1st May 2013
We may be in the midst of an investment Isa crisis – arguably not for those who have invested – but for those who have not.
A presentation this week by broker and investment platform Hargreaves Lansdown painted a picture that was pretty rosy for them as a firm, but not for Isa investment as a whole. In 1999/2000, applications for stocks and shares Peps/Isas were at 4.57 million. In 2011/12 they stood at 2.90 million. This is a fall of 36 per cent. HL’s own numbers are up over the period during which their business has grown spectacularly. They took 58,500 applications in 1999 but 172,800 in the last year.
Britain is clearly in danger of getting out of the investment Isa habit. Mindful Money would argue that is a bad thing. By and large, unless you happen to be very unlucky with market timing, being invested in some sort of “risk assets” to use the industry parlance should be better for your financial prospects than not being invested, and certainly on a medium to long term time frame. It is certainly better than having a very large amount invested in cash for the medium or long term. This piece about inflation by adviser Alan Easter this week helps demonstrate why.
Here we suggest a few reasons for the decline over the years and finally why it should concern us all.
1) Tinkering. Labour rebranded the Pep and the Tessa to the Isa in 1999 perhaps causing confusion by calling both the cash savings product and the stocks and bonds product the same name. It is likely the damage was limited. However there was a lot of tinkering. Chancellor Gordon Brown would often only confirm the Isa limit on a year by year and budget by budget basis.
2) TMT bubble. The 1999/2000 Isa figures come just before what is known famously as the Telecoms, Media and Technology bubble and of course subsequent burst. Share prices got wildly out of kilter with underlying profits – sometimes wildly out kilter with what was only the promise of future profits and when the bubble burst some investors decided they had had enough of markets permanently. Some fund managers think a generation of investors was lost just when many were warming to stock market and fund investment. Since that crash, stock market performance has been rather muted though we are close to 1999 levels. Of course, people who are not fans of share investing often forget the huge difference reinvested dividends can make and only see the headline FTSE numbers.
3) A litany of misselling scandals. Although most of these scandals involved other financial products, typically not those that would be sheltered in an Isa (with a few ignoble exceptions), the run of bad news certainly hasn’t helped. Many national newspaper journalists and some of their readers are also convinced that fund charges remains too high. Certainly prices for unit trusts have been pretty uniform, though regulators and new entrants are now looking to shake up the market.
4) Not enough money. Perhaps people don’t have enough money. This is particularly important given the falls in household income in real terms over the last few years. It clearly makes it harder to find money to set aide.
5) Rules and regulations. Fund managers and advisers face a raft of rules and regulations about marketing. Hargreaves Lansdown boss Ian Gorham this week said that he felt regulation was generally holding back investment. For example, there are very clear rules on discussing past performance. As we know, it is no guide to the future. However, some feel this has stopped funds being marketed as effectively as they might have been. Then again, before the rules became clearer a minority of managers undoubtedly abused the past performance numbers picking periods that showed their funds in the best light. Most posters and newspaper advertisements avoid mentioning it at all. Fund firms also have to include risk warnings of course. The other issue is the sheer amount of paperwork involved in taking out an Isa, doubly so if you do so with financial advice. The good news is that the new financial watchdog is trying to cut down the paperwork (in its vocabulary known as the disclosure requirements).
6) IFAs move upmarket or quit. Financial advisers have increasingly moved upmarket to service people with bigger pots of money to invest. Adviser firms often have a minimum amount of assets before they will advise you. This is usually upwards of £50,000 and can be as high as £100,000 or £150,000. This may sound harsh though arguably they have to pay for their time and for insuring themselves and you in case something goes wrong. The move upmarket has been compounded by the ban on commission which made some advice appear free (though investors paid for this commission though a higher annual management charge on a mutual fund). Adviser numbers have fallen dramatically – 20 per cent in the last year as trade paper Money Marketing reports. There was some good news from Hargreaves Lansdown yesterday. It is now aiming to advise people with sums of around £20,000. But the question remains how do we convince people to accumulate £20,000 in funds in the first place?
7) Borrowing is easier than investing. In a related point, on regulation it is so much easier to borrow including even a pay-day loan than to invest. This is worrying policymakers but it has been worrying them for a very long time and not much has been done. Mr Gorham said this week, that his firm could advertise on tV but, unlike for gambling or pay-day loans, he feels there is no receptive audience.
8) Financial crisis. The financial crisis knocked confidence in just about every kind of investment though global stock markets have just about recovered. Of course it is not just shares – at one point even cash looked very vulnerable.
9) The British love affair with houses. Property remains king in many people’s minds. The UK public are wedded to property investment whether it is stretching themselves financially to buy a bigger house (we are not sure this really qualifies as an investment) or by investing in buy-to-let. The rental sector now booming. This recent myth busting article in the Guardian comparing stock markets and property markets in the UK may give pause for thought however. It may not be the best investment after all.
10) Money merry-go-round. Maybe the investment and financial services industry has talked and thought itself into a corner. It has also expended a lot of effort on convincing people with a lot money to switch to them, rather than convincing people with a little money to invest and build up a pot.
It is not all bad news. New reforms under the retail distribution review may shake up the market and open it up to new types of fund management especially investment trusts, ETFs and new financial advice outfits. The price of fund management should fall long term. The economy will recover eventually and some believe that process is starting. See Simon Ward’s view. The regulator and some politicians want to make things simpler. It is arguable that new powers given to the Financial Conduct Authority to ban risky products from the mass market may eventually increase confidence and cut misselling and the fear of it. Finally, the auto-enrolment pension reforms may make people more interested in investments if those reforms work.
But it remains a worry. If you are not invested, you may be more financially vulnerable. If you are saving but not investing your capital may be eroding in real terms. And if the UK as a society doesn’t start investing more regularly, it could mean we all pay in the long term.
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