As part of both the FCA’s and CMA’s drive toward transparency and accountability within the financial services industry, price comparison and review websites are being used as the preferred management tool, to deliver their ambitions. Payday lenders were recently targeted with legislation that will see them forcedto sign up to price comparison websites. The rationale is that increased visibility increases transparency, and offers evidence that the players are competing fairly, with any fees incurred by customers clearly displayed. ReeVoo’s move into the financial services marketplace offers further evidence that insurance and even price-comparison companies such as moneysupermarket.com are very much aware that reputations are won and lost on customer experiences.
Life as an equity research analyst has not been a bed of roses since the financial crisis.
Frost Consulting, a specialist in commission unbundling one of the forces that has brought greater transparency to this traditionally more opaque corner of the financial markets estimates that global equity-related commission payments declined by 43 per cent between 2007 and 2012, to $23.5bn a year.
Edison Investment Research, a smaller purveyor of equity research, suggests this led to a halving of analyst numbers to 9,000 over the same period and there is a widespread expectation that the Financial Conduct Authority’s recent clarification of the rules on asset managers’ use of client money to pay for research will lead to a further scaling back of research commissions, at least in the UK and potentially further afield.
Not everyone will shed a tear over the human cost of this bloodbath, but the consequences for the efficient functioning of capital markets may, some argue, be serious.
Even as far back as 2009 there were estimates that 35-40 per cent of publicly traded equities had no analyst coverage whatsoever, a figure that has almost certainly risen since.
The issue has reached the upper echelons of the European Commission. It fears the research vacuum is hindering the growth prospects of small and medium-sized companies, which are more likely than their more heavily traded blue-chip peers to be bereft of coverage.
This in turn has led to a greater focus on the alternative models that may be available to plug the growing holes in provision of equity research.
One alternative is for issuers of equity or the companies themselves to sponsor research by independent analysts; the model however, has one obvious weakness. Business would obviously cease very quickly if analysts wrote reports that expose weaknesses and / or highlight areas of risk. There are also other clear conflicts of interest. For example, analysts don’t know how much is being paid for the research, what third parties are involved, or why it has been commissioned.
The concept draws a parallel with the bond market, where it is the norm for Standard & Poor’s, Moody’s and Fitch to be paid by issuers to provide a rating, although this model was found not fit for purpose in the pre-crisis US subprime mortgage market.
A recent survey of five asset managers found that, on average, they only valued issuer-funded research at 1.8 points out of 10, even when no other research was available. This clearly shows a huge discount for the value of research where the issuer has paid for it. A slightly more popular alternative was research paid for by a third party, such as a stock exchange, valued at 3.8 (compared with 5.6 for broker research and 9.6 for the managers’ own research).
The simplest solution therefore would be for asset managers to conduct more of their own analysis in-house, and to some degree this is happening. Allianz Global Investors, for example, has doubled the number of stocks covered by its own analysts to 2,000 since 2010, with coverage of smaller stocks (with a market cap below 3bn) trebling to 700.
The downside of this approach is that asset managers have to bear the costs of in-house research in their profit and loss account. In contrast, the cost of ‘sell-side’ research could be passed on to investors, potentially without their knowledge.
The CIDG model however, does allow truly independent and unbiased investigation to produce objective and impartial reports, and by making the reports and scoring available to any interested party through an industry specific subscription portal, it can be commercially funded, hence www.comparesecondarymarketequityinvestments.guru.
The FCA has launched a review of the financial advice market, as the industry calls for greater clarity and accessibility around guidance and advice.
The review was welcomed by many in the industry, as increasing complexity from last yearâ€™s â€œfreedom and choiceâ€ pension reforms have increased the need for financial advice.
The review launched on Monday, August 3 2015 and will examine the gap between the free guidance offered by the Pensions Wise service and professional advice that is typically only available to more wealthy individuals.
The formal objective is for the review to examine the following:
- The advice gap for people who want to work hard, do the right thing and get on in life but do not have significant wealth
- The regulatory or other barriers firms may face in giving advice and how to overcome them
- How to give firms regulatory clarity and create the right environment for them to innovate and grow
- The opportunities and challenges presented by new and emerging technologies to provide cost-effective, efficient and user-friendly advice services; and
- How to encourage a healthy demand side for financial advice, including addressing barriers that put consumers off seeking advice.
Many in the industry have been warning of the risks if large numbers of savers choose not to take advice in the new pensions environment. Speaking at a briefing earlier this year, the now pensions minister (then the government’s older workers champion) Ros Altmann described the consumer advice system as ‘completely messed up’.
Given the current public debate around pensions, it seems logical to provide a comparison tool for those looking to invest in the various schemes available, both when starting a pension and upon retirement as an alternative to an annuity. Once again impartial reporting in this area is impossible to find and as such it is an obvious service for CIDG to deliver using their information by subscription model, hence www.comparepensions.guru.
How easy is it to compare the cost of financial advice? Today it is very difficult, as demonstrated by the fact that only 11 of the largest 100 independent IFAs publish charges on their websites. The rest typically require a face-to-face meeting as they argue that costs depend on the complexity of an individual’s circumstances. Recent analysis of the largest 100 financial advisers websites found only six – Brewin Dolphin, Cumberland Place, Hargreaves Lansdown, Investec Wealth, Skerritts Consultants and Vestra Wealth publish their initial and annual advice costs. Another five – Saunderson House, Epoch, David Williams, Clarity and HBFS publish some fee details online.
Separate analysis by the consumer group ‘Which?’ found about half the IFAs ‘dodged’ the question when asked for an indication of their charges over the phone. Rules introduced in 2012 mean an adviser must agree fees upfront with clients before providing help.
Compare Investments Dot Guru, much like ‘Which?’, believe all financial advisers should clearly display their charges for a range of scenarios to demonstrate transparency as this would assist’the market to work more efficiently and drive value for money to consumers. The subscription model once again makes it commercially possible, hence www.compareifas.guru.
A YouGov poll of 2,036 individuals found that most people badly misjudge the fees they are being charged on investment funds. When asked how much would be a reasonable amount to pay in annual charges on a ‘10,000 investment, eight out of ten (81 per cent) of respondents said 50 a year or less. Most investors are paying far more. The standard stated fund manager charge on this amount is ’75 (0.75 per cent). Add in an adviser or platform fee on top, plus ‘hidden’ charges not stated in the headline figure, such as research and auditor’s fees, and the average cost is 125-175 a year (1.25 per cent-1.75 per cent), says the Investment Association, the fund manager trade body. This does not include dealing costs incurred by the fund manager and passed on to the investor for buying and selling assets within the fund.
Over time these fees can have a huge impact on returns, wiping more than a quarter off the returns of the average investment. Much of this goes into the pockets of highly paid fund managers whose performance is mediocre or poor. Even those who do generate consistently good returns cannot justify the sums, argue industry insiders.
Compare Investments Dot Guru believe that delivering transparency, objectivity and unbiased reporting in this and all financial markets is fundamental to the delivery of value for money investments and investment management to consumers, hence www.comparefundmanagers.guru.