I am not sure how the FSA thinks that IFAs manage to sleep at night. It gives the impression that it believes many IFAs are unscrupulous sharks preying on the innocent consumer with little regard for their financial well-being.
This is simply not true. If it were not for IFAs, far fewer people would be in as strong a financial position as they are now.
What will have given many IFAs insomnia in recent years are the ever increasing and ever changing burdens put upon us by the regulator.
Alas, helping people to invest appears to be considered a bad thing in some circles and the advice process is seen as being driven by self-interest. But what are the alternatives?
People exhibit two clear financial behaviours – they are either spenders or savers. Without some sort of conversion, the former will continue to spend and, given all the means-tested benefits now in place, there must be something in this view. Many savers, on the other hand, will make ill-informed decisions resulting in a lower level of long-term financial security than if they had taken advice.
Take saving via a deposit account, which many savers opt for if they do not take advice. Deposit accounts are generally regarded as risk-free and are unregulated. But how risk-free are they? If you add the dimension of time, they are risk-free in the same sense that jumping out of a plane without a parachute is risk-free – you will be guaranteed a swift return to terra firma but your life expectancy will most certainly be seriously curtailed in the process.
How risky is investing in cash over equities? The excellent Barclays equity gilt study shows that over the last 107 years, the average annual real return on equities is 5.3 per cent while on cash it is 1 per cent. Add inflation to the matter and cash savings start to look anything but attractive.
Instead of making people aware of this, there seems to be a deliberate attempt to get people to invest in low-risk investments but by doing this it becomes almost impossible for anyone to save sufficient funds.
Indeed, the less you have or the longer your time horizon, the more your appetite for risk could be argued to be. If you invest in something riskier than cash or gilts, there is at least a risk that you may achieve your investment goals or that you may build up a big enough pot to buy a reasonable annuity. Saving in a deposit account may involve no investment risk but equally there is almost certainly no risk of you achieving your objectives.
All my pension goes into an emerging markets fund. That way, there is a risk that it will be worth something meaningful to me one day.
I also keep some money in deposit accounts – and we advise clients to do the same. After all, it is the most appropriate place to hold shorter-term liquid capital.
But what really lies behind the FSA’s questions about advising clients to put money into deposit accounts or National Savings? Does it really think that we would exclude these products from our recommendations purely on the basis that they pay no commission?
In 2007, the amount in deposit accounts is expected to exceed £1trn for the first time. That is either a big emergency fund or lousy long-term asset allocation by many people.
Yes, there have been some scandals in the financial services industry and some scoundrels. There are also many overpaid, mediocre fund managers under-performing their benchmark.
Over time, however, investing is a positive for all stakeholders including the investor and the economy. So why do I feel a profound sense of depression, even despair, at so much of what our regulator says and does today? This is a feeling that I know is shared by many.
Why does there seem to be a pattern that manages the behaviour of those who are regulated to reduce and avoid risk for clients and thus for themselves?
Is one of the reasons why the rich are getting relatively richer than the rest of society that they are able to take risks while risk is being squeezed out for the rest of us? But it is for our own good, we are told.
What is my point? Mostly, the public can look after themselves. They make rational choices, even if they are not always logical. Yes, people need protecting from rogues but they do not need nannying.
New cars are expensive purchases that are almost guaranteed to depreciate very quickly. Thankfully, so far, car buying is not regulated, yet insuring one is. I can buy a sofa that has no secondhand value but the credit agreement that goes with it is regulated.
Just because people cannot touch and feel something does not mean that they have to be overprotected from it. If they take the time and responsibility to read about it, they will be able to make an informed decision about buying it.
Squeezing the IFA industry will profoundly reduce the returns that many people get on the money that they save over the coming decades. It is also bad for the economy, which needs capital investment. It may make things easier to regulate but that should not be the overarching policy goal.
You can argue that I have missed the point. That the FSA wants people to invest and get advice, just that the model needs fixing and the protagonists need managing.
I would argue that you cannot force things. Endless change never gives consumers the chance to get on top of things. Just as people started asking me about Peps, they were changed into Isas, which are the same, only more complicated. And for what?
One of the reasons why 401(k) plans have been so successful in the US is that they are still 401(k) plans after 30 or more years.
Regulatory pressure and negative press reporting of the stockmarket will reduce many people’s appetite for perceived risk when, for many, the risk is actually in not taking the risk.