A friend recently asked me for some advice on how to invest a windfall, couched in the following caveat: “I don’t want to place it with a manager. I don’t understand how they justify their fees and seeing as they call their clients ‘muppets’, I’d rather go it alone.”
This brief and damning summary of financial services from an average individual shows the scale of the challenge facing the industry. In the minds of the public it is homogenously untrustworthy – the 2016 Edelman Trust Barometer showed financial services remains the least trusted of all sectors.
A lack of transparency underpins this problem. In the past, some firms have been able to rely on opacity to create a structure that put their own gains before the needs of their customers. In good times, this did not attract much scrutiny, but today’s landscape affords no such hiding places and it demands an overhaul of how the sector conducts itself and communicates with its customers – with transparency as the watchword.
This is becoming increasingly urgent in the retirement industry, which is incidentally where most individuals will have their main interaction with large asset management companies. The disappearance of generous defined benefit employer schemes, auto-enrolment, longer life expectancies, risk free returns near zero and little to no prediction of what state benefits will look like by 2050, all mean younger people will need to be much more closely involved with their retirement savings than previous generations. Every penny will count, so it will be essential to know who is slicing off how much, when, and what for, particularly given the huge impact of just one or two percentage points in fees on the ultimate return.
In the long-term, this will be difficult to achieve without the first foundational step of improving financial literacy in the UK, beginning with objective financial education in schools from a young age. This will produce adults who understand what they are paying fees for and which services they genuinely need.
In the interim, I believe one solution is to develop a new industry-wide lexicon agreeing terms of reference for itemized charges in pensions which everyone can use and understand. This is not designed to trigger a race to the bottom on fees. Rather, it is about equipping individuals with the right knowledge so they can assess value for money independently, rather than getting lost in reams of T&Cs and jargon they have no hope of following between different providers. Terms such as “total expense ratio” are likely to be meaningless to many, as is “annual management charge” when it does not include underlying dealing costs. These need to be spelt out, itemized and explained in a language everyone can understand.
The work of organisations such as the Transparency Task Force show the spotlight is gradually turning to hidden fees. However, there will need to be a concerted joint effort between the industry, authorities and policymakers to create an open, fair market where consumers fully understand what they are paying for.