Future of Investing


The assessment of the value of new products is best carried out, not by manufacturers nor regulators but by retailers in close touch with the needs of their customers.

I recently spent time with a dairy farmer. His business was subject to a variety of government inspections but the inspections that concerned him most were those by Marks and Spencer and Waitrose.

In modern business, good retailers play a regulatory role. They succeed by being sensitive and responsive to the needs of their customers, as well as their suppliers. Their existence substantially reduces the need for regulation.

Regulators should work with market forces rather than trying to supplant them. The principal recent achievements of the financial services regime have employed this approach. “Naming and shaming” providers for misselling pensions and endowment mortgages has encouraged companies to protect their reputations

by reforming their internal processes.

Regulators have also enjoyed some success in improving the performance of intermediaries. However, individual financial advice is prohibitively expensive for a mass market. The public can be best served by the presence of effective retailers.

Historically, banks were horrified by the notion that they were retailers at all. More recently, the culture has become sales-driven, but undesirably so. Retailing is seen as an outlet for product.

“Life insurance is sold, not bought” was a slogan of the insurance business, as ignorant salesmen on commissions bludgeoned customers into buying inappropriate products. This tradition infected banks when they sought, in the 1980s, to become “bancassurers”. Any discussion of the cross-selling of products almost always describes the advantages to the bank,

not to the customer.

The selection of retail products is driven more by margins than by customer needs.

A strategy of focusing on high-price goods because they offer bigger margins is the opposite of the business model pursued by successful retailers, which have instead pursued volume growth through competitive pricing and building a long-term relationship with their customers.

The most egregious practices of salesmen have been stopped. But looking at the financial services industry, it is hard to conclude that customers are better treated than they were 20 years ago. As one historic problem is eliminated – the misselling of personal pensions – a new one emerges – encouraging households to take on unaffordable debt. Banks have too often been guilty of petty abuse of customers – as in the penal charges for minor overdraft or credit card lapses and the pushing of overpriced payment protection insurance.

The problem goes deeper. Both the dotcom bubble and the subprime mortgage crisis were the result of giving sales forces incentives to peddle products that were unsuitable for customers but enabled providers to report substantial, if illusory, returns. These instruments were created in investment banks, and the transactions-orientated culture of these institutions corrupted the retail sector.

The assessment of the value of new products is best carried out, not by manufacturers nor regulators but by retailers in close touch with the needs of their customers.

The challenges of financial services retailing are likely to be boring for people whose eyes light up at the valuation of an exotic derivative or a large corporate acquisition.

But that is part of the problem. People such as these should not be running retail financial services businesses.

The people who should be in charge of these businesses are customer-focused. They recognise that retail is detail and derive their satisfaction from identifying and meeting the needs of their shoppers. Many such individuals are already employed in the financial services sector. It is time to give them their opportunity, free of the distorting and – in the last decade, massively disruptive – influence of the deal makers, traders and investment bankers who dominate financial conglomerates.

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