Financial and energy regulators need to talk

Posted by Robin Powell on February 21, 2017

Energy regulators.

I can’t speak for other countries, but my experience as a UK consumer of water, gas and electricity is that regulation has been a good thing. Suppliers are required to be much more transparent than they were about how much much they’re charging (and exactly what they’re offering in return), so that customers can easily compare different services and switch providers if they want to. Nowadays, if you’re paying more than you need to for your basic utilities, you only have yourself to blame.

If only financial consumers were afforded a similar level of protection.

A recent study that caught my eye was one entitled Does Feedback on Personal Investment Success Help?, produced by academics from Goethe University and Leibniz University in Germany. It’s well known that retail investors who buy and sell individual stocks generally perform very poorly, that they overestimate their returns, and that those who trade most frequently do the worst. What the researchers wanted to find out was whether confronting clients of stockbroking firms with the actual results they are achieving can improve their behaviour and, consequently, their net returns.

It is, of course, not in the interests of brokerage firms to make this sort of information readily available. Indeed the German paper quotes one study which found that only one out of 120 banks in Germany regularly informed their customers about the risks, costs and return of their portfolios.

But the researchers persuaded one online broker to let them provide more than 1500 customers with a monthly update on their investment performance over an 18-month period. Interestingly, they found that the customers who were given feedback did significantly improve their behaviour — specifically, they traded less frequently and diversified more — and, as a result, they earned higher risk-adjusted returns.

All this begs the question, What if brokers and wealth managers were required to be similarly candid with their clients about the results they’re achieving and how much it’s costing them?

There is, in fact, a direct parallel here with gas and electricity regulation. Ofgem, the UK regulator for those industries, requires suppliers to provide their customers with regular updates on their energy consumption and advice on how to cut their costs. Of course, this is not only good for consumers, but also for the country and the environment.

It’s exactly the same with asset management. Study after study has shown that the lower the fees and charges we pay, the bigger our net returns will be. There is also a benefit to the economy and to wider society of reducing the amount of money that ends up in the pockets of financial middlemen. To quote Ben Edwards, a leading US expert on financial regulation, “money (that) stays inside the financial sector and never makes it out to fund projects in the real economy”.

Present investors with the evidence of their poor investment performance and they will change their ways, just as UK consumers have reduced their energy consumption. Any such much would, of course, be fiercely resisted by the financial sector. But if the FCA and other financial regulators around the world really are serious about putting the consumer first, it has to be on the agenda.

 

Robin Powell

Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.

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