A couple of weeks back I hosted a panel on Open Banking and PSD 2 at the Lendit Europe event. I’d like to think we roamed widely in our discussion of the issues and challenges but as we chatted it became obvious to me that Open Banking should be just the start. If we mean what we say about the need for more transparency and helping the customer, shouldn’t we be looking elsewhere – at our investments?
Over the last few weeks, we’ve seen the rollout of the UK government’s Pensions Dashboard, a brilliant online tool that allows ordinary people to see an aggregated view of all their pensions. The government has long recognised an obvious market failure – individual suppliers of financial services have no real incentive to give clients a proper holistic view of their products and investments. Individual app-based solutions driven by technology might have wonderful ideas about visualisation and behavioural nudges, but they’ll get nowhere if the incumbents hoard their information. Pensions are a classic example of what in reality is a market failure. Increasingly we have products littered all over the place and the prevailing language used by suppliers is complex and arcane – deliberately so because of regulatory requirements. Thus, putting all the products in one place makes ordinary clients much easier.
But I would argue that this welcome change only makes the bigger problem more acute – how to properly analyse our investment portfolios, including our pensions and other tax wrappers.
To help explain what I think is the problem, let me use my own example.
I’d like to think that I am a fairly sophisticated private investor. I’m happy to take a risk by investing and I have a SIPP and an ISA and some non-tax wrapper investment products. Annoyingly these investment products are distributed between different platforms. Each of these providers does a half decent job of giving me granular information on my investment holdings but their effort stop there.
Crucially I’m left with three challenges:
- How do I find out how my investments in aggregate are performing against any sensible peers or benchmark or even over distinct time periods? I could, I suppose, extract the information from downloaded spreadsheets and do the calculations myself but frankly, I have neither the time nor the inclination. The chief challenge here is what I call Performance Analysis and Attribution.
- How do I aggregate each of these investment products and the resulting platform products into one page where I can see costs for each and understand how my savings are performing in total i.e an aggregating function.
- Last but by no means least how do I take this aggregated information about my investments and then project them forwards to understand what gaps I may have in my financial planning. The challenge here is to take that backwards-looking information and then project it forward using freely available financial planning tools.
I’m sure that the initial reaction of many is to shrug their shoulders and admit that this all sounds much too complex and bothersome.
But this ignores a patent reality. We are midway through a process that involves moving from DB to DC schemes and a general push to force people to invest for their future. Auto-enrolment is just one part of a much wider process of financial enablement. Ordinary clients may not like the fact that they have to take responsibility for their investment planning, but they have no choice. It’s happening. End of story.
Wealthier clients can, of course, seek the services of a professional, who can probably provide most of the services needed above. But after RDR, the reality is that any client with much under £150,000 simply doesn’t make sense for most professionals to engage with.
Robo advisers are attempting to fill this space and they do an excellent job in providing some of the information I outlined above but I would argue that they are not providing anywhere near the level of information that is needed.
Scrappy upstarts intent on aggregating investment information could, I suppose, provide the information that is required by scraping existing client accounts – upload the spreadsheets and then set up some forward-looking tools – but I suspect they’d soon be held back by incumbent platform providers denying access.
Platform providers might also be prodded by said robo advisers to up their ante on portfolio analysis tools but my suspicion is that we’ll be waiting for a very long time before any real progress is made – why invest the money required in IT infrastructure if clients aren’t currently demanding the information?
Enter the regulators and the government. We need Open Investment and we need it now. Force investment providers to provide client information to trusted third parties if authorised by the client. Then let these providers better visualise and analyse the underlying investment information.
My guess is that most incumbent platforms would probably end up using these third-party data tool providers anyway over time while a small hard core of private, individual, investors will opt to use paid-for independent data vendors – to better analyse their investment returns or maybe run tax reconciliations.
But none of this will happen unless we recognise the market failure – existing investment platform providers have no business rationale for embracing increased transparency and better analysis of returns. And if we don’t have this information, how can the great mass of unadvised clients know if they are hitting their long-term investment targets?