Oh for the love of the big man, people, you were meant to have got this all fixed by now. But returning after a stint looking after the lang kitten, I find that we are still ripping ourselves apart on the issue of how we charge customers less for stuff.
I’m in favour of preserving cash rebates and I think the FSA are way off right now. But actually what I’m in favour of is choice and transparency. Investors are offered the chance to automatically reinvest dividends on funds which don’t offer an accumulation share class; I don’t see why this should be any different. So good luck to the platform chiefs lobbying for a more reasoned regulatory stance.
But let’s go sideways for a minute and think about, ooh I don’t know, the customer for a second. The answer to a bunch of the questions we’re asking right now depends on one thing, how enlightened and savvy do we think customers a) will and b) should get?, Do we genuinely believe that customers will x-ray the market looking for better deals on funds or influencing their IFAs to do the same?
Some will. But this isn’t a straight-line fight. Behavioural economics is going to start raising its head on both the supply and demand sides. There are a couple of principles that I think we’ll start to see having a real-life impact. This is going to make a good thesis for somebody sometime.
The first is a supply-side principle called anchoring. You can see this at work right now in English universities as they rush to charge the full, Â£9,000 fee. Anchoring is the way in which a market finds a price pivot point that becomes the norm. Where that market is not openly traded then price setting decisions are made by funny looking bags of water and squishy red stuff called boards of directors, and that’s where it starts to get interesting. Where everyone talks about one price, let’s say 75bps for an actively managed fund, that will become the anchor and we will see drift to that norm. If this does happen, the rebate discussion may become moot. Volume will become ineffective as a price determinant as transparency increases and a market price anchor starts to develop. This will suit the smaller players and hurt the big incumbents.
The second is a demand-side principle called cognitive efficiency. There’s a good example of this in today’s Guardian to do with popcorn makers. Where information is not easy to come by or readily digestible, consumers turn to cues that help them make buying decisions, and the most visible cue is price. So in the popcorn maker example, people reckoned the best makers were more expensive even when the bench tests showed cheaper models were better. They don’t understand how the makers differ in terms of feature set or performance (not being engineers), so price becomes an efficient proxy for them.
So back in investment world, what cues can people follow when price is not visible? What other metrics are easily comparable and cognitively efficient (which is to say that they give the best bang-for-buck in terms of regret-free decision making)? I haven’t done the research, but I bet you all the money in my pockets against all the money in your pockets that itÃ¢??s past performance. Which as we all know is an excellent guide to future performance. No, wait!
And here’s a further thought, despite the best efforts of the Citywire trolls to prove otherwise, IFAs are people too and just as wildly differing in their approaches and rationales as anyone else.
This is why transparency in our industry will lead to better decision making. Putting price front and centre doesn’t mean you’re in a price war or that you’re only selling on price. Done right, it means that you’re setting out your stall and saying “this is what we do and this is what we charge? Do you want it?” Once we’ve got that bit right – and IFAs have as much to do here as providers – then we can get tore in round the other stuff.
Maybe all the theory is unimportant. These bits are just part of the massively complex set of cognitive calculations that go into purchase decisions. But in all the hoohah about how rebates should be paid, it’s worth remembering that until our market is working transparently and efficiently, the mechanism in which we actually charge people less probably doesn’t matter all that much.
So to the FSA, get out the way and let the market function. To the fund houses, get ready to show why you’re more deserving of your anchored 75bps than the rest. And to the providers Ã¢?? get ready to be ruthlessly transparent if you want to have the slightest control over how your service is perceived by consumers and those who advise them.