This type of network is often referred to as a scale-free network (cf. Albert-Laszlo Barabasi, Linked (2003)). This kind of network is particularly good at establishing contact between any two nodes with relatively few connections.

In order to visualise this, think of the hub-and-spoke systems that most airlines use. A few airports, like Heathrow in London, Hartsfield-Jackson in Atlanta, or Haneda in Tokyo are hubs and these airports all handle over 50 million passengers per annum. Compare that to say Esbjerg airport in southern Denmark with a throughput of less than 200,000 passengers per annum.

It is relatively easy to get from Esbjerg to Atlanta. You just fly to the nearest hub, London, and then board a direct flight to Atlanta: only two connections. Even if you had to get to another small airport in Georgia, you would only need three connections.

Another clear advantage the scale-free network has, is the resilience to random attacks. If you take out a few random airports in the world, hardly anyone will notice. There are still enough hubs to keep everybody connected. Similarly if a few businesses cease operations, it will not affect the global business network.

However, a scale-free network is very sensitive to a non-random attack. Say you targeted the hubs in such a network. Very soon the effects would be felt, and everyone would lose connectivity.

Banks are such super-nodes. The largest of them all carry millions of connections. If banks were taken out, very soon, the entire network would feel the effect, and the global business network would lose vital connectivity.

Faced with a loss of the most important super-hubs of the global business world, the governments could not just watch the banks drop out of the network. They all acted swiftly and decisively. Fortunately it looks like a financial meltdown was averted.

The government action to support the banks did not attack the root cause of the problem (which is not the topic of this article), so we may still see legion other effects of the underlying source of the banking crisis.

©2008 Defaqto Insight Team. All Rights Reserved.

Processes that took weeks now take days. New businesses have been formed, and old businesses have been altered beyond recognition.

Some of the most profound changes have taken place in the banking sector. Banks no longer just take your deposit, lend you a bit of money, and make living on the spread. They now have to provide a number of other services including pensions, stock broking, insurance and online overview of your personal banking products.

One of the biggest changes brought to the banks by the Internet is disintermediation.  Three decades ago trust was provided by buying a large building with thick walls and pillars in front combined with your “banking adviser”, whom you knew and trusted to give you advice when choosing personal banking products.

Online neither exists. You are a “user”, and your transactions are data-mined to lower the cost and to provide efficiency over comfort. Your debt is sliced, diced and securitised. There is no link between you as a breathing customer and the efficient transaction driven markets.

A sub-prime borrower even gets told that he is sub-prime, high risk, and self certified. There is no social link, no feeling of letting anyone down when going into arrears. You are actually encouraged to do so if you live in the right post code and display “attractive” socio-economic demographics.

The message was: it is easy to make and spend money. Just borrow 100%, buy a property and start spending. Value is unlocked automatically; you can swipe your credit card until the magnetic stripe glows. You can always consolidate your debt if you can’t make the minimum payment.

Yet we wonder where this crisis came from …

©2008 Defaqto Insight Team. All Rights Reserved.

Personally, I was reminded of it today on the cross trainer in my local gym. It was Monday morning and I had too much Pouilly Fumé during the weekend. After 20 minutes I couldn’t keep up my usual pace and had to slow down for a few minutes. The hormonally controlled network connecting my muscles to my cardiovascular system managed this brief slowdown seamlessly and my overall performance was only mildly affected.

Our economy is interconnected by a complicated network system, just like our body. The economic system is of course not hormonal, but more or less as fast and responsive as if it were. When the economy is running at too high a pace, networked messengers will kick in to slow it down.

If we allow the pacing to take place, it might not affect the overall performance other than mildly. However, if we inject hormones, i.e. force tax payers to keep the pace (known as an increase in public spending), we run the risk of damaging parts of the system.

The balance is delicate. Sometimes injection of stimulants can boost short term performance without lasting negative effects, other times not.

As errors can be made, we need to consider how we exercise caution. Perhaps this is a question to ask: Do we want to hit a slowdown with steroids, or do we want to make sure that we preserve a long term healthy system?

©2008 Defaqto Insight Team. All Rights Reserved.

Of key interest here is the fact that these two entities are even having this debate when a few years back it would have been unthinkable. This says much about the fact that the pressure is on across the advice sphere to deliver a professional proposition and service to clients.

Defaqto has observed the closing of the gap between the retail and private banking sectors in its 2007 and 2008 wrap market reports.

Firstly, retail providers and advisers are aiming to upgrade their propositions to target more profitable business in the form of wealthier individuals. Secondly, private banking operations are being minded to protect existing business and target new business via the identification of ‘would-be’ wealthy individuals.

Hence the two industries are coming into contact more regularly in the contest for ‘holistic’ wealth management business. Watch this space for further conflict between the main players…

©2008 Defaqto Insight Team. All Rights Reserved.

Defaqto asked¹ 1,065 UK consumers which political party they trusted to solve the pensions problem. Although at the time Labour (25%) were more trusted than the Conservatives (12%) and Liberal Democrats (4%), the resounding result was that 57% trusted none of the political parties to solve the pensions problem. 

Although a particular stance on pension policy could be seen as a vote winner for an individual party it would seem that it is high time for all parties to work together towards improving trust in Government and its prescribed pensions system. Particularly when the long-term commitment required to deliver consistent pension policy is taken into account.

When asked how they would solve the problem of people having inadequate savings for their retirement and relying solely on the basic state pension, one-third of the consumers in Defaqto’s sample felt that it should be compulsory for everyone who works to contribute to a personal pension plan.

This is a sign that consumers have a growing awareness of the fact that serious action needs to be taken, even in the form of compulsory pension contributions which may previously have been viewed as an unpalatable solution.

Perhaps auto-enrolment into Personal Accounts is a stepping stone but the Government will still be under pressure to deliver this initiative on time and provide proof positive to the general public that it is better to save for retirement via this national scheme than rely on state benefits. By working together and putting out consistent messages the parties may have more chance of meeting these objectives.   

¹Research carried out for Defaqto by GfK NOP from 30^th August to 4^th September 2007

©2008 Defaqto Insight Team. All Rights Reserved.

 As the empire declined, London’s primacy in areas such as insurance, foreign exchange and commodity trading transferred to other areas such as derivatives trading, hedge fund management, wealth fund management, as well as M&A, legal services and compliance.

Simon Culhane, the Securities & Investment Institute’s CEO, was able to cite figures at its recent Annual Conference, identifying London as the world’s premiere financial centre. But the figures had shown some decline on the position the year before. Other financial centres are catching up and reflect the growing financial power of the East; Singapore, for example, being the world’s fastest growing private banking centre.

London’s position is not unassailable so conference delegates might have been pleased to hear the Economic Secretary to the Treasury, Kitty Ussher MP, declare that “for London to remain the world’s leading financial centre, we need to work together” and that she would be “the City’s champion in government”.

A fundamental reason for the City’s rise to global prominence, however, is its traditional independence from government, to the extent that, in the past, while countries might be at war with Great Britain, they still obtained funding from the City. Such activity, while militarily wanting, helped establish the foundation of trust in the City from which we benefit still.

London is now a global phenomenon and while a dialogue with government is welcome, its aims should be to both ensure its independence from government and to retain its competitiveness.

©2008 Defaqto Insight Team. All Rights Reserved.

The regulator is also suggesting that there should be a step change in the professional standards and qualifications required of advisers. Those in the industry without the requisite qualifications might prefer to be grand-fathered in to the new regime but this option may not be open to them; the regulator is considering imposing the full entry via examination route.

Is a one-off set of exams imposed on an experienced practitioner the most effective way to raise standards? It is certain to impose strains on their business and home life and as our business is all about relationships this is unlikely to be ideal. Examinations also are not noted for delivering long-term changes in behaviour.

Something that could, however, would be a more rigorous CPD regime where practitioners would be assessed for their weakness and take on an appropriate programme of remedial CPD. This would form part of their business life, open them to new practices, and could promote business opportunities for them. Also, the longer term nature of CPD would be more likely to encourage a more enduring improvement in standards.

The financial advice industry needs to rise to this challenge, however, by delivering rigorous CPD. The pledge signed between the Chartered Insurance Institute, Institute of Financial Planning, Securities & Investment Institute and the Chartered Institute of Bankers in Scotland, to form a single, independent professional standards board for advisers, makes this possible.

By embracing a structured programme of CPD that supplements their skills, behaviour and knowledge, advisers can establish themselves as the trusted professionals they deserve to be, reflected by an increased uptake in the financial planning they offer, from consumers.

©2008 Defaqto Insight Team. All Rights Reserved.

But at a fascinating lecture on hedge funds at the Raymond James Investment Services annual conference recently from Professor Harry Kat of the Cass Business School, we learned that every hedge fund follows its own strategy and that even funds classified by the same strategy tend to produce completely different returns. That is, if we can rely on the returns as presented. Professor Kat went on to say that the data collected in commercial hedge fund databases is not audited or independently verified. His own researchers have to spend time taking out errors to analyse performance effectively.

So, can we be sure what we are putting into client portfolios?It can also be easy to regard hedge funds as an asset class, particularly when APCIMS allocates a 5% weighting to hedge funds in its balanced and growth portfolios. But hedge funds follow particular strategies and it is incumbent on us as advisers to know what the strategy is and how it sits in our portfolios and whether the funds are following that strategy. But poor quality performance data is not all for Professor Kat alluded to the “marketing materials (which) are often highly suggestive, emphasising the good and wonderful while ignoring the less attractive elements of hedge funds”. Caveat emptor!

©2008 Defaqto Insight Team. All Rights Reserved.

Last time the Bank of England’s base rate was changed to 5.00% was 17 months ago in November 2006. Comparing the fixed rates available then and those available now shows massive differences. The highest available 6 month fixed rate bond is now paying over 1.50% more than 17 months ago on a £10,000 investment.

David Black, Principal Consultant  - Banking at Defaqto, said: “With many people thinking  that the base rate is likely to fall further this year some of the fixed rate products available now look outstanding value.”

Variable saving rates look set to be reduced, but with some of the newer entrants, such as Kaupthing Edge & Icesave saying that they will hold their rates for the time being, people could still maintain or better their current rates going forward if they are prepared to move their money around.

“It is clear that some financial institutions are making their decisions about fixed savings rates in the light of their own particular circumstances and are not being influenced too much by what is happening to the Bank of England base rate. While this is the case, savers can consider taking advantage of the situation by locking into some very attractive rates.  Remember though, that only balances of up to £35,000 with any one institution are covered by the Financial Services Compensation Scheme.”

Comparison of past and current fixed gross AER rates for

a £10,000 balance with Bank of England Base Rate at 5%

Highest fixed savings rates currently available

B = branch  I = internet

T = telephone  P = post

-Ends-

For further information contact:

Defaqto Limited          

David Black or Luci Mylward

01844 295 454

©2008 Defaqto Insight Team. All Rights Reserved.

“This 0.25% cut by the Monetary Policy Committee was widely anticipated and comes as no surprise. What remains to be seen is how much each individual lender will pass on of this cut to its variable rate borrowers. 

“Prior to this cut the average Standard Variable Rate was 7.21%. Last time the base rate was at 5.00% (between 9^th November 2006 and 10^th January 2007) the average Standard Variable Rate was 6.80%” 

-Ends-   

Notes to Editors: 

¹ Dependent on the content of the release 

For further information contact: 

Defaqto Limited          

David Black, Chris Johnston or Luci Mylward

01844 295 454  

©2008 Defaqto Insight Team. All Rights Reserved.