Statistician, transparency campaigner and former policeman CHRIS SIER was recruited by the Financial Conduct Authority, the UK regulator, to work with asset managers on a template for disclosing investment fees and charges.
To the surprise of many, they were able to produce a template that both sides were happy with. So, how did Dr Sier manage to persuade the industry to stop dragging its feet and start providing the relevant data? Is he optimistic that the trend towards greater transparency in asset management will continue? And how have his experiences influenced the way that he manages his own money?
In the third and final part of our three-part interview, he openly discusses his work with the FCA — and expresses his genuine fear at the size of the pension savings gap.
Given how outspoken you are on transparency, and how reluctant asset managers have been to reveal the total cost of investing, some were surprised that you managed to agree on a template for cost disclosure. How did you persuade asset managers to get on board?
Let’s start with the phrase “total cost”. Bear in mind that the cost of using asset management as a function involves more than just asset managers. Only one of the layers of intermediation is asset management. Now, sometimes asset managers own different parts of the supply chain, because they’re vertically integrated, so yes, they get more money than just asset management fees. But the point is that it’s not just an asset managers’ problem.
So that’s that’s one of the messages that you give to asset managers to just get on with providing the data. It could help you justify what you do by pointing out clearly and empirically that it’s not just you that’s taking money out of the kitty. You’re not the only slice of the pie. That’s the first thing.
The major thing I learned at the FCA was how not to be so bloody angry with people saying no. As a policeman, I tended to get quite robust with people who said no to me, so I’m used to people coming round to my point of view. That’s just the nature of who I am. I’m an enforcer. But the one thing I had to be on the FCA panel was collaborative, because the standards were set not just by me, but by the asset owner community, with the help of the asset managers. Both sides of the fence participated.
It was done in the full glare of the regulator, and my job was to be independent. What I had to do was reach an agreement about what was appropriate, and so the only tools that I could deploy were my expertise and the powers of persuasion to say it’s in your interests to get something that works for both of you.
Ultimately, I succeeded because I managed to paint a vision of the future where asset managers accepted that it was a good thing for them for a number of reasons. I don’t think anybody disputes that it’s good for the asset owners. Some people may say “Oh, it’s so complicated, they’re going to be confused,” but that’s just rubbish, because you’re underestimating the ability of asset owners to learn things. That’s like telling your children they’re stupid; it’s the one way in which you’re going to upset them and demean them. Asset owners are not stupid. They are extremely smart. And no one’s ever given them the opportunity to learn this stuff before.
So it’s clearly in the interests of asset owners to have greater clarity on costs. But what are the incentives for asset managers to be more transparent? After all, they’ve done rather well out of being the opposite.
With asset managers, you have to point out the business case to them, and there are four aspects to it.
The first aspect is, “Now you have a standard, and it’s your standard. You’re going to be able to put your systems together once and for all to give data to this standard, and quite robustly say no to those who come fussing around you for data other than that standard. There are lots of organisations out there who ask asset managers for data, and say they need to have this data and that data. Asset managers can now say “No, the data has been agreed by the industry, by the FCA and by our clients, so you’ll have this data or you’ll have no data.” I think that’s an entirely reasonable thing to do. We’ve given them a standard, so they can do it once and once only.
The second thing is, if you give data to this standard, you will be like-for-like comparable once and for all. So the example I will give is of an asset manager that charges an all-in fee, which includes not just their management costs, but everything that goes around the side like custody and legal and distribution and all that stuff. Then there’s an asset manager that only charges management fees but has additional costs that get drawn down by the fund( the other layers of intermediation effectively), that are added on that you don’t see.
And so an asset manager that charges this much for all-in gets compared unfairly to one that only charges this much for the management fee, and this one is discarded because the other one hasn’t correctly presented its data.
The third reason is, because we are getting the costs in the supply chain out into the open, asset managers now have something that they can look at and say, “Ah, that’s too expensive, and we can do something about it.” So one of the fundamental reasons for this transparency around costs is to get the asset management industry to take responsibility with innovating for the entire supply chain.
And the final one is trust. Right now, the market is buying on trust. The simple trust metric now is is not what the data is, it’s whether you are willing to give data. And asset managers that say, for whatever reason, that they’re not going to give data soon learn that the client is boss. So I’ve seen asset managers fired for refusing to give data, or prevaricating, or not giving data in the format that’s required by their clients. Trust is pretty much the most important purchasing signal that you can have in any market, but it’s most important in financial services.
Have your experiences of the asset management influenced how you invest your own money?
I don’t even think of myself as having a risk profile. So, the classic thing that someone asks is, “What’s your risk profile? High risk? Low risk?” I don’t even think of that. What I say to myself is, “I want the majority of my money to be somewhere safe. I don’t want somebody else to take risk for me, I’ll take my own risk.” That’s probably the safest place to start. That means that most of my money goes into simple things — tracker funds, that kind of thing — because I don’t want to have to go through the complexity of dealing with complex decision-making for the vast majority of my money. I want it to be simple.
If I ask myself, “What is the amount of money that I am willing to lose without ever having a chance of getting it back?”, that amount of money is very small, frankly. So, 5%, 4%… whatever the number is. I never look at the return. It’s all about my capacity for loss. That, to me, is a very personal thing. I think everyone’s different. Some people like to gamble. They like to put their money and think of the potential upside. I don’t think of that. I think about what my capacity for loss is, and anything that isn’t a capacity for loss has to be safe — somewhere that’s not going to have much downside risk. It may not have much upside performance, but whatever upside performance it has has to be linked to inflation. That’s kind of where I’m at.
What that means is, if I am going to do an equation around capacity for loss, then I want to be the one who was responsible for that loss. I don’t want to give that to somebody else. So I stick that portion of my money into direct investments as an angel investor. Now, I’m fortunate that my role has put me in quite a lot of contact with start-ups that are doing interesting things. So it’s kind of a fun thing, but I’m governed by my capacity for loss, which means I don’t have much to invest.
So how do I decide where to put that money? The answer is very, very simple for me. It’s about trust. I’ve worked with a lot of asset managers for the past 11 years, and what I know is that I only want to give my money to people that I trust. And there aren’t many of those, because trust has to be won as opposed to me giving it away for free. If they’re willing to give data, it means they’re not frightened about the consequences and that’s got to be a good thing. But there are very few organisations that have given me the opportunity to learn enough about them that I trust them. There’s only one really passive fund manager, and one active fund manager that I ever select when I’m looking at my fund selections, and I’m not going to name them, because I think that would be unfair.
Much has been achieved in the past couple of years in terms of cost transparency in the UK. How hopeful are you that we’ve turned a corner?
I think we have turned a corner because I think we’ve found a way of talking to asset managers, and the market is also right for them. I think there has to be a moment in time when people realise the game is up. You can no longer say no. Now, I’m not saying that asset managers said no because they were cynically trying to hide the data; but, in terms of their core business, clawing through your data systems and finding the answers to peoples’ questions has got to be low down on their hierarchy of needs.
Now what’s happened is that the clients — largely the institutional investors — have changed their tune, and they’re saying, “Actually, it is about trust. And if you’re not going to give us your data, then how can we trust you? We might go and choose somebody else who is willing to give us data.”
So there’s been a simple switch in the minds of the institutional investor to ask, “Are you going to give us data? No, then we’re going to find a way of removing you from our portfolio.” That has shifted the balance of power back to the institutional investor, and forced asset managers to admit that they have to give data.
So now we have a standard, a standard they agree on, and we have a shift in the understanding of who’s in control. With those two things having happened, I’m very optimistic that we can sort this thing out. It’ll be to the benefit of everybody. Nobody wants to work with a dishonest asset manager, and no one wants that in the market place… the FCA doesn’t, I don’t, you don’t, no one does. So, finding a way to force that transparency and honesty onto the marketplace was the most important thing, and it has now happened. Have we solved the problem? Time will tell, but I’m very optimistic.
One of the benefits of transparency and genuine competition will presumably be lower fees and charges, and better investor outcomes. But most people in UK and other developed countries are simply not saving enough, are they?
I think the problem we have is that what people expect to get, and what they will actually get when it comes to the time they retire, will be vastly different. That’s going to be a source of massive discontent, and also a massive problem for the government. It has to be, because it means they’re going to be relying on state benefits to be able to survive.
It’s like a two-order problem. You’ve got to get them to start thinking about what it is they want to have when they retire, and then you’ve got to educate them about what it is that they actually need to do to get there from the point in life that they are, in the light of potential unemployment and wage deflation, or low wage inflation.
I just think there’s a mismatch in expectations and it’s terrifying, because I’m mismatched myself and I’m supposed to be one of the clever ones. It really scares me.
Missed the rest of our interview with Chris Sier? Catch up here: