24 October 2022

BETTER FINANCE’s answers to DG FISMA’s Discussion Note on Value for Money

BETTER FINANCE firmly suggests providing clear definitions for key concepts, as is the present case for value for money. On it hinges the qualification of “evidence”, i.e. whether products deliver or not value for money to the customer.

In our view, value for money incorporates suitability or appropriateness of a product with a client’s profile (knowledge, needs, investment horizon, risk tolerance), but it goes much further. As explained in our earlier exchanges, Value for Money (VfM) should be designed as a fundamental safeguard for consumer protection1 building on the already existing safeguards, i.e. the alignment of the product with its target market (suitability/appropriateness) and the general duty of care (act in the best interests of clients). With this in mind, VfM must bring the standard of consumer protection higher, which is ultimately a goal that must be pursued through all Union policies by virtue of Art. 38 of the EU Charter of Fundamental Rights.

To illustrate through an example, a product whose annual expense ratio exceeds the average return and inflation of its peers is highly unlikely to deliver positive real net returns, thus it may be suitable for the client, but not in its best interest and certainly will not deliver value for money.
There is extensive research available, including BETTER FINANCE’s,1 proving that there are many savings and investment products offered to individual investors that do not deliver VfM. A clear example is the quantified case of the French market for unit-linked life insurance contracts highlighting the difference in cost and returns between products distributed under the commission-based model and those under execution-only services (no “inducements”).

From the available data and research it seems that most of retail investment products do not offer VfM. The study2 commissioned by the European Commission drew a grim picture detailing the obstacles retail investors face when seeking financial advice or wanting to buy an investment product. For instance, in the debate between passive, index-linked exchange traded funds, which closely track the performance of markets that most active funds consistently underperform, the findings of the “mystery shopping” analysis provided in the abovementioned report evidenced that these low-cost options were rarely proposed by “human” advisors but almost exclusively by robo-advisors. To the latter finding, BETTER FINANCE adds that, most probably, this is due to the lack of “commissions” paid by ETF manufacturers: given that all “inducements” need to be “clawed back” through the form of ongoing charges, and the price competition in the ETF market is fierce, this type of investment is rarely proposed by “non-independent” advisors....

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