FOOL'S EYE VIEW
Savers To Get A Fairer Deal

By Jane Mack (TMFJane)
July 9, 2002

If you wanted to invest in a unit trust or the OEIC equivalent, would you know which one to invest in and why?   And what about the jargon – I mean, are you asking yourself 'what's an OEIC anyway?' Would you know how to compare charges to ensure you weren't paying through the nose? And would you be any good at sniffing out the hidden costs?

The answer is probably no, and it's not surprising because there are some 1,600 of them to choose from, they vary in hugely in terms of performance and cost and they're all rather complicated. What you'd probably do is go to an Independent Financial Adviser but, even then, how would you know whether you were being given sound advice and getting value for money?

The publication today of the Sandler Review, an independent report on the retail savings and investment industry, has pointed to all of the above questions as the main reason we're not saving enough for our future.

It's no wonder we're reluctant to save – we don't know how to do it ourselves because there are too many complicated products on offer and we don't particularly trust anyone else to do it for us. As Ron Sandler himself says:

 "It is of fundamental, and growing, public importance that Britain should have a savings industry that is both efficient and widely trusted.  The long-term welfare of millions of people depends on it, as does the effective operation of our capital markets. The industry has achieved considerable success in many respects. But there are also grounds for concern."

And these concerns are the key to the recommendations that Sandler makes in his report.

The Financial Services Authority should be given more money specifically for consumer education so that we can make informed choices about our finances. In particular, he suggest that the FSA should establish a separate sub-board with overall responsibility for consumer education.

There should be a selection of products available that are transparent and easily understood by the consumer and which are sufficiently regulated so they can be bought without the need for financial advice. This would entail using regulations similar to the Stakeholder Pension and the CAT standard that currently applies to certain types of ISA -- both of which have ensured cheaper products because there are no initial charges and annual management and surrender charges are strictly regulated.

Sandler appears rather puzzled about why consumers invest so much in actively-managed funds when he's discovered that they tend to underperform the market by an average of 2.5% a year. You might have noticed that the same thing has been puzzling us for some time! It is, of course, mainly because of high charges but also because of 'unsuccessful active management', ie: consumers who pay more don't usually get more for their money. We've said many times before that index trackers are likely to provide better returns – and Sandler agrees.

Products that involve a 'with profits' element have come in for particular stick. They're so unintelligible that they might as well be written in Sanskrit. Worse than that, if it makes much difference, information about performance and costs is quite often simply unavailable. We don't know how they work and yet we're pouring money into these policies year after year after year. All we know is that they're supposed to 'smooth out' investment returns so the volatility of the market doesn't affect our investment over the longer term.

Sandler reckons that smoothing is a good idea in principle, but he's recommended a new model for consideration which should enable us to compare performance and costs more easily. Among other things, he suggests that funds should publish an annual report setting out the current state of the fund, its performance and costs, as well as prove clearer information about payout rights to policyholders.

Financial advisers need more stringent qualifications and the products they recommend should not be commission-driven. (The industry watchdog, the Financial Services Authority has also been reviewing this part of the industry and they found 'statistically significant evidence' that advisers recommend one product over another because it pays a higher commission).

Instead, Sandler recommends that the price of advice should be negotiated between the adviser and the consumer, without any input from the product provider. This would provide more transparency so the consumer knows how much he is paying for advice. In fact, when The Motley Fool responded to Sandler's initial review last year, we suggested that financial advisers should not be able to style themselves 'independent' if they worked on a commission basis. This idea has cropped up in today's Review. Sandler suggests that only if advisers are fee-paid should they be permitted to call themselves 'independent' or, indeed, 'advisers'. He suggests that those who are paid by commission should adopt the term 'Financial Product Distributor' which is a more accurate description of what they actually do.

The tax regime also comes in for attention. As we've often said, investments should not be tax-led – it's the investment performance that's important, not how much tax might or might not be involved. Yet time and again, consumers have been persuaded to invest on a tax-related basis. Sandler wants the rules simplified for various tax-based products and even suggests that governments don't introduce new tax-based savings incentives if they want people to actually save. In other words, stop complicating things!

The structure of the UK savings industry has served consumers very poorly in the past. Too often, they end up with inflexible products that overcharge and underperform. In addition, countless products have been sold that do more for the financial companies and salesmen than they do for the consumer.

The Review goes a long way in its recommendations towards protecting the consumer from the vagaries of the industry and encouraging the introduction of cheaper, more comprehensible products. Let's hope the Government, the FSA and the industry move quickly to start implementing them.

More: Sandler Review