From my conversations with people in the IFA industry, it worries me intensely that we are not taking the Sandler review as seriously as we ought. I believe advisers who take on board the principles of the Myners and Sandler reviews will immediately prosper, as will their clients.
The issues discussed in my articles over the next few weeks are extremely important. This week, I want to set the scene for what is certain to become a key issue for all advisers.
The Myners review concluded that “competition to offer retail customers investment performance should be the primary driver of investment decision-making. In principle, however, several factors work against this”.
This, of course, is a nice way of saying that financial advisers do not always put the client first in determining which investment products to recommend. This suggests we are either not knowledgeable enough or too greedy to consider the client's needs in front of our own.
As a fierce supporter of face-to-face financial advice generally, and of the IFA sector in particular, this at first appeared to me to be the work of yet one more bureaucrat who knows the cost of everything but the value of nothing. However, on reading the report, I have to voice my support (a little grudgingly, perhaps) of almost every finding and suggestion in the report.
I am now certain that, within the next couple of years, it will lead to a fundamental change in the way in which we all give investment advice.
That report has led to the Sandler review, whose terms of reference are to “identify the competitive forces and incentives that drive the industries concerned, in particular in relation to their approaches to investment, and, where necessary, to suggest policy responses to ensure consumers are well served”.
This has been interpreted by some as indicating that commission-hungry advisers will be replaced by IT-driven and cost-effective distribution channels. However, the head of the Treasury's financial services review Ron Sandler is having none of this nonsense and his consultative document (to be frank, an interim statement of intent if ever there was one) is a blueprint for the future of investment advice and advisers. We ignore this review at our peril because I am certain Sandler is not a million miles from the truth.
Over the next couple of weeks, I will look at the key issues highlighted in the Sandler document and speculate where all this is leading. I will refer to particular paragraphs within that document (which asks for responses before September 28) for ease of reference and for those wishing to contribute their thoughts to the debate.
Copies of the paper can be obtained from http://www.hmtreasury.gov.UK. Please be aware that all your observations and suggestions will be warmly welcomed, whether in relation to any specific part of the review or of the whole report. You can email firstname.lastname@example.org.UK or write to The Sandler Review Team, Room 316A, HM Treasury, Allington Towers, Allington Street, London, SW12 5EP.
Paragraph seven sets the scene when it comments: “This review will look at whether the UK market leads to efficient investment decision-making and to optimal outcomes for consumer interests more broadly. It is not a review of current regulation.”
In other words, it is a look at what is good for the client, not at what is good for the regulator – a refreshing idea.
Paragraph 10 tells us that Sandler's first thoughts are not to kill the goose which laid the golden egg. “This industry has been extremely successful in encouraging a wide range of retail customers to save for the long term and to benefit from stockmarket returns in recent decades. It has also made a major contribution to the UK economy as a source of employment and growth.”
In other words, we have done a great service to the country, regardless of arguable shortfalls in our service. A nice start and one which should rightly encourage financial advisers to believe that Sandler is not out to get us.
However, paragraph 11 recognises that “there are grounds for concern as to whether the competitive process in the industry is necessarily producing efficient investment and an appropriate range of products that deliver to the consumer an efficient risk-return trade-off at the lowest possible cost”. This paragraph is hugely important to this discussion as a number of particular issues are identified (with my interpretation following the actual text):
“Many consumers lack the time for or expertise in investment and savings issues and there is limited shopping around.” (Clients might buy the first thing that is suggested to them?) “As a result, products are usually distributed through intermediaries, who are subject to their own commercial incentives.” (Advisers might be influenced by higher commission providers?) “Costs and charges are poorly understood by consumers and exhibit very wide variations across the various product markets.” (Don't apologise for high charges – the client will not have noticed them, anyway?) “High distribution costs generally create substantial disincentives for the consumer to switch products or providers, even where it might be in their best long-term interests to do so.” (Don't be afraid to churn uncompetitive products – Equitable Life and all that?) “In certain products, such as with-profits policies, competition is based on proxies that are only indirectly related to the underlying investment performance.” (You get what they want to give you, not what it is worth?) So much for the introduction to the report but, without wishing to sound too much of a Sandler groupie, his common-sense approach and immediate grasp of our market has only just started.
From here on, I suggest you consider each paragraph not only as an indicator of where the investment industry is now, and where we are going to be in the near and distant future, but also how your firm can position itself to benefit from structural changes among investment-buying consumers.
Paragraph 15 suggests “that consumers are aware that buying long-term financial products involves risk but they have a poor understanding of the risks involved and only a rudimentary grasp of risk-return trade-offs”.
Paragraph 16 surmises that “this weakness of consumer influence plays a fundamental part in shaping the way in which the market functions and how firms compete”.
Even in these early paragraphs, Sandler had, to my mind, identified the core deficiencies in our service to clients. They simply do not understand investment issues. They buy the first thing that sounds half-reasonable. They do not understand (or care?) what they are paying for the advice (or lack of it?). They are not even bothered (or aware?) about their lack of knowledge or understanding.
All these points add up to the perfect imperfect market in which inadequate providers (product providers and intermediaries) can flourish. Sandler is not out to get us. He merely strives for a more perfect market in which both buyers and sellers trade on equal terms.
My next few weeks' articles will discuss in more detail the main proposals and observations of the Sandler review so far, with suggestions as to how advisers can position themselves and their businesses ahead of the changes which are certain to be made.
Keith Popplewell is managing director of Professional Briefing