Drop the sales pitch for a stewardship-approach, Colin Lawson tells wealth management companies

Despite decades of regulation, the financial services industry continues to be plagued by mis-selling scandals. Many of these sadly have led to catastrophic losses for investors, some of whom have seen their entire life savings being wiped out.

The open letter to the New York Times from Greg Smith, recently resigned director from Goldman Sachs, made international headlines and demonstrated the type of ‘culture’ that, if left unchecked, can lead to many of these scandals.

Toxic climate

The letter is well worth a full read, but in a nutshell Smith believes that the environment within Goldman Sachs is now “toxic”, with the firm asking not how much money can we make FOR our clients but instead how much money can we make FROM our clients. He even went as far as to claim that clients were referred to as “muppets” in internal emails from senior directors.

The article led me to think about the difference between what we class as a sales-driven organisation and a stewardship-driven organisation.

In a sales-driven organisation that is looking to maximise short-term profits, the overriding question is often “what can we sell the most of today?”. Unfortunately, most clients are hard wired to make the wrong decisions at exactly the wrong time and, in terms of financial services, this means investing at the peak of the market.

I recently read an analysis of a fund that had delivered 15 per cent per annum average returns over a ten-year period. This is great for marketing purposes - until you consider that the average return for clients investing in the fund was actually -1.5 per cent each year. How can you lose 1.5 per cent a year when the fund makes 15 per cent per year? Easy - you buy at the top and sell at the bottom. These great performance figures are based on a time-weighted period and an assumption that is false – that investors put in money at the beginning of the period and hold it until the end.

Past performance

The marketing of investment products often includes charts and graphs highlighting the performance of funds that clients wished they had invested in five years ago. The mandatory warning of ‘past performance not being a guide to future performance’ is unfortunately often entirely ignored and this leads clients to buy at the peak and to sell some time later, disillusioned and disappointed.

Here’s another example of how performance figures can be manipulated for marketing purposes. A unit trust group set up a new UK income fund which, despite the name, invested a significant proportion of the fund’s capital into Russia. This is entirely allowed within the Investment Management Association rules and, in this case, it led to the fund having stellar performance against its UK income group peers. Hardly anyone invested in the fund initially as it was not marketed and was seeded at outset with the group’s own capital.

However, once they could produce the big advertss with the great performance, they pulled out of Russia, took the fund to market and have since taken in millions. A true case of a wolf in sheep’s’ clothing and a simple, deceptive strategy which allowed them to rapidly build assets under influence.

With a stewardship-driven organisation, the thought process is entirely different. The underlying question is “what can we recommend to clients today that they will be delighted they bought in five, ten, or 15 years time?”. I believe that you can only create value in a business if you first create value for your clients and are able to demonstrate the value that you have added.

The challenge is how to convince potential new clients that you really do put their interests first. It is, of course, much easier to advertise your wares with impressive performance graphs (even if they are irrelevant) than it is to explain your culture.

In my opinion, the answer is having the courage of your convictions and building a reputation for daring to be different.

Colin Lawson is founder and managing partner of Equilibrium Asset Management www.eqasset.co.uk