| I have no doubt that before the days of the web, the purchase and issuance of airline tickets was extremely complex. It probably still is – inside the software – but for the traveller it is really simple. Yet for the financial services industry, the fulfilment of simple needs presents the investor with products which are incomprehensible, advisers both within and outside banks who profess to understand them but in fact have little more knowledge than their clients, and a method of purchase and sale which would have made a street trader in the 1970s look high tech.
For the financial services industry, the fulfilment of simple needs presents the investor with products which are incomprehensible, advisers who profess to understand them but in fact have little more knowledge than their clients, and a method of purchase and sale which would have made a street trader in the 1970s look high tech.
Conflicts and cartels
So what went wrong? I suspect three things:
First, there is an inbuilt conflict of interest whereby large sections of the industry made money as a result of the status quo being inefficient. Providing opaque products allowed actuaries and others to charge high fees for little value added. Custodians made money out of the inefficiency of settlement systems and the mutual fund providers annual management charges marched in sync. The price for a European long only equity mutual fund is 150 bpts no matter who you buy it from or how good their performance is. There is no competition because IFAs and banks rely on the product providers for their remuneration and have no incentive to challenge the cartel, despite the fact that the compounding of high management fees ensures that the average fund manager have no chance of outperforming their benchmark.
The long awaited arrival of platforms will challenge the cartel and make charges more transparent. In the UK, the Retail Distribution Review launched by the Chairman of FSA Callum McCarthy’s now infamous speech at the Gleneagles Conference last year will, if it is accepted by the industry, fundamentally change the relationship between adviser and client, giving the adviser an incentive to seek low factory gate prices for their clients. Hopefully these changes will start to spill over into the monolithic retail banks who distribute products to the poor unsuspecting European retail investor.
Secondly, there was an inability to understand that the new technology meant changes to the business model. It did not simply allow the old business model to be automated. This should have meant the disintermediation and disappearance of businesses which had been providing services to investors for many years. The best example for this was the Taurus settlement system in UK, which would have threatened the way registrars traditionally conducted their business.
Finally, there was a lack of understanding by CEOs of the effects on revenue and costs the new technology could bring. At long last, this is changing and changing rapidly. New systems of cross-border trading and settlement are on the horizon, not least being challenges to traditional exchanges by the investment banks in the form of “Dark Pools”. Direct Market Access (DMA) is becoming a strategic product for investment banks, perhaps eventually fundamentally changing the way in which brokers and fund managers interact.
Readers may have noticed that I have left out any reference to regulators being a cause of the slow speed of change. Perhaps they did have an effect, but the industry spends far too much time blaming the regulators and far too much time allowing their compliance departments to invent regulation where none was intended or persuading regulators to regulate to protect the domestic industry.
Change is on the way but it is desperately slow. There is no reason why we cannot make product easier for the investor to understand and, once that is done, use technology to reduce the cost to the client, make purchase easier and reduce the need for advice. In due course, pigs will fly!
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