If you hear the sound of bated breath, whatever that sounds like, whenever
you come across any investment marketing people these days, there is a
We are waiting to see where the FSA comes out on the question of the use
of past performance figures in investment marketing.
You remember the background. Last August, the FSA published an “occasional
paper”, possibly so called because it was occasionally comprehensible,
which aimed to demonstrate that past performance was of no predictive value
and therefore should not be considered by investors (or, presumably,
advisers) making fund decisions.
This year, it became clear that on the basis of this paper, the FSA was
reviewing the whole question of past performance claims in fund marketing
and that proposals can be expected in the autumn.
If you hear muffled cries of pain in the vicinity of Canary Wharf over the
next few mon-ths, that will be the sound of the regulators wrestling with
one of the nastier nettles they have ever chosen to grasp.
The FSA has said there will be proposals but they will be bloody difficult
to formulate if it sticks to its starting point – that researching the past
performance of funds does not in itself enable you to pick winners.
What many people have said is that researching funds, and particularly
fund managers, increases the probability that you will pick a fund that
performs better than average and that performance is one of the aspects of
funds and fund managers that is worth considering.
Nobody in their right mind would dispute this, not least because if they
did they would implicitly reduce making inv-estment choices to a lottery
and position IFAs as no more than lottery ticket sellers.
If the FSA wants a gambling analogy, the right one is not lotteries but
betting on horses. Knowing how a horse ran in its last race or, indeed, in
a particularly good race it ran three years ago, does not tell you whether
it will win its next race. But by studying every aspect of form, including
the horse's past performances, you are more likely to pick a runner which
finishes in the top half of the field.
The FSA has painted its-elf into a corner claiming, in the original paper,
that past performance is completely immaterial.
That sounds like grounds for a ban. But at this stage there must be a
fighting chance at least that the FSA will emerge with a softer view and
content itself with new rules, guidelines and restrictions.
And if so, what then?
Regulatory bodies such as the FSA are, by their nature, utopians,
believing that one step at a time they can create a world in which educated
and interested consumers, with access to full, fair and balanced
information – and/or expert and reliable advice – can make the best
decisions possible about the investments that are ideally suited to them.
All the evidence of the real world says that nothing could be further from
the truth. In pretty much any market that you consider, the large majority
of consumers make ill-informed, ill-considered and objectively
unjustifiable purchase decisions.
And the more expensive the commitment and the higher the financial risk,
the more irrational the buying decision becomes. People may buy petrol on
more or less rational criteria (convenience, need, price) but when it comes
to holidays, cars, homes and the most expensive and riskiest commitments of
all, spouses and children, reason goes out of the window.
This is not just a cheap debating point. In terms of pounds, shillings and
pence, more people lose more money by buying cars with high running costs
and levels of depreciation than by investing in underperforming Isas.
The facts and figures are readily available. You only have to look in
Autotrader to see the hit you will take when you come to sell your
three-year-old Fiat or Citroen. The bottom line is that most people are not
So what does all this have to do with past performance figures in
investment promotion? Simply this – the FSA can ban them altogether or ban
them from advertising or hedge them around with a forest of new caveats,
footnotes and volatility analyses or dem-and that they must appear only in
a comprehensive new fund facts document that must be provided along with
the key features document. But the large majority of investors making
purchase decisions will carry on deciding just as impulsively, irrationally
and emotively as they have always done.
That is not quite the end of the story because there will be two other
side-effects, one arguably positive and the other very negative.
The arguably positive one is that having once made their impulsive,
irrational and emotive decision, it is possible that some consumers will
suffer less than they have in the past from expectation mismanagement.
If it is the case that significant numbers of investors do currently
believe that past performance indicates a probability – or indeed a promise
– of future performance, then either a ban or high-profile caveats would
put them straight.
Very likely, the FSA will be conducting research into the extent to which
this misunderstanding exists – in the real world, though, there has been
very little sign of incensed and embittered technology fund investors
besieging the fund managers whose Isas they bought 18 months ago and
The truth is that if there is one thing that is pretty much universally
known about stockmarket investments, it is the fact that they offer risk.
The negative consequence is the whole idea of investing in funds will look
very much less attractive, more complex and impenetrable and more
inaccessible than it does at the moment.
The exact balance between unattractiveness and inaccessibility will depend
on the form that any new regulations take but either way the result will be
the same – the idea of investing in funds will become significantly less
appealing to most people and they will do a good deal less of it.
One of the greatest truths of effective financial services marketing is
that it almost always engages with two huge and powerful emotions, fear and
greed – broadly speaking, fear for protection and greed for investment.
Eliminate or emasculate the appeal to greed and you eliminate the
fundamental driver of the investment industry.
There are real problems with the use of past performance claims in
investment marketing. Some claims do border on the mendacious. And perhaps
more fundamentally, if the great bull run of the last quarter century is
indeed finally over, all the reminders of the performance that has been
achieved in the past, taken as a whole, create false expectations of what
can realistically be exp-ected in the future.
But in the end it is a political decision. If we as a society want people
to invest for the future then we must want the companies which promote
investments to make them appealing.
Of course, that does not mean that marketers have a licence to lie but
equally it cannot mean that marketers are effectively prevented from
arousing the consu-mer's interest.
If that was the consequence of the FSA's current deliberations, then for
consumers, advisers, product providers and our financial system as a whole
that nettle they have grasped at Canary Wharf could turn out to have a very
nasty sting indeed.