We’ve reached a critical juncture in the history of investing. All around the world consumers are demanding a better deal.
Of course, specific details differ from country to country but, broadly speaking, the problem is the same — here is an industry that is riddled with conflicts of interest. There’s a powerful coalition of intermediaries, including fund managers, ratings agencies, consultants and brokers, who are compensated for pushing expensive and unnecessary products.
Independent evidence overwhelmingly demonstrates that the less you pay to invest, the greater your net returns will be. The industry knows this all too well. But because it benefits from the status quo, it does all it can to maintain it. It does this largely with the help of its vast PR and advertising budgets, but increasingly through political influence as well.
Indeed there are worrying signs in the UK and the US, where this battle is raging fiercest, that politicians are starting to split along party lines.
The New York-based blogger Josh Brown this week expressed his dismay that the Republican Speaker of the House Paul Ryan appears to be siding with the industry, and arguing that conflicted advice is better than none at all. The Wall Street lobbyists, says Josh, are telling a lie that goes something like this:
“Middle-class Americans are not worth serving if we can’t charge them egregious fees and sell them products that they do not need.”
Similarly, in the UK, the Guardian columnist Polly Toynbee has claimed that the City of London lobby was instrumental in persuading Chancellor George Osborne to abandon plans to reduce pension tax relief in his upcoming Budget. She wrote this:
“The industry relies on people trusting financiers who make their money by fleecing savers with unseen or hard-to-compute charges. Most Tory donations come from hedge funds and fund managers, and many Tory MPs protesting vigorously against the reform have fingers in those pies.
“They are the ones who make most noise, set the agenda and terrorise governments. Yet again they have won this battle to protect their phenomenally disproportionate bounty from the state.”
This shouldn’t be a matter of party politics at all. I’ve spoken to several people on the political right who feel even more strongly than Polly Toynbee about the need for reform. Michael Johnson from the right-leaning Centre for Policy studies writes:
“Pensions are afflicted by rip-off penalties (such as the) annual charge for “holding assets”, expressed as a percentage of assets which can amount to thousands of pounds per year, each year. What is being provided is merely a safe custody service, albeit shrouded behind proffered unsolicited research (invariably unread) as a desperate attempt to hint at value for money.
“The Government is, to some extent, complicit in this theft. For decades, it has unwittingly granted a licence, in the form of the sanctity of the “pension product” tax wrapper, that has facilitated the industry’s profitable inefficiencies and rent-seeking behaviours. The result is a bloated, inefficient, opaque, over-paid industry that is increasingly uncompetitive on the global stage.”
Even the right-wing press has started to question the huge profits made by the big fund houses and the astronomical remuneration of their senior staff. Referring to Michael Dobson, the new chairman of Schroders who has taken out £39 million in salary and bonuses since 2005, while also accumulating an estimated £9.2 million in share options, Alex Brummer recently wrote in the Daily Mail:
“Bankers usually receive the ‘fat cat’ epithet in the City but, as we can see from Dobson, it applies to senior executives in fund management too.
“What makes this egregious for people who manage assets is that they directly or indirectly work for ordinary citizens – some with very limited savings built up over a lifetime of careful husbandry.”
The bottom line is that this is far too big an issue to be treated as a political football. The Council of Economic Advisors (CEA) estimates that the lack of a fiduciary standard costs US households some $17 billion in excess fees and adverse performance. Some independent studies put the true cost at as much as $33 billion.
Until these conflicts of interest are resolved, there is little hope of an end to the looming retirement crisis, or the chronic lack of public trust in big finance, on either side of the Atlantic.
Related posts:
Asset management — the one industry that was never Thatcherised
Time to explode the City of London myth
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.
