending end of polarisation. I know this initiative from the regulator is last week&#39s story but it will run and run.

Make no mistake, we are about to see a fundamental change in the way in which financial products are distributed. Only time will tell whether the man in the street benefits as a consequence.

Despite initial reactions, the ending of polarisation is not necessarily all bad news. When first introduced, it was the direct salesforces of life companies that came in for the most flack in our industry. Their job was to sell rather than advise. They have now largely vanished, priced out of existence by a demanding and costly regulatory regime. The IFA market, on the other hand, has gone from strength to strength and has become significantly more professional in the process.

In an environment where a better trained, more highly qualified adviser is on hand to dispense financial medicine, should the industry be concerned that competition and price is about to gain the upper hand and true independence vanish? You might ask whether true independence ever existed. Although screening techniques have become increasingly sophisticated, the reality is that it is difficult to monitor the whole market for investment products.

Most advisers will content themselves with a limited range of what they consider to be the best of breed. Who can blame them for excluding those that they see as peripheral providers?

Of course, personal contact still counts in the industry. Just as people like to deal with like-minded souls when it comes to managing their money, so advisers need to relate to the people who act as their conduit to the providers of the financial products they use.

Fund managers can acquire a following and, similarly, good salespeople will earn a greater loyalty if they deliver the service expected of them with a personal touch. The end of polarisation and the introduction of multi-ties, if that is indeed what happens, need not make too much difference.

Does this have implications for the investment end of things? I remain concerned that regulation could limit the range of options available to those who seek portfolio management. Of course, you could argue this is no bad thing, given that equity investment in particular has not made many people rich during the past couple of years.

Moreover, a greater focus on what you are actually buying when you come to entrust your savings to a manager is no bad thing. But performance could be driven to a median level that can only favour index tracking. If the US experience is anything to go by, there will be greater transparency of investment style and approach but I wonder how many investors will be capable of reaching a sensible decision without advice.

The game has changed, though, and nobody knows quite by how much. Equity investment is predicated upon continuing economic growth and the imperfections of the market allowing professional managers to outperform.

But in a market that is increasingly professional, the efficient valuation theory holds more sway and it becomes more difficult to outperform. Moreover, greater involvement of the full-time professional investor adds to the volatility that already is heightened by the continuing growth of the derivatives market and the speed of information dissemination.

Many market commentators suggest that valuation expansion – the rise in the price that people are prepared to pay for equity investments as a consequence of falling inflation and interest rates – came to an end as the old millennium finished. The crowd is usually wrong but when you balance this not unlikely proposition against the fact that more of the developed world&#39s prosperity will need to be channelled into correcting the economic imbalance that exists with lesser developed countries, then perhaps the golden years are indeed behind us.

It seems ironic that the shake-up in the distribution of investment products should be carried out at a time when prospects for both the products and the distributors themselves are undergoing such difficult times. No one can accuse the FSA of not having a sense of timing. But then I always thought that timing was the most important attribute of a successful investment manager.


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