Tim Price: We must shun the banks
By
Tim Price Jul 23, 2009
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The financial crisis is radically changing attitudes towards the City and Wall Street, with deference replaced by profound cynicism about how City firms conduct themselves. We last saw such a bitter reaction to market abuse in the wake of the technology boom, after which investment banks’ analysts were found to have been overhyping trash. But a few years of recovering equity markets drew punters back.
This time, the wholesale abuse of borrowers (via self-certification mortgages that should never have been written) and widespread abuse of investors (via structured mortgage products that should never have been rated, let alone sold), combined with ridiculous amounts of leverage by the banks, has brought the entire financial system close to the brink. So far, finger-pointing at presumed culprits has generated much heat, but little light has been thrown on any way out of the gloom.
But each of us has the means to resolve this crisis, at least as regards our own savings and investments. When the equity market boomed in the 1980s, institutional brokers had a near monopoly on equity dealing. Individuals had to pay stockbrokers what amounted to a bundled, two-fold charge. The first charge was for market access – the execution of deals on the floor of the London Stock Exchange, on which they had an effective stranglehold. The second was for advice, whether such advice brought any value or not.
But thanks to the democratisation of markets and the march of technology, we can now buy and sell shares online far more cheaply than before. And we can also buy exchange-traded funds (ETFs) offering specific sector or thematic access at a fraction of the price of actively managed (and almost inevitably disappointing) funds.
ETFs offer today’s individual investor the same sort of asset management flexibility that was once a preserve of larger institutions. They’re not the only development to do so. The growing turnover in contracts for difference (CFDs) and spread bets also allows the active investor to tax-efficiently hedge his market risk as well as any fund manager. The growth in self-managed pension arrangements, not least Sipps (self-invested personal pensions), means that many individual investors are no longer at the mercy of life insurance products or other wrappers that guarantee high charges without any necessary expectation of decent returns.
City institutions have betrayed the public trust, as suggested by the bankers’ initial response to Sir David Walker’s relatively modest plans to rein in executive power and make their pay more transparent. Despite billions of pounds of taxpayers’ support, those same bankers refuse to acknowledge their responsibility for the damage they’ve wrought to the economy and to the public finances. The banking sector now looks set to be a political football for the foreseeable future.
But as individual savers and shareholders, we can circumvent the banks if we want to. We can direct our savings toward the institutions that played no significant role in the structured mortgage debacle (which includes a number of the more soundly run building societies), or to those financial institutions with the least need to raise further capital. We can remove our savings from, sell our equity stakes in, and refuse to buy any further financial products from, those banks that were most culpable in the crisis and which remain most vulnerable now.
Nor are such responses limited to the individual investor. Investment banks and their staff have for years grown rich on the proceeds of merger advisory fees. This is despite the evidence that, on average, a takeover or merger between two businesses tends to be value-destructive rather than wealth-creative. So if corporate executives can resist the siren songs of self-interested M&A bankers, they stand to leave their businesses in better shape than if they succumb.
It’s too easy to describe our current problems as being down to market failure. The markets haven’t failed us. Banks, intermediaries and regulators have failed us (and under a future Conservative government the Financial Services Authority may well be the first administrative casualty of the crisis – see page 21). But you don’t have to despair at this grim state of affairs. We can take matters into our own hands. Firstly, the triumph of scepticism over deference to financial services providers is to be wholly welcomed. Secondly, we owe it to ourselves to question whether we should ever be buying what the City is selling. And thirdly, by taking ownership of our financial futures (perhaps supplemented with an independent and appropriately remunerated advisor where required), we will be liberated from a venal establishment whose interests will always be markedly at odds with our own.
• Tim Price is director of investment at PFP Wealth Management. He also edits
The Price Report
investment newsletter. Contacts: 020-7633 3637
• Matthew Lynn is away.
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