​​​​​​​Ethics and the Issue of Costs

By Dr Theo Marais, 14 April 2017

Those of you who are fans of “The Hitchhiker’s Guide to the Galaxy” will remember that the ultimate answer to every question is “42”. While such a simplistic answer does not normally exist for investment, planning and insurance decisions, we may conclude that somewhere amidst the contradictions and confusion we find figures, numbers – and costs expressed as figures. In this last concluding article on ethics I want to touch, albeit briefly, on the issue of costs and the ethics thereof.

An erstwhile colleague of the industry corresponded with me after my webinar series on Ethics in the Financial Industry, and put forward his view on the “Morality of Costs”. Let me say outright and at the beginning that I am talking of costs as a whole, and not purely that associated with a financial planner. The issue of costs is a serious matter. Cost reduces the return to an investor; and the higher the costs . . . and so on.

p>There are two things I have learned in my life: Expensive does not necessarily equal good or even best (of service, product, etc.). Cheap does not necessarily reflect nasty either. Secondly, I learnt that getting something for free is often not worth much. Does the same hold true for the financial industry? Off the bat we need to identify that the issue of costs in especially investments incorporate at least three categories: that of the financial planner or intermediary, the product house and the fund manager. Mostly I am unable to negotiate fees with the latter two, but they are not the people I see, I call for information and/or advice and expect at times to visit me.

What is ethical – or morally acceptable – regarding costs? Firstly, I believe as a client I should match up my expectations with what I am willing to pay. Secondly, I should also realise that I have approached or accepted the approach of a financial planner for a specific reason – I need a service. Is this a once-off, or a long duration need? I may expect to pay more for a once off, as the planner’s time and experience is to be recouped in a shorter time. I marvel at people who will pay 7% commission to an estate agent they will never see again, but bicker about an adviser’s fee and expect year-after-year prompt service.

As a provider of these services to a client, my first question would be around delivering a specific level of service – my time, costs, experience and the amount of risk I must shoulder as part of the calculation. At what rate or costing am I willing to render this service, keeping in mind a business model that say ‘small’ clients could become ‘big’ clients – and this may mean many happy referrals as opposed to size.

However, it is calculated, there is no argument that costs reduce returns. Over a long term this may mean a drastic reduction of gross return. There is also no argument that if I do not have the time or aptitude to handle my portfolio myself, I must find someone I am happy to pay for the service. At the very least I should be aware what the applicable cost structures are, and the very old products have a nefarious tendency to be extremely opaque in this area – hence the rise of newer, more transparent products.

Carl Richards, author of The Behaviour Gap, says , that we should start talking about the things that really matter and focus on the little intersection between things that matter and things we can control: “If we could just spend more time focused on the things that actually matter, helping clients and the public . . . people would be happier and, as a by-product, they’d have a better investment experience.”

At the time of writing the powers that be were mooting a new, “twin peak” structure to regulate the financial industry. The cost estimates I have seen indicate that the new structure may cost up to 5 times more than our existing regulatory structure. The sad part is that the financial industry is expected to foot this bill – which will have to be recouped through fee structures. The public and the industry, as ultimate ‘clients’ of this new twin-headed monstrosity, has no input into nor any guarantees that the new structure will be more efficient or effective in its workings than the current model.

When it comes to the ethics of costs, there is so much more to look at than just the financial planner’s fees.