The UK financial services industry has the potential to change the lives of millions for the better. To make this happen, Vanguard believes the industry has a responsibility to come together and commit to give investors a fair deal and a better chance of investment success.
Tom Rampulla, managing director for Vanguard in Europe, says he saw some encouraging signs that this was starting to happen in 2014.
Firstly, financial education was introduced into the National Curriculum, secondly George Osborne removed the compulsory need to buy annuities, and thirdly the competition on cost and services heated up as the effects of the Retail Distribution Review (RDR) began to be felt.
Looking ahead to 2015, Rampulla has identified four ways the financial services industry can continue to help investors…
1. Lead the way on financial literacy.
The introduction of financial education into the National Curriculum will raise the level of financial literacy for millions of Britons, giving them a better chance of achieving financial freedom.
This change comes at an interesting time, as the impending abolition of compulsory annuitisation will place a greater onus on the industry. We must deliver the right mix of education, clear communication and straightforward low-cost products.
2. Let’s figure out the retirement conundrum.
Defined Contribution (DC) pension plans in the UK and other parts of the world have historically been focused on asset accumulation with a view to buying an annuity at a defined date. We need to re-think this.
We need to get plan members thinking in terms of future income rather than the size of their pension pot. In other words, we must translate the Defined Benefit (DB) concept of income provision to the DC world.
The upcoming changes in UK pension legislation should be a catalyst for developing new investment approaches and retirement solutions to meet the multiple goals of DC plan members. The challenge for us in the pensions industry is to respond with easy-to-understand products that will engage members and provide for a comfortable retirement.
3. Bring additional clarity to the role of costs.
Recent legislative and policy changes have put fees under greater scrutiny in the UK. This increased push for transparency has made investors more aware of the importance of costs in the investment decision-making process. While it is early days—and product and distribution fees still vary considerably—we believe the Retail Distribution Review is proving a positive force on the investment industry, providing investors with greater choice, fairness and transparency.
The result is that investors are voting with their feet and allocating a greater share of their assets to lower cost mutual funds and ETFs. Investment Management Association (IMA) data shows that 40% of UK retail flows in the third quarter of 2014 went into index trackers. This shows that investors understand the importance of costs.
Vanguard has built its reputation on the principle that costs matter. Common sense dictates that, all other things being equal, a fund with lower total costs will outperform a higher-cost alternative. The FCA’s and IMA’s drive to achieve real price transparency should do much to build trust and credibility for those fund providers who embrace their efforts.
4. Help advisers tell their story.
Post-RDR, clients have greater clarity on the fees they are paying and, unsurprisingly, they want to know that they are receiving good value for money. Consequently, financial advisers will need to clarify how they provide value to clients. We think this will continue to lead financial advisers to tie their value proposition to things they can control, such as these four investment principles:
Goals: create clear appropriate investment goals;
Balance: develop a suitable asset allocation using broadly diversified funds;
Cost: minimise cost, you can’t control the markets, but you can control how much you pay to invest; and
Discipline: maintain perspective and long-term discipline.