Fighting conflicts of interest
The story of financial services regulation is one of progressive tightening of the constraints on contact law which in the UK allows parties to a contract to seek to get the better of each other. In spite of the constraints, agents in retail finance still manage to exploit their information advantage and to create incentives in their business models that have this effect.
Echoing calls from consumer groups, the Kay Report recommended that it should be a new legal requirement for investment managers to meet a fiduciary standard. The Government, in its response, said it had asked the Financial Conduct Authority to report on the differences between its rule book and those that would apply to a fiduciary, ‘with particular reference to the issues raised in the Report around conflicts of interest’.
In a new ‘Insight’ article, I highlight the fundamental nature of the changes that we think would be required of wealth management firms if they were to meet these higher fiduciary standards and how these changes might affect client outcomes.
Asset-based fees were the first that has to go. Far from aligning interests, asset-based fees introduce conflicts between agent and client but also between different clients. ‘Standardisation’ on which the economics of the industry depend also have to change. These conflict with the need for ‘customisation’ implicit when acting for individuals as a fiduciary; and they conflict with the objective of ‘maximising client utility’ – a concept rooted in goal-based wealth management and financial planning that is largely alien to the wealth management industry.
Written for accountants and solicitors (many themselves fiduciaries) who refer their clients to investment managers, this article should be of interest to anyone following the fight against conflicts of interest in financial services.
Our agenda here is pretty obvious: we designed every aspect of our business on fiduciary standards (as in ‘No Monkey Business’) and would prefer to see buyers and referrers being much more discerning about the resulting differences in the service format itself but particularly how we charge for it, and what these differences mean for their own outcomes and for their peace of mind along the way. The best defence against exploitative businesses is the market, not regulation. But effective competition requires marketing rewards for firms that break the mould (profit, not virtue, has to be the reward) and that takes discernment on the part of buyers (or their advisers). Monkey business thrives when we make monkeys of ourselves.