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Sandler on receiving end of industry fury

The Sandler report has provoked a scathing backlash from an industry furious at accusations that active funds are overpriced and that IFAs lack investment knowledge.

Coming at a time when falling stockmarkets and corporate accounting scandals are threatening the economy and battering investor confidence, the report has incensed those who claim Sandler has failed to understand how the industry works.

Almost as soon as it was published, fund managers and IFAs – the former often reluctant to make detrimental statements against Government-sponsored reviews – were falling over themselves to condemn the report&#39s more contentious claims.

Fidelity IFA business executive director Stuart Holah says: “When Sandler set out his original document, it was clear what his prejudices were. He has taken an economist&#39s view of the market and thinks what he has done will be enough to get through consumer indifference and create demand. But in making that assumption he has not understood consumers or the true value of advisers.”

Fidelity is most concerned about Sandler&#39s view that passive funds are not only cheaper and more effective than their actively managed counterparts but less risky.

It “strongly refutes” this claim and believes that passive management is often more risk-laden, volatile and, by definition, unable to outperform the index.

In fact, to come to conclusions Hargreaves Lansdown calls “barking mad”, Sandler, according to fund managers, can only have used past performance figures – something his review states should not be used as a basis for decision-making. Not only is this method contradictory, they say, it could be potentially dangerous as stockmarkets continue to drive trackers into the ground.

However, this may only be an issue for investors going direct to the provider or through a supermarket to buy a fund. IFAs say they would not steer clients towards trackers unless they insisted or there was an index rally – both unlikely eventualities at the moment.

But the report also posits other problematic recommendations which, if adopted, could cast another cloud over an industry which can ill-afford to further test investors&#39 patience. The principal area of concern is the mutual or unit-linked fund element of the stakeholder suite of three products which Sandler believes can be sold without advice. Jupiter says the retailing of such a stripped-down product could be the next misselling scandal to hit the industry while multi-manager Selestia believes Sandler&#39s proposals would simply exacerbated existing problems.

Selestia managing director Brett Williams says: “The assertion that simplifying products will prevent them being missold perpetuates rather than resolves much that is wrong with the industry and its obsession with product when what really matters is the underlying investment. People do not go to an IFA looking to buy a product, they go there looking to find a solution to their investment problems.”

Nevertheless, Sandler has wasted no time in attacking the role of IFAs and their level of investment knowledge, which he believes is woefully lacking in the majority of cases. While his contention that more stringent exams are needed is widely accepted, his view that most IFAs are bumbling amateurs has infuriated not just the targets of his vitriol but the fund managers which rely on their business.

Holah says: “Sandler is just going to the back of the queue in saying that advisers are driven by commission. He has misunderstood what they do, does not appreciate their true value and has failed to recognise that they actually encourage people to save.”

Fidelity is only one of many investment houses to put forward this view but, surprisingly, not all IFAs have been as robust in their own defence. But some, such as Michael Philips proprietor Michael Both, question why Sandler has effectively exonerated fund managers when they are res-ponsible for some of the worst financial mishaps while others feel the report was right to say IFAs have deficiencies.

Roberts Clark director Jo Clark says: “Most IFAs have only got FPC qualifications, which do not specialise at all in investment. IFAs who have only taken these exams and are on salaries – usually working for national companies or bancassurers – are under pressure to hit their targets. If they don&#39t, they get sacked. If they are implemented, Sandler&#39s proposals could hit those people the hardest.”

In fact, the payment system outlined by Sandler has generally been well received by IFAs, who view its flexibility as immeasurably preferable to the FSA&#39s defined payment option. But when the main thrust of Sandler&#39s report was recommending that investors buy non-commission paying trackers, the question is whether people will be prepared to pay a fee for receiving advice on a straightforward fund.

Hargreaves Lansdown inv-estment manager Ben Yearsley says: “There is a contradiction here. What is the point of advice for a tracker? I doubt too many investors will be seeking advice for something that does not really need it.”

Yearsley also questions why Sandler was so keen to highlight the fact that IFAs lack investment knowledge – with which he agrees – while simultaneously pushing the case for trackers – the product inves-tors need least advice to buy.

But while IFAs and fund managers may pour scorn on Sandler&#39s recommendations, they still remain simply that – recommendations. With the FSA claiming it will not give Sandler&#39s views any more weight than anyone else who responded to CP121, the industry should not become too concerned about some of the proposals just yet.

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