He was speaking in the wake of the decision by the Financial Services Authority (FSA) to consider the relative merits of advised and non-advised sales as part of its general insurance effectiveness review — a review that will consider banning sales that have not been discussed with an adviser.
Such a move would in effect outlaw Direct Line, Esure and the many telephone-based insurance operations that sell direct to the public. Those companies argue that this would deny millions of people access to cheap insurance. Even if, by taking out cover without advice, they buy policies that are not exactly right for them, the direct sellers say that is probably better than not being covered at all.
Of course Baigrie, as an adviser, has a vested interest in advice. But his case is compelling. “Every non-advised sale I’ve ever studied has a bit of stupidity in it somewhere,” he said. “It might be the failure to put the policy in trust, or the sale of payment-protection insurance instead of better- value income-protection cover, or the simple fact that someone has bought only life cover when they needed additional or alternative protection arrangements. Whatever the specifics, the end result is the same: consumer detriment.”
His internal figures suggest that as many as two in three final decisions on a policy are radically different from what the consumer originally had in mind. Now, insurance advisers are not saints, and some of those changes may be more of a testimony to their powers of persuasion than the consumer seeing the light, but if the advice is sound the consumer should gain.
The big questions are whether a consumer can afford the advice, and whether there are enough good advisers to go round. And it is anyway hard to believe that the FSA would go so far as to ban unadvised insurance sales. The mouse in the Esure TV ads can breathe again.
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But I can see the FSA insisting that direct sales are accompanied by at least some of the fact-finding that advisers have to go through with clients, if only to salve the regulator’s conscience. How much that will achieve is another matter.
Slamming the shutters
SOMETHING the FSA might take a closer look at is the thorny issue of popular investment funds that are closed to new business at little more than the drop of a hat, usually because the manager is worried that they are already — or are in danger of becoming — too large to handle effectively.
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A good idea can transform a £50m fund, but may get lost in the midst of one worth £1 billion, and that means the manager does not get full credit for his brilliant insight. Fragile egos are not confined to the Celebrity Big Brother house.
JP Morgan Asset Management is the latest to close its UK Dynamic fund, after similar action last year by Anthony Bolton at Fidelity Special Situations and George Luckraft at Framlingtons Equity Income.
As Darius McDermott at Chelsea Financial Services says, there is no problem with funds being closed. Indeed, if money is pouring into a fund because it is successful, closure is very much in the interests of existing investors. The trouble stems from the lack of warning, which is often unfair on intending investors who then miss out. JP Morgan gave a little over two weeks and Bolton and Luckraft a day and a week respectively.
The difficulty is that a lengthy warning period could provoke a stampede into the fund, which might defeat the object of keeping it to a manageable size. The answer may be to declare a ceiling on the value of the scheme, either at the outset as JO Hambro tends to do as a regular practice, or at the decision to close. Then any stampede would be automatically limited.
The FSA said last week that a number of firms had lodged applications to limit funds, so this is going to be a continuing headache. But the FSA does not make funds give the public a minimum warning period, or set a ceiling.
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If the regulator is going to stay out of this issue, then it may be a conundrum for the Investment Management Association. Meanwhile, would-be investors should get into the popular funds while they can, or risk having the door slammed in their face.
Pensions on the wing
I COULDN’T help smiling when I read the other day that hedge funds have bought shares in life insurers because the predicted flu pandemic will cut pension liabilities. Naked capitalism indeed.
But maybe this could be the answer to the pensions black hole: turn it into a macabre form of a tontine, where bird flu culls the population and the survivors find that their pensions have been magically boosted.