Secrets of Success: Obvious questions begging for answers

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The Independent Online

In the week that Sir Richard Sykes and his team at the consultancy Tomorrow's Company demanded a "holistic" approach to reforming the investment system, I prefer to ask some more practical questions that, after many years of writing about the investment business, continue to puzzle me.

In the week that Sir Richard Sykes and his team at the consultancy Tomorrow's Company demanded a "holistic" approach to reforming the investment system, I prefer to ask some more practical questions that, after many years of writing about the investment business, continue to puzzle me.

Such as:

* The fund management business says it cannot produce simple Sandler-type investment products with a cap on charges of 1 per cent per annum. Yet out of the industry standard 1.5 per cent annual management charge for most unit trusts, the industry is quite happy to pay 0.5 per cent in annual "trail commission" to IFAs and others who recommend their products.

The net return to the fund managers in these cases is 1 per cent per annum or less. So why can they not make a similar level of charges work for bog standard products that in theory won't require advice? They may have good reasons for not wanting to go into the business, but what it cannot be is a matter of the sums not adding up, as they claim (and the Government seems to have accepted).

* Why is it that you can obtain a rebate of 3 per cent or more on the initial charge for a unit trust if you buy it from a discount broker, yet if you buy it direct from the fund management company you will normally be charged the full initial charge?

* Why is that so many IFAs recommend you buy a unit trust when you can buy almost exactly the same portfolio more cheaply by buying an investment trust run by the same manager? The most famous example is Anthony Bolton's Fidelity Special Value investment trust, which admittedly now trades at a modest premium to asset value, but yet is barely 7 per cent of the size of his better known Special Situations fund.

* Why are half the products sold as funds these days products that nobody in their right mind would ever suggest to someone for whom they were acting in a fiduciary capacity (such as a relative)? Why for that matter are most sales of funds for funds that have performed the best in the most recent one of three-year period, regardless of their potential?

* Why do the vast majority of equity funds in the UK look so similar to the market index? On my calculations, something like two-thirds of all equity funds display a statistical correlation of more than 90 per cent with the FTSE All-Share index.

* If the Government is so keen for people to buy simple low-cost investment products, why does it not ask National Savings to produce a range of own-label tracker funds that can be sold through Post Offices? Given the potential buying power of the State, it should have no trouble in putting together a range of funds with, say, five different asset allocation policies (from 0 per cent to 100 per cent equities) with a total expense ratio of less than 0.5 per cent, compared to the industry's 1.5 per cent.

Of course commission and the profit motive are involved in the answer to most of these questions (and in the case of Government, I dare say the Treasury would be unhappy to lose the tax revenue it receives on the profits of the fund management companies).

Yet it is hard to avoid the conclusion that nobody wants the hassle and expense of taking the long-term interests of the consumer seriously when there are easier ways to make money.

But the puzzle still remains why so few participants in the industry seem to appreciate the value of building long-term brand loyalty through providing a consistently high level of service - which starts and ends with the idea that it is idiotic for serious companies to sell people things that aren't right for them at rip-off prices.

On the subject of institutional failure, I wonder if any readers have experienced the same bizarre conversation with their High Street bank as has happened to me five times in the past month. The mobile rings and the conversation goes as follows:

"Hello, is that Jonathan Davis?" "Yes". "Hello. My name is Frank/John/Simon and I am calling from XYZ Bank (my bank). For security reasons can you give me your full name and date of birth?"

"No. I am sorry. I don't give that information over the phone to people I don't know by name". "Oh. I see. You do understand why we have to ask these questions which are for your own protection."

"Yes. I fully understand that. Perhaps you could give me your full name and the branch of the bank that you work for?"

"No. I am sorry it is not our policy to give out that information over the phone."

"Well, okay, can you give me a telephone number that I can call you back on, so that I can satisfy myself that it is XYZ Bank that I am calling?"

"No. I am sorry. It is not our policy to give out that information over the phone." And so it goes on, a fatuous dialogue of the deaf. Needless to say, the mobile tells me that the caller has chosen to "withhold their number".

My first reaction was that the calls were a hoax or even a sting -- not least because at least half the calls have been made at the weekend. This is not a time when one traditionally thinks of bank employees going happily about their work.

But the more times this has happened, the more convinced I have become that the calls may actually be genuine. This is not just because the callers don't click off when they are challenged to say who they are, but because of the tone of incredulity that accompanies the realisation that what I take to be the call centre script is not going according to plan.

I still don't know whether the calls are genuine or not, but I do know that, on past precedent, this bureaucratic absurdity of a procedure is something that the banks are more than capable of generating, with the best of intentions. If it is my bank on the phone, it would be nice to know what it is they want from me, though I rather doubt that it is good news.

jd@intelligent-investor.co.uk

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