Insurers and banks were quick to heap praise on the Sandler Review, the former, presumably, for an a...
Insurers and banks were quick to heap praise on the Sandler Review, the former, presumably, for an acceptable compromise on with-profits and the latter for an opportunity to gain market share on the back of lighter distributor regulation.
Puzzlingly, many investment managers also gave the review a cautious welcome even though we believe it is based on fundamentally flawed assumptions about the funds' industry.
One such assumption is that investors should buy index-tracking funds. Is this from the same Ron Sandler who admits that invest- ment outside index-constituent stocks is necessary for efficient capital markets?
If all, or most, retail investment flows were channelled into passive funds, equity markets would be far more volatile and all but a narrow group of UK companies would be starved of capital to invest in products, services and job creation.
The primary recipient of the Sandler Review is Gordon Brown. I wonder if the Chancellor believes passive funds will help support his stated desire for an enterprise culture in the UK?
From a consumer viewpoint, index funds are hardly low-risk propositions.
Basic market risk is compounded by index concentration in a handful of sectors and individual mega-cap stocks. Nor are index funds reliable: tracking errors vary widely depending on fee levels and replication method and all are pre-destined to lag the market over the long term.
Successful active funds, in contrast, select stocks on merit, taking account of companies' prospects. Such funds have added value for investors even in a market as liquid and well researched as the UK. On a topical note, virtually every company in the scandals of recent months has been a major component of one index or another.
Passive investors are condemned not only to hold these stocks but also to follow them down. Overall, Sandler's basic premise is that the financial services industry is beset by complexity and that this forms a barrier to greater savings take-up. His goal is therefore to simplify, but despite this worthy objective, supply chain reform alone cannot create increased demand for financial products.
In our experience, strong growth in consumer buying is driven by three factors: tax incentives for savers, product innovation and choice, and, finally, an effective advice industry.
We believe Sandler misses the target on all three. He has ruled out further tax incentivisation and it is likely that his proposals on product regulation will lead to mediocrity and limit, rather than simplify, consumer choice. Sandler deals a further blow to the IFA sector.
In summary, we are not convinced that the review will bring about the desired step-change for consumers. And along the way, the Review seeks to discredit the fund industry's primary product, it short-changes our customers and it disadvantages our most important distributors, namely IFAs.
Stuart Holah is executive director, IFA Business, at Fidelity Investments
For details of the State of the Nation conference, email [email protected] or go to the registration website at www.thestateofthenation.co.uk.
Simplify and modernise
'Asleep at the wheel'
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