All financial miseries start with misaligned incentives

Neil Woodford: sitting on your cash
Last weekend The Sunday Times ran an article written by an ex-St James’s Place (SJP) adviser. It made for disturbing reading. That’s not because of the way in which SJP charges its clients. We don’t like the ad-valorem model – in which advisers and managers take a percentage of your assets each year. We’d prefer a flat fee model. However that is, for now at least, the standard system – so we can’t single out SJP for criticism. We can, however, single it out for the scale of its fees (most comparisons have it coming out at the extremely expensive end) and for what The Sunday Times’ James Coney refers to as its apparently “culturally bankrupt” environment.
It turns out that the core of the thing has advisers competing not to be the best of advisers, or to provide the best of services at the best value, but to flog enough product to rack up enough points to get a nice pair of cufflinks or a trip by chartered plane to a luxury-safari destination. Almost all financial miseries start with misaligned incentives of one sort or another (perhaps unsurprisingly, reports City AM, SJP is now “reviewing” its rewards scheme). Something for clients and perhaps investors to bear in mind.

This brings me, as usual, to the great scandal of 2019 – Neil Woodford. The correct thing for him to do now would be to wind his Woodford Equity Income Fund down and to return any cash available to investors as fast as possible. But here too the incentives are misaligned. That may work for his investors, but not for him: as long as he keeps the cash locked in, he is still, notes Alex Brummer in The Mail on Sunday, pulling in £100,000 each working day. Works for him (to the extent anything does any more). Doesn’t work for Brummer (one of the many stuck in the fund).
I see little upside for those involved with SJP (charges and incentives aside, over the last ten years, 23 of 38 SJP funds have underperformed their peers, says Coney). But on Woodford, there is something. In this week’s magazine, Max King looks at the Downing Strategic Trust, a company that actually knows what it’s doing when it comes to micro-caps – and which, thanks to the post-Woodford “liquidity witch hunt” you have a chance to buy cheaply today.
Your must-read for the week is William Dalrymple’s The Anarchy. We worry endlessly here that one of the threats to democracy – and one of the things that makes modern voters feel so powerless – is the rise of the all-powerful-looking corporation. Dalrymple’s book, which traces the extraordinary history of the East India Company, makes it clear that this is hardly the first time round for this dynamic. It might also not be the last time that overly influential companies suddenly come a cropper (the reversal of globalisation and the great decoupling of China and the US might mean trouble ahead for corporate profits).
How should investors react? See this week’s cover story for part of the answer. For a defence of modern tech investing, Matthew Lynn explains why the stocks you love to think of as being overhyped rubbish might actually be the ones that could make you rich. Finally for (another) reminder on why everyone should hold a little gold, see our briefing on the end of the reign of King Dollar. Oh, and don’t miss our Wealth Summit on 22 November!

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