Blog: TSC missed the elephant in the room

Fundamental Tracker Investment Management’s managing director, Robert Davies, explains how the FSA could really help change the UK’s savings culture.

The Treasury Select Committee (TSC) has issued its report on the Retail Distribution Review (RDR). Disappointingly, it has missed the elephant in the room.

The bulk of investment products are now distributed directly or indirectly by IFAs through platforms. Nowhere in its report does the Committee address this issue, which eloquently demonstrates that it has failed to grasp how the industry works. Instead, it focuses its attention on the issues of an ageing and poorly informed industry that is a sales force masquerading as an advice network.

While there are real issues about the quality of advice provided to the public, the main problem the country faces is a lack of savings, not the wrong type of savings.

In an environment where defined benefit pensions are now mostly restricted to those employed by the state, the urgent need is for individuals to at least save something, even if it is perhaps not the best available. Surely any advice is better than no advice. The admission by Hector Sants of the FSA that he expects, and is comfortable with, a 30% reduction in the number of IFAs as a consequence of the introduction of the RDR is a chilling demonstration of how out of touch this organisation is with the people it is supposed to be protecting.

If people are to be encouraged to save for their own future, and it is hard to argue otherwise, then surely the government should ensure that it is as easy as possible for them to do so. The current structure has grown like Topsy, driven by the vested interests of the established product provider and distributors, not the consumers or new low cost product providers.

The role of the middle man

In other industries, airlines for example, new entrants have been able to win business by offering lower prices directly to travellers by promoting themselves through the press and new media. Imagine how much progress Ryanair and easyJet would have made if they had not been allowed to advertise their prices and were forced to sell only through travel agents? Cutting out the middle man has been a key part of the process in reducing the cost of air travel.

That option is not available to investment product providers because of the requirements imposed by the FSA and this has entrenched the positions of the middle man, the IFA. Tax wrappers such as ISAs and SIPPs have reinforced their role. However, for a variety of reasons IFAs generally use a platform to hold their investments and this second agent between the investor and the product provider is where the chain is most opaque.

The exact relationships between the IFA, the platform and the product provider are not publicly disclosed, and certainly not to the investor, and yet this is exactly where the greatest scope for conflicts of interest lie. The FSA has ignored this and the Treasury Select Committee seems not to have appreciated the scope of the problem at all.

Its only acknowledgement of the issue is the comment that it sees no justification for intermediaries to continue receiving trail commission without the provision of ongoing advice. Is it not aware that one of the largest distributors of funds in the country has built an extremely successful business model by doing exactly that? It is understandable that the Committee has listened to the representations of many IFAs about qualifications but that is a side issue in relation to the fundamentally flawed structure of the industry and how funds are distributed.

The Committee used part of my submission in its report to illustrate the lack of incentive for IFAs to sell lower cost products. Why would an IFA sell a fund that has an annual management charge (AMC) of 0.5% and no trail commission when it can sell a fund with a 1.5% AMC and keep a trail of 0.5% as well as provide the platform with a slice of the trail?