Cultural self-defence for investors:
"Money it's a crime. Share it fairly but don't take a slice of my pie."
- Pink Floyd
When I started as an Independent Financial Advisor in January 1973, after vain attempts to lose any personality and thus qualify as an actuary, there was no formal investor protection. Nor was there disclosure of charges or costs when you invested in savings or pension plans either. None. Nada. It was the Wild West for investors. And things didn't improve until after a London based bunch of conmen with a name like a motorbike ripped off Pink Floyd.
But what really upset the Government of the time was that this bunch had also been appointed to look after the savings of Bank of England retired staff and their widows. And they'd done the same to them. That triggered the Gower Report which culminated (far too many years later) in the Financial Services Act, 31 years ago.
So what has all this "consumer protection" achieved after miles and miles of mumbo jumbo legislation and a cumulative multi-billion pound compliance spend? (The Financial Conduct Authority alone cost taxpayers over £500 million this year – and that doesn't even include the cost of keeping the banks in order.) Let's have a look shall we.
We had a recent visit at work from a retired couple who'd just turned 70 and had us recommended to them by their best friends, clients for 20 years. Their IFA, they explained, was a one man band and wasn't returning calls. Understandable they said, given they'd been led to believe he had terminal cancer.
So because they're receiving income from their pension plans that they described as SIPPs (Self Invested Personal Pensions), and as they weren't getting any younger, they felt they needed ongoing advice, so wanted us to take over the management of their financial affairs. And that's where the fun started. Perhaps not an apt expression, as you'll soon learn.
Despite almost forty years in a family business, they conceded that when it comes to investment, personal tax and pensions they were nowhere near being financially sophisticated. They described themselves as risk averse, perhaps cautious at best. So it came as a shock to all of us, them especially, to discover their SIPPS included "investments" that frankly were downright dangerous.
Three to four years earlier their pensions were with a well-known Scottish insurance company, in funds that while not exactly setting the heather on fire but neverthe-less sheltered them from any nasty surprises. But then their adviser suggested they needed a "high income" strategy to fund their lifestyle now they'd retired. Their dividend income would leave them well short and annuity returns were far too low to bridge their income gap. It was time for a change.
"The price to pay"
- Bruce Springsteen
As trusting souls they went along with his suggestions but it meant moving from the boring insurance company to a more up to date plan called a SIPP. They'd read often about SIPPs in the newspapers so it seemed to make sense. Could we see the reports of recommendation? ("Reason Why" letters the FCA likes to call them.) "We don't have any," came the reply. "But we've got copies of all these documents which aren't easy to decipher. But he knew we were cautious anyway and couldn't take any risks."
Any details then of hard disclosure? "Such as?" Charges, costs to you or fees earned by him for the transfer and afterwards for ongoing advice/ management? "No, but he was kind enough to pay all the lawyers' fees and the bills paid when the investments were bought inside the SIPP." So how
much did that come to? "Don't know; but to be fair we never asked." Hmmm. How does that sound to you? Can you see where this is going?
For some unknown reason, despite years of the regulators insisting on transparency (or hard disclosure of costs etc. to investors) there's still ways for the dishonest to hide charges. Take SIPPs. If you end up as an investor in one, by law you need Trustees to act in your interests, and to ensure you don't run foul of HMRC rules. So how come the Trustees do not pass on to you details of charges/fees made at the expense of members (the fancy word for you)
And why would Trustees of SIPPs allow this risk averse retired couple to invest all their funds in long stay airport car parking spaces, short-term loans to holiday lets and storage pod income schemes that have no guaranteed asset values? Why turn a blind eye to the purchase of unregulated investments that typically reward "advisers" with initial "commissions"? (I'm not supposed to use the word "commissions" these days, but hey what else is it?) What's more, these unregulated investments are most probably going to be almost worthless when you have to sell them as in the event of a death for example
If you think I'm being unfair to the previous "advisor", let me share some small print on the "holiday let" income investment:
"Investment in these bonds carries substantial risk. Potential investors should note these bonds are high risk. They are unlikely to be suitable for those who do not have experience or the understanding to be able to evaluate the chances of success of start-up companies."
Similar warnings were buried in the other documents regarding the storage pods and car park spaces. These are scary investments at best, and have no place in pension plans for low risk older investors. Unregulated Investments have no investor protection
available from the FCA or compensation schemes. Anything unregulated should only attract ten-foot barge poles. You could say it's a scam, but this was advised by a registered IFA at the time (no longer the case it seems) who should have acted as agent of his clients, not agent of his own pocket.
SIPPs in our view are suitable for a minority of older investors who wish to invest in property or individual shares and who understand the risks in doing so. So be very careful. And if you already have a SIPP go ask the Trustees for hard disclosure of all costs. It's your money after all.
You may have heard about pension scams in the news. Since George Osborne dreamt up Pensions Freedom on the back of a fag packet a couple of years ago in a master plan to increase tax revenues without the usual complaints from taxpayers, crooks have reacted much faster to opportunities for mis-selling than our regulators, who are still thinking about the best guidance to give, but not, it seems, too busy to plan a £60 million spend on new offices, and blowing £66,000 on a new logo.
Millions of pounds have been stolen from those "benefiting" from Pensions Freedom according to various reports. Even well-known experienced pensioner trustee specialists like James Hay, we understand, have been contacted by HMRC chasing a £1.8 million bill over another unregulated scheme into which 500 of their clients piled their pension fund money. Then on
23rd May the Serious Fraud Office announced an investigation into a £120 million unregulated storage pod fraud linked, yet again, to SIPPs.
In case you think that's the worse over I have further bad news to report. While the FCA dithers over whether or not to look further into charges of investments as against the "cheap" index trackers and passives the herd are so keen on, and while they argue the theories of risk with other academics, many millions of pounds pour out of Defined Benefit schemes (Final Salary Schemes in old money) and are transferred into SIPPs with initial charges of 2% or 3% if investors are naive enough, and plenty are it seems.
Charges including a 1% annual management charge are conveniently hidden behind SIPP screens, and funds are being dumped willy-nilly into With Profits funds, which actually need no extra management whatsoever. This transfer epidemic is being orchestrated by registered IFAs under the nose of the FCA.
If this is a sensible place to plunk ex-DB money on transfer it might be worthwhile to examine the last 20 year performance numbers of said With Profits. Or go and ask thousands of With Profit Bond investors or former Equitable Life policyholders what they think of their With Profit plans purchased on the cheap in the 1980s and 1990s.
Regulators over the years since the Personal Investment Authority came along in 1987 have spent fortunes, changed their name twice (to protect the guilty?), had their various Chairmen CEOs collect knighthoods and move to plum private sector jobs, despite failing consistently to spot dangers to investors until it's far too late. Think Equitable Life and the Split Cap Investment Trust fiasco in the 1990s, pensions mis-selling in the late 1980s, endowment mortgage mis-selling, and the Financial Crisis of 2007/08, for starters.
Meanwhile research by Fidelity confirms that despite scams and mis-selling fears, over 20% of the 55 to 64 year olds don't take any advice before choosing their retirement income strategy. Aargghh!
However, given the dismal record of financial regulators over the last 30 years – plus the bad experiences of too many investors when dealing even with trusted companies like Equitable Life – could there be a better way to protect your wealth? As Josh Brown in the US recently wrote, "All the rules and regulations and disclaimers you can pack into the back of a prospectus aren't going to matter if people are determined to seek out loopholes or follow the letter of the law while completely violating the spirit of it. Examples of this are legion..."
His conclusion is that culture beats regulation every time – and probably will continue to do so. Like Pink Floyd I have "High Hopes" of that. So why not take your time as an investor, especially where it involves pension plans, to seek out those advisers who are rewarded emotionally and financially for for being on your side. As Josh says, "There should not be a big glaring conflict of interest between what's best for them and what's best for you." And that's the truth