The founder’s vision of a financial advice business with positive-only social impacts
Where we came from, how we’ve developed and where we’re going.
The closest thing I’ve had to a mission statement, till this, is what I set out in my 2002 book No Monkey Business: what Investors need to know and why. Writing a comment for its cover, David Lascelles, co-director of the Centre for the Study of Financial Innovation, described it as ‘a disturbing exposé of the incompetence and dishonesty of the UK investment business’. Nick Cann, then CEO of the Institute of Financial Planning, referred to ‘controversial statements on investment methodology and the quality of advice in the financial services marketplace’. But it wasn’t just negative: I wanted to set out a manifesto for technical and ethical integrity on the part of firms and for greater personal responsibility on the part of individual investors – ‘a blueprint for a modern wealth management firm’. This is what Fowler Drew Limited, initially called No Monkey Business Limited, made real.
It’s a small-scale thing: working individual by individual. It’s not even any individual: maybe the blueprint can be scaled up to the mass market but that was never in my scope to deliver. This is a vision of the social good that a single, small, private company can do within its own capabilities to execute and within the limitations of its target market.
How come a retail financial services industry that prided itself on its long-standing professional bodies, each with its own code of ethics, was unable to prevent the succession of scandals (described in the book) that gave rise to the first financial regulation act? How come self-regulation (version 1.0) proved inadequate for the task of forcing firms to design ethics into all their business processes? How come tougher, external, regulation (version 2.0), bringing with it thousands of pages of additional rules and cultural initiatives like Treating Customers Fairly, was even necessary? Though external regulation has undoubtedly helped, it has clearly not stamped out exploitative behaviour by firms and has not stopped boards from instituting perverse remuneration incentives and approving the sale of harmful products. These persistent conflicts undermine the culture the regulator and professional bodies are seeking that puts ‘client interests at the heart of everything we do’. Yet every firm with a mission statement will mouth those words.
Like all regulated firms operating in retail financial services, we do so under ethical codes and accompanying disciplines that are imposed from without. All our staff are bound by the high-level principles and conduct rules of the UK’s Financial Conduct Authority. Those of our staff with roles involving professional qualifications and requiring membership of a professional body are variously held to account under Codes of Ethics of: the CFA Institute; the Personal Finance Society (itself part of the Chartered Insurance Institute that has the widest historical responsibility for firms operating in the retail financial services marketplace); the Chartered Institute for Securities and Investment (which acquired the Institute of Financial Planning). To which the cynical observer of the evidenced ethics in this marketplace might just say: ‘so what?’
My insight was that ethics as a culture comes not from outside but from a simple choice made by the firm: to share or exploit the ‘information advantage’ that makes financial services so different from most retail markets. I chose to share it, on the basis not that I was worthier but that enough individuals would recognise and reward a firm that demonstrated, in everything it did and said, that it was on their side, empowering them by using the firm’s information advantage to help them make better financial choices and to improve their own relationship with money. Maybe that was naïve. If so, even that’s the privilege of a founder shareholder owing nothing to anyone.
Outcomes as a social good
What was never in doubt is that those clients who took advantage of this would benefit in a number of different ways that would constitute a social good. The testimonials on our website speak to these, after the event: composure, as in both ease of decision making and levels of comfort living with uncertainty; clarity about the purposes of their money; motivation and commitment to a plan; better relationships, in terms of the ‘psychology’ of money, between spouses and between parents and children. These remarks hint at a pride of ownership which is an important reward of taking responsibility. Some of these benefits are absences: not enduring the negative things they may not fully have appreciated before, like excessive and maybe hidden costs, conflicted advice, poor technical standards, inefficient products and the encouragement of a false sense of priorities.
What client testimonials also underline is the connection between these outcomes and the methodology of the firm that makes them possible.
Empowering clients, as an explicitly disruptive business format, involved drawing heavily on the more technical ideas in my book for a redesign of the role of family financial adviser, as enabler of decisions rather than as a proxy decision maker. That distinction is critical to sharing not exploiting, as the proxy decision maker is a necessary product of a successful sales person: getting people to do what you want them to do. Without that purpose there would be no need to dream up all the products and services that have proved so disappointing in the industry’s chequered past.
Helping people to make their own choices, which obviously involves encouraging personal responsibility, ironically cuts across the paternalistic, protective instincts of regulation. Paternalism is implicit, for instance, in the requirement that all personal advice on any retail investment product rely on a recommendation. It also cuts across the notion that ethical standards would be higher if the role of adviser was subject to more explicit fiduciary tests, which would only raise standards at the expense of the agency of the individual in their own financial futures. I’ve always known which side I’m on in the paternalist versus personal responsibility debate.
The vision of the book, then, was that it was perfectly feasible to enable people to make and take ownership of their own choices, even if we had to end up validating their rationale for the choices we had informed by way of recommendation: ‘because you demonstrated…we recommend…’ This is not the place to go into the technical underpinnings for a ‘sharing’ business format except to say that modelling was fundamental. Drawing on my own background in firms using quantitative techniques, I was well aware of the advantages of informing by description and differentiation that relied on numbers rather than ‘woolly flannel’. Hiding the maths is in fact critical to most exploitative sales and to most bad product design. Using modelling in turn required the design of shared user interfaces as the channel for collaborative, interactive and iterative planning.
The revenue model
Initially we felt that it was impossible to make a clean break with the rest of the industry without also adopting a different charging method for ongoing investment management, which was always going to be our main source of income. It wasn’t enough that it be entirely fee-based, with commissions paid by product ‘manufacturers’ being fully offset or rebated – though that model was clearly better than the old commission model, an unhealthy collusion between product manufacturers and ‘advisers’ as distributors that brought opacity and agenda conflicts. We thought it was also important the fee be flat or fixed, not value-based (also known as asset- or portfolio-based fees), yet value-based was the model adopted by all other firms, whether old or new school.
It has not been easy to create a scope-based flat-fee menu that does not draw on itself accusations of opacity and invite suspicion about its complexity, particularly at a stage when people may not yet recognise your ethical differences. In the end we have had to succumb to asset-based fees, but only because it is the modeling and the collaborative re-planning using shared interfaces that demonstrates that any economic impacts on our business of a clients’ choices do not in fact taint what we say or do.
The aim of regulators is to shape the culture of the firm by building compliance with regulations into the business processes and systems of the firm. This recognises that it is not enough to have senior management shaping the culture by exhortation. In our case, the primary driver for doing so was control: this was the means by which a firm risking my reputation and capital could not damage either. The second driver was the concept of a franchise: whether or not you want your business to operate as a franchise it is a really good discipline to build it as if it were, by stipulating in writing or by business process design exactly how every procedure is to be conducted. And thirdly, I wanted it to outlive my active involvement as founder or as MD: the ultimate in control freakery.
Business process design has also become a mission of its own with potential to act as a social good: to drive down the cost of the service by adopting technology. This was always explicit in the way we relied from day one on quantitative processes to plan individual goals and manage goal-based portfolios. But it is increasingly clear that we are a Petri dish for the research of machine-guided advice models, whether remote and fully-digital or with advisers involved. Not so many firms are exploring this space.
CSR and ESG
These are the mnemonics of the modern corporation’s ideal relationship with society: Corporate Social Responsibility and Environmental, Social & Governance Investing. Where do we stand on each?
As to CSR, our constrained but realistic view of the good we can do for clients, combined with being a good corporate citizen and tenant in our local community, satisfies this founder’s ambition for the company’s role in society. And the firm is not the best vehicle for a shareholder’s charitable purposes. However, it is wholly constructive that we test all possible social impacts a firm can have, in the form of an ongoing audit of our own social impact in each area, to which all staff can contribute ideas and evidence. We are happy to share that with anyone interested in it.
As an external discipline, affecting how we invest for clients, ESG presents as a trade-off between the good we can do for our clients through our preference for low-cost index tracking and the wider social good our clients could do, through our agency, by adopting a higher-cost ESG-discriminate approach. Our clients to some extent dictate for themselves how they make that trade-off. I suspect that, like us, they are not yet convinced the reality (how much better are the companies and how big the resulting social benefits) matches up to the intention. There are too many dubious accommodations with the appeal of chasing share-price performance whose origins are not the most ethical. Meanwhile the cost savings of a purely passive approach are real and tangible and the safest predictor by far of better individual investment outcomes.
To the extent the ESG activity of other investors is producing benefits to society, passive funds might be seen as free-riding that activity. That is a moral conundrum present in tracking generally: passive funds don’t pay a contribution to the costs of market efficiency and price discovery, for instance. But we don’t see it as our role to resolve this in favour of the investors who have chosen the price they pay, for either ESG activity or return seeking, via expensive active funds.