Armageddon Postponed
It is a year since I last wrote about changes to the way that financial advisers are paid so I went along this week to a conference of wealth managers organised by ComPeer, a company that provides information and research for the sector and organises conferences.
To recap, the badly named Retail Distribution Review, usually shortened to the even more mystifying RDR, led to the banning of commission payments for financial advisers from last January.
The idea was that advisers would no longer be tempted to put their clients into the investments that paid most commission rather than the ones that were more suitable. Instead, the clients would pay fees to the advisers so they would know exactly what the service was costing.
I feared that this would lead to a big drop in investors seeking advice. In a world where the internet has taught us to expect things for free, it would come as a rude shock for many investors to discover that they were paying for this advice all along in hidden charges. I was also concerned that independent financial advisers would be ill prepared for the change and would be left scrambling to rearrange their relationships with clients, with many dropping out altogether.
Research carried out by accountants and business advisers EY suggests that this was only partly true. The big drop in the number of qualified advisers came before, not after, the changeover and was not as severe as many thought.
Predictions of a halving in the number of advisers from 41,000 to 20,000 were overly pessimistic. The number in fact fell to about 30,000 and has actually risen by about 5% over the course of this year. Many advisers, it seems, decided that extra exams and greater red tape were not worth the hassle. Others, however, were determined to qualify and have done so since the deadline.
This uptick is good news. There was a serious possibility that the very people who most need a helping hand with their investments would be the ones who went back to seeing their savings rotting away in a bank account. While I encourage all investors to take their lives into their own hands, it is far better to find an adviser than to do nothing, especially now that the remuneration system is more transparent.
James Brown, senior analyst at ComPeer, said at the conference that ‘there is little indication of withdrawals by disgruntled clients.’
Presenting the outcome of the EY research, he said wealthier people were more willing to take on risk, which is what you would expect and indicates that the less wealthy are sensibly reluctant to throw away what they do have.
Nearly half of investors were worried about the volatility of the stock market. In my view this is a natural reaction to the two crashes in 2000-2003 and 2008, but it is a little worrying. Private investors have an unhappy knack of piling into the market after a long period of rising share prices only to discover that they have bought at the top. This is a hard habit to break.
One almost amusing statistic was that when asked what would persuade them to switch cash that was currently on deposit, 58% of investors said a guaranteed return on capital and 57% said a guarantee that the capital was protected. Given that even in the best of times capital loses value in a deposit account, and in an era of low interest rates this is accelerated, such an unrealistic demand is misplaced.
Simon New, a director at EY, said that more than half of clients have not yet seen their investment manager since the RDR changes came in nearly 11 months ago. That is a wake-up call to the industry, since EY’s research showed that clients feel that a good relationship with their adviser is more important than the actual return on their capital.
Clients, on the whole, want to meet their adviser at least twice a year. Quite right. If you have an investment adviser and you have not seen him or her so far this year, get on the phone now.
Build for the Future
It’s not quite in the same league as bringing quantitative easing to an end, but the same lessons can be learnt from the stock market reaction to the Bank of England’s decision to switch its Funding for Lending Scheme from house buying to business.
Shares in house builders fell, providing a better buying opportunity for investors looking to get into a sector that was clearly overpriced.
We should be looking at the good news, that the Bank thinks the housing market can now stand on its own feet without artificial support from a scheme that will be put to better use helping cash-strapped businesses. In any case, the housing market still has support from the Government’s Help to Buy scheme.
Building society Nationwide says loans for house purchases have reached their highest level since before the credit crunch and that house prices are rising at 6.5% a year, up from 5.8% a month ago and the highest level since April 2008.
While other surveys suggest that house price growth is only about half this level, no-one doubts that the housing market is recovering. Indeed, there has been much – premature – talk of a bubble developing. There’s just no pleasing some folk.
I own shares in Barratt Developments (BDEV) and Taylor Wimpey (TW.) and I really do wish I had had the courage to buy more two or three years back. This week’s share price fall is only a pin prick.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.
