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Is the FSA manacling marketing?

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&#39s 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

that bothered.

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

demanding satisfaction.

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&#39s interest.

If that was the consequence of the FSA&#39s 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.


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