McFarlane likened some managers to Johann Tetzel, the Catholic Church’s seller of indulgences in pre-Reformation Europe, who exploited the ignorance of believers to fund the construction of St Peter’s basilica in Rome. “We have a lot of fund managers in the business of Johann Tetzel,” McFarlane said, adding that some managers and their salesmen “put a huge premium on hope, and hope has been able to sell itself at 180 basis points per annum”. To justify his claim that the industry was overpopulated with managers and products, McFarlane pointed to findings from the 2009 Investment Company Fact Book, published by the Investment Company Institute in the US, which showed the worldwide total of mutual funds reached 69,032 in 2008.
This population dwarfed the number of stocks in the MSCI All Country index, including small companies, which was 6,616 on January 20, 2009. The industry was under a burden of proof to explain how this growth in products benefited investors, particularly since the margins claimed by fund managers remained very lucrative, he said. McFarlane steadfastly opposed trail commissions as a source of income for financial planners, and said the controversial pay mechanism encouraged the development of new and often unnecessary product, creating an unjustified level of complexity in the industry. “The moment you make the economic incentive the commission, it’s tough to keep the story pure.
And it’s tough for an investment team to shut their ears to the pleading of sales teams who want new products.” This meant the industry as a whole became prey to “an anxiety to not miss the next big thing,” which drove some manufacturers and their sales staff to continually bring new products to market. But if financial planners “were paid a salary, and told that in the fallow years they’d be looked after,” their prime motivation might not be to sell, but to build solid, long-term investment portfolios for clients. “What we need to do is come up with a model that involves good salesmanship of sound long-term investment products, but without the malign factors associated with a high-churn, high-commission model.”