Customers come first in the trust stakes

ALREADY battered by the public, consumer associations, the media and politicians, the fund management industry might well think the last thing it needs is yet another think- tank telling it how to mend its ways.

But that is what it got today with a report from Tomorrow's Company entitled Restoring Trust: Investment in the 21st century. But whereas Higgs, Myners, Pickering, Sandler and the rest looked at different bits in isolation, this claims to be the first whole body scan.

With the Bank of England, the Stock Exchange and the Treasury among its sponsors, and individuals such as Stanley Fink of hedge fund company Man Group, Tony Watson of pension fund management company Hermes and John Sunderland of Cadbury Schweppes among the members of the inquiry team which was chaired by Sir Richard Sykes of Imperial College, it cannot easily be dismissed. These are people who know the issues and know the City.

But what emerges from more than 100 pages is that there are no easy answers. If the City is to regain the trust of its public it has to learn to put the customer first. It must become much more rigorous in its self-policing, much more transparent and accountable, and maintain that stance for a decade while the message filters through.

Its central recommendation initially makes the heart sink because it wants yet another voluntary code of conduct and best practice to be produced by an industry-wide forum.

The City is, of course, already knee-deep in codes, but this should perhaps be best thought of as a platform like the National Housebuilding Council that establishes a standard to which all members would have to adhere.

It would not stop all bad building, but it would weed out a lot of cowboys. Even better, it would provide a forum and a unified voice for the industry beyond that provided by trade associations.

All the report's recommendations urge greater professionalism and intellectual rigour. Thus the problems between fund managers, investment analysts and companies could be addressed by shareholders getting a better understanding of the drivers of long-term success and companies actively helping with detailed discussions on strategy.

Rows about pay might be addressed by greater transparency, clearer targets and more-coherent timescales on the one hand and by fund managers dealing better with the conflict between their own business and the interests of clients on the other.

At individual level, much greater efforts should be made to educate potential buyers from school to old age, plus much more after-sales reporting on performance, charges and everything else relevant to the continuing appraisal of a product.

It is hard to find fault with the general thrust of what is proposed, though some ideas will no doubt induce apoplexy. It suggests, for example, a separate board for fund management companies which would report on the primacy of the investors' interests.

It proposes that non-executives should get independent advice before agreeing to any proposed acquisition; that consultants should rate fund managers on their effectiveness as owners and that analysts should get closer to universities to find out what really makes companies succeed.

All good thought-provoking stuff. But, as ever, the problem is in the follow-through. Will anyone actually make any of it happen?

Proud crowd

IN ITS annual review of pension fund performance, the WM group observes that fortunately the nation's pension fund trustees are not investment or financial experts like the people who ran Long-Term Capital Management and Equitable Life. So they had the good sense to be net investors in equities in the bear markets from 2000 to 2002 and net sellers in the bull market of 2003. This was the opposite of the activity of most professional investors.

A book already out in America and soon to be published here by Little, Brown, provides an explanation. It points out that the 'phone-a-friend' experts on Who Wants To Be A Millionaire? get it right 65% of the time, but the audience gets it right 91% of the time.

Called The Wisdom of Crowds, the book by New Yorker columnist James Surowiecki explains that a group will not always give you the right answer but on average it will consistently give you a better answer than an individual.

With most things the average is mediocrity - as in running 100 metres. But with decision making the average is often excellence.

The problem with expertise is that it is narrow. The wisdom of a crowd comes from its diversity.

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