Tomorrow's Investor report launch

Tomorrow's Investor launches report

The Tomorrow’s Investor interim report, launched in October, contains the findings of unique deliberative research into investment and accountability. The report emphasises that any long-term solution to the current financial crisis must aim to ensure citizens as well as financial institutions are able to take more responsibility for the management of investments.

The Tomorrow’s Investor project, sponsored by Invesco Perpetual and PricewaterhouseCoopers, takes as its starting point the millions of small investors who, in aggregate, own the UK stock market. Through their pensions and insurance policies, small investors hold over 40 per cent of UK equity. But they are rarely conscious of their role as owners. This is preventing the financial system functioning the way it should.

The financial crisis makes this issue more important than ever. The launch of the report was accompanied by an article by Matthew Taylor in the Investors Chronicle magazine which blamed the disconnect between shareholders and their representatives for the credit crunch. “The current financial crisis is a crisis of ownership and control”, he wrote. “The financial system allowed fund managers, and bank directors, to take excessive risks”.

The report also blames the gap between shareholders and their representatives for the excessive costs and charges of fund management. The research found that investors were shocked to discover that charges will swallow up to 40 per cent of the value of their pension over the course of its lifetime (roughly equating to ten years worth of contributions). Not only are they being charged too much, but people do not know how much they are being charged.

The report found that companies were to blame for keeping investors in the dark. When the participants tried to find out more found fund managers unaccountable and financial institutions opaque. But investors were also culpable. Researchers found that people were almost universally detached from the management of their investments. They did not have the knowledge or the inclination to get involved.

The final Tomorrow’s Investor report, to be released at the beginning of December, will present a solution to this dilemma. On one hand, the financial system needs investors to be actively involved if it is to function properly. On the other hand, people do not want to be involved. They want clear, simple choices that they can understand and take without having to think too much. In other words, they want the market to provide a solution.

The RSA is planning to announce that it is investigating the possibility of setting up a fund based on Tomorrow’s Investor principles. This fund will correct the failure which means that investors are currently not able to see the choice they want in the market by combining low costs and high accountability in one single package.

It has often been thought that this combination was impossible to achieve. Speaking at the UK Social Investment Forum AGM recently, Taylor rejected this claim. He compared the investment fund management industry to the British car industry in the 1970s, when consumers were told it was impossible to have reliable cars at cheap prices. “Then the Japanese came along”, Taylor said. “It is our ambition to be the Japanese in this sector”.

The idea is still in development, but suggestions for improvements are already emerging. One example was suggested by Alistair Blair, in his forthcoming Tomorrow’s Investor paper on the investment fund industry. Blair recommended that, instead of presenting their charges as an annual percentage of the funds being managed, fund management companies should expressing their fees as a total cost over the lifetime of the investment.

This fits in with the latest behavioural psychology, as Taylor noted in his speech. Referencing Richard Thaler and Cass Sunstein’s book Nudge: Improving Decisions about Health, Weath and Happiness, Taylor described how, if people are told that a sausage is  ‘90 per cent fat-free’ they are far more likely to buy salami than if they are told it is ‘10 per cent fat’. The fund, he said, would tell its clients about the 10 per cent fat. This returns to the RSA’s contention that accountability is not only about being held to account, but also giving an account.

David Pitt-Watson, founder and former chair of Hermes Equity Service, will lead this final part of the project.