Competition Won't Make Investment Firms Transparent

Let's not forget that heated, intense competition is what brought us the banking crisis. Competition between banks - to be the biggest, the most profitable - stoked the selling of inappropriate mortgages, PPI and interest rate manipulation. Competition between traders or between salespeople - many of whom are measured daily by their earnings, with some firms posting these numbers publicly - is precisely what drove otherwise good people to do bad things.
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The True and Fair campaign wants more competition in order to make British investment firms more honest and transparent. British investors end up paying up to 58% more for their investments than their U.S. counterparts - and most of these charges are hidden amidst oceans of small print that few read or understand. Nobody can argue with the campaign's ultimate goal: for UK investment companies to be straightforward would mark a seachange in the climate of British business and I would be the first to cheer. But more competition?

Let's not forget that heated, intense competition is what brought us the banking crisis. Competition between banks - to be the biggest, the most profitable - stoked the selling of inappropriate mortgages, PPI and interest rate manipulation. Competition between traders or between salespeople - many of whom are measured daily by their earnings, with some firms posting these numbers publicly - is precisely what drove otherwise good people to do bad things. Competition is what led banks to copy each others' crafty moves and that is why we had a bubble and a crash: because everyone was doing the same thing. Or as Anthony Salz put it, in his investigation into gross mismanagement and mis-selling at Barclays, "winning at all costs comes at a price; collateral issues of rivalry, arrogance, selfishness and a lack of humility and generosity."

Competition isn't, alas, what will make investment firms come clean about their costs. If anything, it will provoke a race to the bottom: a determination to find better and better ways to hide or disguise their exorbitant charges. What we need are new firms driven by a passionate commitment to be resourceful, to be different and who attract employees and customers both because of their deep commitment to service.

People always imagine competition will solve all their ills. They have accepted the theory - only a theory - that competition provides a diverse range of products and choices that serve consumers and mitigate risk. But if the last ten years have shown us anything, it is that this theory doesn't work in real life. Instead, competition, which represents and is experienced as an implicit threat, drives people and companies to seek security in gaming the system, not improving it. Competition on our high streets for cheaper clothing has funded the outsourcing consultants who scour the world for cheaper and cheaper labour markets; that's how we get sweatshops. Competition for cheaper food has industrialized farming and introduced dodgy meat into the food chain. Competition in the pharmaceutical markets has driven firms of huge intellectual capacity to devote resources to minor modifications of existing bestsellers instead of pioneering desperately needed research into new antibiotics. Competition in the mobile phone market has led to contracts most consumers don't understand and can't get out of. Contests to be the biggest have produced the worst. Competition for status has exploded pay and inequality. Contests for market capitalization has grown accounting departments at the expense of innovation and creativity.

I applaud the True and Fair campaign for drawing attention to the iniquitous and bamboozling charges levied by investment firms. It's brave, appropriate and necessary. But don't expect the cause of a problem to fix it. What we need instead are different kinds of investment companies, run by the people who own them, who have a long term interest in the success of their customers. (In the U.S., this is how Robert W. Baird works.) We need standards of financial literacy that ensure people can manage their own investments, cutting out middlemen (and middlewomen) who add no value whatsoever. We need investment clubs that share their expertise, knowhow and insight so that consumers can't be ripped off. And we need a business culture characterized by service, resourcefulness and a recognition that business - when done well - is a part of society, not a predator.

Margaret Heffernan's examination of competition,A Bigger Prize, was published last month.