Last week I posted part 1 of a 2-part interview with Andy Agathangelou, the founding chair of the Transparency Task Force, a campaigning community dedicated to driving up the levels of transparency in financial services.
Part 1 was all about what the Transparency Task Force does and why. In this second part of the interview, we discuss the argument that too much transparency can confuse consumers, the investment consultancy sector, and finally ESG investing.
SW: What would you say to those who argue that the consumer will be too confused by full transparency of fees?
AA: I think essentially, they have a very, very valid point because, in many ways transparency is all about shining a bright light on things. But if you shine too bright a light, you can actually be blinded by it. I contextualise this by saying that “yes, of course transparency is profoundly important” but, if all we have is lots of data coming into the market as a consequence of transparency and nothing else, you can actually make things worse not better. So I completely get the argument.
So what I say very simply is: we have a responsibility as an industry, not only to apply the power of transparency — to provide the data that the market needs — but also to provide it in a clear, intelligible, and easy-to-understand way. We need both of those, and that’s why the people who say transparency alone is necessary but not sufficient are absolutely right. And that’s why we’re also working with people to try to communicate what this new data means in a clear and intelligible way.
SW: Surely, the problem there is with the teacher: you can't blame the pupil or the child in this analogy for being too stupid. We actually need the teachers to become better, and financial advisers may have to become more like teachers than they ever expected.
AA: That’s a very valid and very fair way of looking at it. I guess, when you really think about it, ultimately, the responsibility for effective communication is on the person communicating. You have to make sure the message is being understood, being received… and you have to check understanding as well. If a financial planner is dealing with a client who, frankly, is unlikely to get all this sort of stuff first time round; you have a responsibility to make sure that you can articulate it in a way that is clear and intelligible for them. The quicker we learn to do that effectively, the better; because, as you know, costs are such an important part of investment outcomes.
SW: What is your view of the investment consultancy sector, and the steps being taken to make it more effective and competitive?
AA: Most of the people I speak to in the investment consulting sector are actually very grateful in a way that the regulators, through the FCA and the Competition of Markets Authority, are looking for the investment consulting sector to become part of the regulated landscape. It’s been a bit of a quirk for a long time that you have a regulated individual giving individual financial planning advice for clients, but somebody advising the investment strategy of a major multi-million (or perhaps even billion) pound pension fund could, at least in theory, be totally unregulated. So there has been this regulatory arbitrage, this uneven landscape. It’s very good that the regulators are sorting this out.
I think what we’ll see, as time goes by, is the investment consulting community getting better and better at articulating showing and perhaps improving how they provide added value. Historically they’ve not really been required to do that, and they’ve not been doing it very well at all. So, I think that, what we’ll see in years to come, is investment consultants who are, not only capable of adding value, but also capable of evidencing how they’re adding value.
There are all sorts of nuanced differences between investment consulting, fiduciary management, delegated advice, etc. They’re all, if you like, themes in terms of the approach. But the fundamentals are always the same. What is the client, in this case an institutional scheme, looking to achieve? what are the most effective ways for them to go about doing it? What are the stepping stones? What are the trigger points? What are the checkpoints along the way for helping them to get there?
SW: What do fund trustees need to do to ensure that the advice they receive from a consultant is good advice, and worth the expense?
AA: I think there have been instances in the past where a trustee board has been quite myopic or even blinkered in the advice that they’ve received. What I mean by that is that they haven’t checked it with other parties, they haven’t been seeking second options. They haven’t gone out of their way to kind of “sense check” if what they’re being told or guided towards is good and what you end up with is this dependency culture. Trustee boards who’ve found themselves becoming simply dependent upon the inherent advice being given to them by their incumbent advisers.
I think time has moved on, I think trustee boards are starting to shop around and are becoming a bit more savvy. I think there’s increasing pressure on them to be able to evidence that they are becoming challenging purchasers of services. That’s certainly what the pensions regulator is requiring of them.
And I think it’s become absolutely necessary for investment consultants and trustee boards to have very open, honest relationships where it’s not a simple case of the trustee board accepting, at face value, what’s being told to them by the consultants. Good clients are clients that challenge. Good consultants are consultants that don’t mind being challenged, and are confident that they can give a very good account for themselves.
SW: What is your view on ESG investing?
AA: To my mind, ESG investing is about investing with a sense of responsibility. If somebody were to own a revolver, a shotgun, then we’d all accept that that person would be responsible for what that shotgun does or doesn’t do. It’s perfectly possible for somebody to own assets in a company — “I own a share of the company” — but to completely divorce themselves of any responsibility for what that company does. As a consequence, we have a very large proportion of our investment world where there’s a disconnect between the owners of the assets and those owners having any sense of responsibility.
I think that needs to change. I think that responsibly investing, ESG-type approaches, is all about reconnecting the asset owner with the responsibility for what those assets actually do. So why should we invest in organisations that are harmful to the planet? Why should we invest in organisations that exploit society rather than add value to it? With that ownership comes responsibility; and I think that’s the paradigm shift that society is currently going through. I think we’re at the beginning of a very important trend, and I’m hoping that — five-or-ten years from now — everybody will be investing in one form of responsible investing or another.
Thanks again to Andy for his time, and his thoughts. If you are interested in getting involved in the Transparency Task Force or attending any of their events, I’m sure Andy would welcome you getting in touch.