The morons don’t go crackers for trackers

This was particularly good timing because just days before Peter Hargreaves was reported as having said that most stockpickers were ‘morons’.

A moron, technically, is someone with an IQ of between 50 and 69 – compared to the average of 100. But we know what he means: some could not spot a stock worth picking if it leapt up and punched them on the nose. Mr Hargreaves has since sought to clarify that he was referring to certain managers from more than 30 years ago.

In fact most managers did manage to beat benchmarks in European and the UK large/mid-cap equity sectors.

But elsewhere the results were pretty dismal, making it perfectly valid to raise the question: where is the added value for those extra fees?

It is interesting that the report’s author Daniel Ung says the main reason for the increase in under-performance of sterling denominated funds is that market performance turned worse in the second half of last year.

So much for the argument that used to be dashed out that trackers were good when the market rose but would not protect you against falls.

Of course, the central issue here is that there are still far too many investment funds.

Some investment houses still feel they need to have a fund in every sector rather than specialising in something they are good at.

That phenomenon is not quite as bad as it was a decade or so ago when every new investment fad was accompanied by a flurry of launches.

The corollary of having too many investment funds is that too many people are in bad investment funds: those run by the ‘morons’ – or, as I prefer to call them, banks.

Too many people are in bad investment funds: those run by the ‘morons’ – or, as I prefer to call them, banks.

As investors we can thank the IFAs who do the work of picking the wheat from the chaff and self-investors can be grateful to the likes of Hargreaves Lansdown that try to prune the list.

But as this report shows, trackers remain a very acceptable core holding, because while the performance will not shoot the lights out, it will at least keep investors close to the benchmark while taking less of their profits.

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Pay as you earn

Which brings us to the subject of pay. I can think of no other area of the private sector where mediocrity is so well-rewarded.

Year after year funds turn in average or below average performance while the firm running it scoops up fees and lavishly rewards those responsible.

Now the Investment Association has warned in a memo that the secrecy surrounding fund managers’ pay is a “growing source of reputational risk”. Believe me that risk has already grown, matured, blossomed and seeded.

By refusing to come clean, the investment industry clearly feels it can still persuade clients to pay for failure.

And by failure we mean spending all those hours lunching, golfing and sailing and still failing to match the performance of a computer programme.

It is good to see the Institute of Directors maintaining the pressure for fund managers to come clean. Director-general Simon Walker said there was “increasing disquiet about how the profession operates”.

And as the IoD said recently, fund managers are “ill-equipped to police the governance of investee companies’ remuneration practices if their own pay was secretive and excessive”.

The message is clear: Come clean before somebody else forces your hand.

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The long and the short of it

Should financial advisers benefit from a six-year long-stop preventing old complaints being filed? I do not think, so despite the evidence of a Freedom of Information request showing 15-year-old complaints make up a sixth of claims against IFAs.

There are strong arguments on both sides – not least that memories can be very unreliable over that distance.

Only 150 of the 538 complaints were upheld, suggesting that Fos takes a sensible and balanced approach.

However, the main argument against a long-stop must be that investment is a long-term business and it is entirely possible that people do not realise something is wrong until many years later.

Financial advice is a business built on trust and reputation. Clients put their entire financial future in your hands. They should therefore be able to rely on the validity of that advice for their entire future.

This is not about rewriting history, it is about making certain the present is dealt with correctly.

Any adviser who wants to walk away from advice they gave six years ago is not an adviser I or anyone else should trust with their money.