Both retail and institutional customers are served by a mature advice layer that has a duty to place the interests of clients first. In the retail space, this is the domain of the financial adviser. Financial advisers are, of course, regulated, which means the FCA can act when they see issues that work against the end client, such as conflicts of interest.
This is precisely what they did with the Retail Distribution Review (RDR). On the institutional side, where the large asset consultants tend to dominate, advising a pension fund on their investments is not clearly a regulated activity. Therefore, regulation (like RDR) has not spread into the institutional space.
As I argue here, this lack of regulation allows for distortions in business models that can and do work against the interest of end savers.
The FCA’s recent Asset Management Market Study focused primarily on competition among asset managers. While its findings suggested that asset managers have a lot to do to win back the trust of their clients, they seemed far more severe on the large institutional consultants.
Revealingly, the FCA ended up referring the large institutional investment consultants, not the asset managers, to the Competition and Markets Authority (CMA).
And the CMA seems to have backed the FCA’s original findings, suggesting there are genuine issues with the institutional consulting sector.
According to the FCA and CMA, competition seems weak, conflicts seem high and the investment advice, in aggregate, seems to lack added value.
And the irony is that many of these larger firms appear to be aiming for the business model of the fund manager, one where they can offer independent advice to clients, while potentially steering them into their own investment products.
Does this teach us that when we have no Big Brother, like the FCA or CMA, keeping us in check that we will slowly distance ourselves from the principles of independence and client stewardship, while closing in on a business model that puts us at odds with the spirit of objective advice? Probably.
There are further examples of this. Fund ratings firms are typically unregulated for their fund recommendations too. Their business models, for the most part, involve a material commercial relationship with the fund groups they rate and this conflict suggests their real client is the fund manager, not the end client or adviser. This seems to further validate the narrative that without Big Brother, we create business models with conflicts in plain sight.
Some industries, like financial advice, require a higher moral bar than others, because it directly affects so many people and their ability to retire with dignity. When we read through the publicly available notes from the hearings with the large investment consultants (done by the CMA very recently), we find a common defence: every business has conflicts and it is how they are managed that matters. Chinese walls get erected. But we all know these are porous.
Managing conflicts or building walls of apparent separation, is not enough when the stakes are high. What we need is a closer look at the definition of advice so that it can capture far more scenarios than one where it involves a personal recommendation to end clients.