Relationship-based advice to beat short-termism
The retail distribution review risks creating another layer of costs in equity markets due to the movement of investment business onto platforms, a government-backed report has warned.
A 114-page review of UK equity markets and long-term decision making by John Kay, a professor at the London School of Economics, said only more trust, transparency and better aligned pay structures would avoid short-termism in investments.
Mr Kay warned that while the RDR would remove commission incentives, it would still be hard for fee-based advisers to take no action for clients.
The report said: “Even if the sources of commission bias are removed, fee-based financial advisers will still have a bias towards action. It requires strength of character to advise a client to do nothing, and few clients will pay much for that advice.”
It claimed a bias towards action was an “inescapable feature of a transactions-based system of intermediation”.
The report suggested the most effective offset was to create a relationship-based style of dealing over a transactional one.
The review welcomed the RDR, but said: “We have some concern that a likely consequence of the RDR will be the entrenchment of another layer of intermediation - the platform - in the already lengthy equity investment chain that links saver to company.
It claimed the principal service platforms, consolidating holdings in one place, could be inexpensively provided in other ways, warning that each stage of intermediation adds costs.
It suggested that the FSA’s ban on cash rebates may address this problem.
The report, commissioned by business secretary Vince Cable in June 2011, proposed that regulators, company directors, asset managers and asset holders should adopt good practice statements that promote stewardship and long-term decision making, rather than short-term gains.
The report also called on asset managers to disclose all costs, including actual or estimated transaction costs, performance fees charged to the fun and income from stock lending, which it said should be rebated to investors.
Gina Miller, partner for London-based SCM Private and founder of the True and Fair campaign, backed the recommendations. She said: “Our proposed True and Fair Label is a robust, consumer-friendly solution that would see all asset managers publishing all costs in one number, achieving information symmetry as Mr Kay states, rather than the proliferation of information.”
Jason Butler, partner for London-based Bloomsbury Financial Planning, said: “If a manager is working hard for his money on a risk-adjusted basis and doing it consistently, remuneration should be tied to those promises.”