A few weeks ago Steve Johnson in an article in the Financial Times pointed out that billions of dollars are being wasted on investment advice. According to research carried out by the Oxford University’s Saïd Business School, pension funds and other large investors are wasting billions of dollars a year on worthless advice from investment consultants. The “Picking winners? - Investment consultants" recommendations of fund managers” study concluded that the funds recommended by consultants do no better than others and by some measure even underperform the wider market significantly.
Similar conclusions were reached in a EuroFinUse research report on Private Pensions dating back to 20 June 2013, confirming and expanding on the conclusions of the OECD 2012 Pensions Report which revealed negative real returns on average for pension funds. “The Real Return of Private Pensions” demonstrated that there is practically no satisfactory disclosure of investment charges in the pensions sectors and that financial literacy among savers is very low. In fact, the study concluded that investment charges and intermediary commissions put a significant drag on investment returns. By using the 2010 asset allocation data from the OECD and adding long term real returns to the data of these assets, EuroFinUse research shows that potential long term returns on the Danish, French and Spanish portfolios are somewhere in the region between 1.8% and 3.5% before taxation and charges. However, after taking into account charges and taxation, only Danish savers are likely to achieve a real return on savings.
It is time for investment consultants to come out of the shadows and disclose their recommendations. EuroFinUse insists on public bodies to ensure fair, clear and non-misleading information as well as competent and independent advice for all long term and retirement savings. EuroFinUse is also calling for regulation in relation to the compensation of financial advisers in order to create an environment in which financial advisors are fairly compensated for the services they provide with a focus on providing advice based on suitability rather than on the sale of products that generate the highest fees.