The author, blogger and marketer Seth Godin has a brilliant way of encapsulating in just a few words the challenges that organisations face and how to deal with them — and I couldn’t help but think of the Investment Association and its members when reading his post What are corporations for?
The IA is the main trade body for the UK fund industry. It’s currently seeking a new CEO after parting company with the last one, who it’s alleged was too consumer-friendly. Two of its biggest members, M&G and Schroders, have said they’re leaving, after refusing to sign a Statement of Principles vowing to put clients’ interests ahead of their own. Several other fund houses may now follow suit.
“The purpose of a company,” says Godin, “is to serve its customers.” But “somewhere along the way, people got the idea that maximising investor return was the point.”
He goes on: “The problem with short-term stock price maximisation is that it’s not particularly difficult. If you have market power, if the cost of switching is high or consumer knowledge is low, there are all sorts of ways that a well-motivated management team can hurt its customers on the way to boosting what the investors say they want.”
“Profits and stock price aren’t the point (with customers as a side project). It’s the other way around.”
Alas, I suspect this is something the management of the near-90% of IA members who refuse to sign the Statement of Principles have forgotten.
The actively managed fund industry has had it good for a long time. A combination of factors — huge political influence, light-touch regulation, the pre-RDR commission system, vast marketing budgets, a broadly compliant financial media and large-scale financial illiteracy — have played their part in securing whopping profits year on year.
But, as one senior industry figure, Chris Ford, head of investment at Towers Watson, recently put it, the industry is “not fit for purpose.. not doing what the customers need”. The industry is hurting its customers.
Thankfully asset management is changing and companies that refuse to change with it will be left behind. Around the world, there’s a shift of emphasis from products and the firms that provide them to the client, the end-investor. As Vanguard has proved so spectacularly, serving customers’ interests and commercial success can go hand in hand.
Of course industry bodies are designed to protect industries, not consumers. But part of protecting the UK fund industry is to drag it kicking and screaming into the 21st century, to make it wake up to its responsibilities and the changing commercial environment.
I applaud those within the IA who are standing up to the refuseniks putting profit before principle, and I’m sure Seth Godin would do the same. All members should be made to sign the Statement of Principles, and those that don’t should be asked to leave.
If we’re left with a much smaller and less influential Investment Association, at least for a while, then it’s a price worth paying. Better that, surely, than stumble on with a reluctant membership and a complete lack of trust among the public it’s supposed to serve.