Another loop back from the recent IFIE IOSCO Investor Education conference. One comment stream that attracted the attention of my pen and paper was the following:
“There will always be asymmetry”…”to give them confidence to ask the questions they need to ask”….”become confident enough to ask questions questions”….”take a pass if they do not get the answer they like”.
As if the problem in the industry, here in Canada, is down to the fact that investors do not have the confidence to ask the questions, as if it was a matter of literacy that would provide them with the fluency to articulate a question and to stand up for themselves if the answer did not pass whatever test and standard the consumer set.
There is a culture that seems to be believe that the investor is well served by the simple parameter to parameter KYC and that is able to deliver a suitable product and transaction within an appropriate context. There is a belief that such transactions relate naturally to the whole, to the assets and financial profile of the investor, and that most of the problems are caused by investors not fully understanding and hence, not asking the right questions. This is absurd.
The problems in the industry relate to the fact that most investors are unable to process a suitability decision framework and depend on the advisor for determining a suitable framework and transaction. This fundamental is ignored by regulation, regulators and regulator driven investor education. It also a fundamental which is abused by transaction remuneration that can skew transactions away from the content and structure of transactions that would best meet the client’s best interests.
I am not saying that investors should not ask questions and take responsibility for the generics of the advice, but I am saying that the advice and its structure are often in conflict with those interests and the investor lacks the knowledge and expertise to differentiate between the two. Specifically they lack the knowledge that advisors are not required to act in their best interests and that their function is also one of product distribution, and that their goals are often more aligned with the institutions that develop and manage products than those of the investor.
There is a dumbing down by all, at all levels. Even if investors were aware of the asymmetry, regulators will not allow the type of information that would allow investors to make the right decisions, if they were intellectually able to. Point of Sale documentation and proposed performance benchmarking would not allow a professional portfolio manager to make informed decisions, so how on earth will they allow investors to do the same?
By taking the line that the transaction based industry is capable of meeting investors’ needs, if only they were able to have the confidence to ask questions and give the “heave-ho” if need be, is both patronising and ignorant.
I have of course expounded on this “mind view” before and I would refer you to the undernoted post among others on my site:
…the only way in which most consumers are going to ensure that the right product is selected, at the right price, in the right amount, in balance with the rest of their assets, in keeping with their risk profile and financial needs, is to rely on an expert who can construct plan and manage the complex interaction of assets and financial needs, and of course who does not have a conflict of interest. Then, questions about the product, the asset allocation, the risk etc and the answers to those questions may provide a better understanding for the investor. But this is not the regulated relationship, these are not the minimum standards that define the product distribution market place.