Restoring Trust In Financial Services
In a recent Interview Eunan O’Carroll, Sales and Marketing Director at Friends First, tells Graeme McQueen of Business Plus magazine about the need for a root-and-branch review of the distribution and consumption of financial services in Ireland.
What are Irish investors investing in currently?
Recent trends have seen Irish investors invest into cash deposit, currency and guaranteed instruments. There has been a definite flight to safety and the current market can best be described as being rebalanced and restructured. Investors are looking more forensically at what they have and parking their funds under management, whereby there’s going to be no surprise. With pay freezes in place and very few bonuses being paid out, there isn’t a huge amount of new money being invested. The more informed investor, which is a growing percentage of the population, has gone from being product- led to portfolio-led. Next-best-thing investing is gone and there is minimal evidence of an appetite among investors to get involved with the markets again. That’s despite the fact that if you take away Irish financial stocks, the equity markets haven’t done too bad of late.
What is the appetite for investing in equities and property?
In terms of equities, investors are looking beyond the traditional equity classes. Emerging markets are popular but there remains a lack of understanding about what an emerging market actually is. Equity investors are no longer looking at the traditional financials but focusing instead on energy and food stocks. One clear development is that people are now taking the time to properly inform themselves. Joe Public is now erring on the side of protected products and capital guarantees. People have latched onto the benefit of having a portfolio with a mix of asset classes. Investors are still sour on property but there are some signs of life coming back into prime areas of UK commercial. As an asset class for the typical Irish investor, property remains very minimal. For a lot of people, property would previously have accounted for 100% of their portfolio, which made no sense. That said, the biggest pool of wealth in Ireland remains in bricks and mortar, despite the huge fall in values.
What should equity fund investors be looking out for?
Very often people merely rely on past performance. It’s not a bad place to start but if I was giving an advisor €10,000, I’d be looking to find out exactly who is managing my money. When you buy into a financial instrument you’re not buying the product but rather the trusted advisor. It’s important that you find out exactly what the strategy of the manager is and how they keep you informed of the investment’s performance. Investment product manufacturers are currently grappling with product design that provides long-term value for investors. The problem is that the main focus of manufacturers remains on maintaining market share and customer retention. The job of an advisor is to go back to the customer and say, look, we need to take a second look at this. In order for me to get you to where you want to go, you need to change provider.
Friends First’s Insight Currency Fund has been a strong performer in recent years. Is currency a good alternative to equity funds?
A balanced investment portfolio should look to have a good mix of instruments, including exposure to cash. Since launch in 2001, the Insight Currency Fund has achieved growth of 120%. Investors should not look to tie all their money up in cash but it can provide a good fit with equities, as it can grow even when markets are falling. We’ve now made the fund available to smaller investors, with a minimum investment amount of €12,000 for individuals and €5,000 for personal and executive funds. The fund is managed by Dublin based Alder Capital and invests in eight of the world’s most liquid currencies, including the US dollar, euro, the Australian dollar and the Swedish krona.
What do you see as the main challenges currently facing the financial services sector in Ireland?
The pensions industry in Ireland is going through a significant transformation. There is a need for everyone – the government, the consumer, the product manufacturers, the advisors and the regulator – to come together to face the problems in the industry together. What is needed is a root- and-branch review of the distribution and consumption of financial services, just as they have done in the UK with the recently completed Retail Distribution Review. The life assurance model in Ireland also needs a complete overhaul, though it’s not broken beyond re-pair. Another concern is that the government does not have a clear pension policy, although there now seems to be a clear commitment to get things sorted.
What lessons can Ireland learn from the UK’s Retail Distribution Review (RDR)?
This review process saw all stakeholders consult with one another over a two-year period and resulted in a number of recommendations that will become law next year. It was a great example of everyone coming together to confront the industry’s problems. There are shortcomings with the RDR but it’s going to work out for the UK market eventually. For the Irish industry to move forward, it’s inevitable that an RDR-type review must take place. The two biggest assurance providers in Europe, Zurich and Aviva, who both have their European headquarters in Dublin, played a major role in the RDR process in the UK. I would see it as unlikely that either firm would be prepared to operate one way in the Irish jurisdiction, which is no bigger than the city of Birmingham, while operating another way across the water.
You have spoken previously of a need for pension rehabilitation. What do you mean by that?
The concept of planning for retirement is very much in turmoil and my view is that the industry needs to address that reality. Many private sector workers have seen their pension investments suffer massive losses over the past five years. They now have to try and rescue their pensions by investing in alternatives to managed funds. In order to revitalise their retirement funds, private pension investors need a much greater variety of pension products and new asset classes made available to them. Only that way can they ensure they have adequate provision for their retirement. Pension contracts need to be rehabilitated. There are a lot of contracts out there where the allocation rate is still 95%. So you give them €100 and they invest €95. Yet modern pensions have 100% allocation and the remuneration and charging structure is spread over the lifetime of the product. This means that the interest of the consumer, the manufacturer and distributor are aligned. Given what has happened to our economy, Irish people who are currently in their 30s and 40s will be saddled with debt for the rest of their lives. Their disposable income will go on servicing that debt. If you are a 40-something planning for your retirement, you’re going to have to rehabilitate your whole attitude to how you actually go about it. Putting €100 a month at 95%allocation into a managed fund is not the answer anymore.
Does the life sector struggle from an image problem?
The industry has allowed itself to be tarred with the same brush as the banks but banking services and financial services are two completely different things. The trust is gone and we have to look at wining that trust back. Ireland has a young population that is going to need a lot of trusted advice in the future. But graduates currently don’t want to know about the life business and are choosing accountancy and other professions instead. The blame for that probably lies within the industry, which hasn’t done a good job of making itself attractive to students coming out of third-level education. Our research has found that Irish people don’t know the difference between banking services and financial services. The industry needs to focus on re-educating financial consumers. Re-education of customers is something that the sector has put a lot of time into in the UK. There are too many people in the financial services industry in Ireland who have a vested interest in maintaining the status quo.
