Improve Financial Capability - Simplify Products

The FSA says, "Financial Capability is about being able to manage money; keeping track of your finances; planning ahead; choosing financial products; and staying informed about financial matters."

The implication is that financial services don't have to change - you do. And the FSA provides a dazzling array of data to bamboozle you along the change curve.

This approach is doomed. Adult learning research has emphasised that the older you are, the less likely you are to learn. Of the 20-24 age group, 61% say they are learning now or have been recently. For the 55-64s, that statistic is 31%, and for the 65-74s, it is 18%. We have an ageing population and a ballooning pensions deficit.

So financial services must change, not you. Products must become simpler and cheaper, and it must be really easy for investors to develop fully diversified portfolios that produce sustainable returns.

Why can't I put suitable financial services in a shopping cart, like I can buy other stuff?

To make financial services simpler and more consumable for more people, providers and intermediaries must do much more to make it easy to find, compare, choose and buy products that contribute towards sustainable returns for the investor rather than scandalous profits for the provider. I'm not talking about the price comparison sites that simply list the same old stuff, by product type, by price. I'm talking about far more automated services that make the detail available to those who want it, but simply deliver diversification without the average person needing to understand more than the concept of not putting "all your eggs in one basket".

To support this, the clear objective of the financial regulatory regime should also be to deliver simple, low cost financial products that are accessible to us all. Currently, regulation funnels investment opportunities and funds into a zone in which relatively few firms are permitted to operate, enabling them to charge excessive fees and related compensation. In other words, regulation designed to protect the consumer is actually underwriting "fat banking". But what we need is a regime that fosters the growth of low cost 'facilitators' such as those who've allowed us to unbundle flights and hotels, music tracks and other one-size-fits-all products to create our own personalised, lower cost alternatives.

Training Tips

I spent much of the Christmas holidays digesting Joe Friel's The Triathlete's Training Bible, now in its third edition.

Having plodded my way through various multisport events since 2005 with only sporadic assistance from search engines, I've found myself at a bit of a performance plateau. So I figured I need to get more scientific if I'm to wring any more improvements out of my limited schedule. Although daunting in size, I've found Joe's bible has the right balance of science and practical tips to confidently tweak the training plan. He does a thorough job of explaining the latest research into physiology and diet, and recommending different workouts that contribute endurance, strength and/or speed depending on your needs (all of the above). Hell, just reading about training is a morale boost in itself.

Already I can report an increase in velocity, although times may have been wind-assisted by brussel sprouts.

The Great Aussie Firewall - The Game

The Guardian reports on the latest response to the Australian government's efforts to control the internet.

E-invoicing Integrated With SME Finance Platform

Alternative trade finance for small businesses is beginning to snowball - at least in the US. Early this month, the Receivables Exchange announced its integration with the Ariba Network, a leading provider of spend management services.

The press release says the integration will enable SMEs "to seamlessly transfer their invoices from the Ariba Network to the Exchange’s proprietary trading platform for auction. Leveraging a cash optimizer tool embedded in the latest release of the Ariba Network, suppliers can calculate their cash needs as compared to their eligible outstanding invoices and select the invoices they want to sell to help them optimize their working capital management and improve their cash flow."

This is virtually the same model Zopa and various collaborators took to potential UK clients and partners in 2008. Marketing was the only (major!) hurdle, and we were in talks with someone very big and friendly to support it. But, as is often the way with these types of services, there were simply too many interim integration steps competing against higher core priorities for the service to go into development.

Full credit to the Receivables Exchange for getting this launched - although I still think they need a bigger brand name that is already well-known to all SME's if they are going to get real traction against the established sources of trade finance. I wish them luck.

Maybe it's a signal that Zopa and its partners should dust off their plans...

Simple, Low Cost Financial Services

It's been helter skelter this month, so no time to post. But a recent financial regulatory conversation has prompted me to draw together the threads from a number of earlier posts this year.

The current "problems" in the financial services markets - excessive fees and bonuses, lack of transparency, poorly understood products, the credit and pension crises - are, ironically, the result of existing regulation. To solve them, the clear objective of the regulatory regime should be to deliver simple, low cost financial products that are accessible to us all.

Excessive banking/investment fees, and related compensation ("fat banking"), are the result of funnelling investment opportunities and funding into a zone in which relatively few firms are permitted to operate. Of course, even within that small group of firms, there are a dominant few who get to charge even more for their services. Products become increasingly complex, less transparent and less well understood as these few firms struggle to get an edge on the 'competition' and quote 'stellar' returns, until risk becomes highly concentrated and there is actually very little effective competition at all. In this scenario, fee caps and taxes will be ineffective - the huge flows of investment funds and opportunities will always incentivise ways of getting round the curbs, or the practicalities of getting anything funded at all will sweep them away. As a result, funding costs will continue to rise, as will the incomes of the staff working for the annointed few.

One way to challenge this trend is to open up the investment 'funnel', and make the financial markets accessible to us all. That in turn means vastly simplifying the process for the average individual to invest/save in a fully diversified way. To meet that challenge, successful investment firms would have to race each other to demystify and simplify the funding/investment experience. Today, even 'thin' intermediaries, like discount brokers, still leave too much work to be done for the average person to engage with the financial markets. We speak of 'fund supermarkets', but these are Bond Street boutiques, not Sainsbury's.

Diversification is critical yet remains a black art. The list of asset classes is long, yet most assets cannot be invested in by the average person, even by putting money in the hands of managers who can invest more widely. All sorts of rules, policies and other restrictions limit the extent to which individuals as well as pension and other fund managers can diversify, and this must necessarily affect (and correlate) their performance. So our regulatory regime actually prohibits diversification, and creates a scenario where too many investors effectively adopt the same or very similar investment strategies. Instead, we need to make it very cheap and easy for each of us to 'buy' non-correlated assets from all asset classes so we don't blow our long-term savings on the same bunch of poorly-informed investments.

Individuals have spent the past decade using the internet to gain control of many consumer experiences, from holidays to entertainment. Low cost 'facilitators' have allowed us to unbundle flights and hotels, music tracks and other one-size-fits-all products to create our own personalised, lower cost alternatives. Similarly, we should be striving to produce a financial services market in which any person can add individual stocks and shares to a shopping cart that tells them the extent to which the selection is high risk and poorly diversified, either on its own or when compared to the buyer's existing portfolio.

Effectively pegging firms' reputations to their ability to estimate risk in this way, rather than generate 'stellar' short term returns on complex products, would in turn act as a further constraint on complexity and poor risk management.