“You’ve got to think for yourselves! You’re ALL individuals!” said Brian.
“Yes! We’re all individuals!” said the crowd.
“You’re all different!” said Brian.
“Yes! We ARE all different!” said the crowd
“I’m not” came the lone voice from the crowd (apparently improvised by an extra).
Behaviourally or even anthropologically we are caught in a conflict between a desire to be different or unusual and to be the same or usual.
This can be called the “need for uniqueness”. Social beings strive to feel part of a group, but at the same time, we also want to feel distinct from others.
So what we are often seeking is a balance: not wanting to be too similar or too different.
When it comes to investing for retirement, in a world where interest rates are low the ‘usual’ seems less appealing and the ‘unusual’ more appealing, particularly by people old enough to remember higher numbers.
Each individual, whether an adviser or an investor, can read articles such as this one (and the thousands of better ones) and come up with usual or unusual conclusions. Stories make sense: ‘After 2008 when the banks wouldn’t or couldn’t lend, cutting them out and investing in funds that lend directly to small businesses is the way to go’; ‘Teak trees have two core attributes: they are hard and they grow’; ‘ I have just made an extortionate price for my holiday accommodation – I want in on that action’; ‘One mortgage debt security might be risky but bundled up they are diversified’.
However, whilst these stories all made sense at the time, they were no match for professional objective analysis. The behaviour is littered with biases: Availability cascade, Bandwagon effect, Dunning-Kruger effect, Anchoring and Attentional bias, to name just a few.
Large scale harm and scandal comes when these behavioural biases collectively make unusual investments become more usual, with herd mentality followed by the fear of missing out.
When it goes wrong people then say: “If I only knew.” Of course, in the ocean of information there was no reason for them not to know. It was just that the story was more interesting than the boring analysis. The professional experts knew, and it is therefore important that we listen to them and find a way for them to be heard over and above the noise and behavioural biases. Not an easy task.
This is why the FCAs ‘ consumer investment strategy’ should be welcomed.
The strategy appears to be the usual combination of consumer education to enhance understanding and nudge them back onto the ‘usual’ path and accountability and responsibility across the industry. The scope is interesting here. The update covers:
• Financial Advisers and investment intermediaries
• SIPP operators
• Investment platforms
• Wealth management & stockbrokers
Financial Advisers have only really had more unusual investments in their kit bag through offshore bonds and SIPPs and SSAS. Two questions arise: what is the good consumer outcome from ‘self-investing’ and who is responsible if it goes wrong?
SIPPs were permitted by the Inland Revenue in 1989 and SSAS in 1979. As you know, in summary the individual could then:
- Invest in any regulated fund, not just the pension provider’s own.
- Invest in specific commercial property to help your business in a controlled way.
- Consider a lot of other investments, most of which are captured in the FCAs consumer review as high risk.
The first has such an obvious positive consumer outcome that it has become mainstream, through platforms since the early 2000s and A-Day in 2006.
The second is a very useful tool for business owners and their firms, but it requires very specific and coordinated advice. It is, therefore ‘unusual’, but when handled correctly usually delivers a good client outcome.
It is difficult to see how the third could be a good client outcome. Yes, there will be winners: that is the nature of high risk, high reward. In many cases, it could also be a nil sum game.
So, who is responsible when the ‘high risk’ ‘unregulated’ investment goes wrong in a self-invested personal pension? Is it the client? After all, it is SELF-invested, and perhaps they were required to sign a professional or sophisticated investor form.
Is it the adviser? Is it the platform that enables the trade?
Is it the SIPP trustees? They legally own it, and we have seen a series of remedial regulation already that makes them more accountable. Or is it the fund manager or issuer of the instrument? Interestingly, the Coll-regulated fund manger or unregulated fund manager or issuer is absent from the scope of this FCA paper.
The tone and spirit of the consumer strategy implies that all of those mentioned are responsible, but least of all the consumer. There have been changes to customer definitions since the Alternative Dispute Resolution Directive. In 2015, the definition of ‘consumer’ in this context is: “an individual acting for purposes which are wholly or mainly outside that individual’s trade, business, craft, or profession”. This, to some extent, overlaps the definition of ‘professional client’. This means that some professional clients can now be eligible complainants. We have all followed the series of events that saw SIPP administrators receive a ‘Dear CEO’ letter in Dec 2020 following a High Court ruling two years previous.
Rather than debate here, or worse argue at the point of dissatisfaction, it’s far better to assume that as an adviser you would be responsible. The risk to your relationship and reputation is there regardless as to whether technically you can blame somebody else.
Life will be so much easier for all parties when, if somebody asks you about an investment you have recommended, you are able to reply: “It’s not unusual.”
Chris Jones is proposition director at Dynamic Planner