As part of its Retail Distribution Review (“RDR”) the Financial Services Authority (“FSA”), which will become the Financial Conduct Authority (“FCA”), is, from 1 January 2013, banning the payment of commissions from Insurers and Fund Managers. It is estimated that around 37% of advisers will rejects clients with less than £75,000 to invest. A survey by Deloitte suggests that up to 5.5 million people may not seek advice as they will be unwilling to pay fees. These can either be an annual lump sum or a percentage of assets held. There are regulatory developments within the stock broking firms as the various categories of execution-only, advisory and discretionary services are redefined within the new regime.
It is hard to argue with the direction that these new rules are taking. For years the personal finance industry has been tainted by the excessive commissions paid to IFAs often leading to advice based on greed rather than integrity. There was also the psychology in that individuals much preferred paying by an effective reduction of their investment rather than by the levying of fees.
In the world of Enterprise Britain corporate finance fees have always benefitted from payment by success. A SME wants to raise (say) £2 million and contracts with an AIM Nomad/Broker who may be prepared to act on a success-only basis. Of course if the money is raised the adviser will be handsomely paid but the client has the satisfaction of receiving the net funds. These days most advisers will require an up-front fee.
With fund management the investor not only has the problem of selection but also the measuring of success. It is years before the profitability of a fund becomes clear and with up-front costs accounting for perhaps 30% of the fund, the return to investors may be hidden for a long time.
Is this the time to re-introduce the Investment Club concept? In the Thatcher years, and the age of Sid, private share ownership became the fashion. With a series of successful public floatation’s including British Gas, the electricity companies and the water bodies the British public became a nation of shareholders. Investment clubs flourished as the concept of a low-risk entry price (your monthly subscription: perhaps £20) and the regular meetings in the local pub with perhaps ten others to discuss the progress of your investments, set many individuals on the path of share ownership.
There are real fears that the rate of inflation will increase significantly over the next few years and individuals will look for a better return on their savings: perhaps Sid needs to return to the investment fold! It will perhaps appeal more than paying your IFA a fee.