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If you go into any shop selling electronic goods and you purchase, for example, a radio and that product fails there is a standard course of action, as a consumer, you can take. In the past, if the item broke within a year you took it back to the shop and they usually repaired or replaced it. However, now it is far more common that if you buy a radio and it fails the liability is with the manufacture not the distributor.
This is appears to bear a resemblance to the emerging view from the FCA in the world of retail investments. There is a hint that in future the liability relationship between the private investor and adviser is shifting. It would seem more and more of the accountability could lie with the asset managers themselves, despite often having zero contact with the end consumer themselves - like the radio example. This is of course a simplification of a complex debate, but raises some interesting questions. Especially, with regards what level of understanding an investor must have to grasp actually what they're buying.
Arguably, the adviser should be able to explain the product in a clear and concise manner but if the client themselves is unsophisticated and requires, or indeed, has the capacity to invest in complicated products to achieve their desired outcomes - what happens then? Would there be a level of expectation on the fund information to explain in a full, fair and simplistic way what is being brought? By simplifying the language used to describe the basics of the product is that going to undermine the spirit of exercise – meaning, by making it easy to understand the product you make it feel like a simple investment? Could this also mean that actually the product range on offer is going to be a lot less complicated and for the regular punter there will be a whole raft of very plain, unexciting funds to buy. Is there a danger that there is also a mismatch with the investor’s appetite for an outcome and what they can actually buy.
Understandably, this is an incredibly difficult judgement to make work for every scenario, but it does put the customer’s interest as the primary concern which is clearly good. But, possibly at the detriment of gaining exposure to a wider set of products which might be what the end customer requires.
At Research in Finance we will be reviewing this closely over the coming months as part of our industry outlook - look out for further posts.