Chris Gilchrist: Advisers strangled by regulation as investment landscape shifts

Chris Gilchrist 700

Some years ago I was an early member of the Finance Innovation Lab, an initiative sponsored by the Institute of Chartered Accountants and the World Wildlife Fund. Its aim is to foster changes leading to a financial system “that serves people and planet and allows life to thrive”. Go on – dismiss it as irrelevant to the real world. That would be a mistake.

Positive Money, the group campaigning very effectively for radical reform of banking, was incubated within the Finance Innovation Lab. Several of its proposals, in particular the creation of money by the state, not the banks, and separation of casino from retail banking – beyond the pale back in 2007 – are now on their way to becoming orthodox thinking. They are endorsed by the likes of Lord Adair Turner in his book Between Debt and the Devil, and the FT’s chief economic commentator Martin Wolf. The Lab links a lot of other initiatives involving organisations dedicated to change.

It is obvious there is no going back to normal in economics. There are plenty of ideas about what will replace the broken neo-classical-liberal model. The free-market, monetarist, laissez-faire model has not worked and does not work, and one reason US politician Bernie Sanders is getting such a big vote in the primaries is that the intelligent kids understand that. They are up for radical change, as are Jeremy Corbyn’s and the Green Party’s supporters: both grassroots and democratic in a way that does not fit the Westminster model, which is another signal of change.

Naturally, the interests of the “haves” are against change. But the haves who benefit from the current system are very few – about 10,000 super-rich UK taxpayers and the classic 1 per cent that own half of America. An economic system only gets political support in the developed world if it benefits the middle classes. If it does not it will be discarded or changed. Roosevelt’s New Deal was a socialist upheaval against corporate kleptocracy. It has happened, even in the US, and can happen in any democracy.

The middle-aged bourgeois, who have been encouraged to believe they are beneficiaries of the status quo, are coming to realise they are being shafted by the rich minority (their kids already know it). Either we will get progressive reforms the majority accept or (more likely) we will have another crash followed by radical change.

The UK community of investment managers and advisers barely acknowledge the breakdown of the current system or the pressure for change. That is like sitting on a sandcastle as the tide comes in.

They need to acknowledge trading bits of paper does not create wealth; it simply shuffles it from hand to hand. About the only thing economists agree on is that only primary investment – employment of capital in creating new goods and services – can improve standards of living. The stock market now plays virtually no part in primary investment. If you want to see the future, look at crowdfunding, not the listed markets. The ground is starting to shift under your feet.

Constrained by regulation, neither investment managers nor advisers in the UK are capable of much adaptation to change. They have little choice but to support the current system. But they at least need to be aware that change is going come.

Chris Gilchrist is director of Fiveways Financial Planning