Investors' returns are kept small by the 'extraordinary' chain of intermediation in financial services, from custodians to consultants to platforms and more, which “all have to be paid”, says the author of the Kay Review, an independent report into the UK stock market released last year.
“The amount they take out of the chain in a low return environment can be the totality of what is generated by the chain,” says John Kay, visiting professor of economics at the LSE, who addressed a conference on pensions organised by Russell Investments.
Kay has discussed intermediaries before, suggesting in the Kay Review that they sometimes act to the detriment of savers.
Kay also suggests that stock markets are no longer effective in their role to raise money for users of capital. He claims few companies go to the stock market to raise capital and argues those that do view initial public offerings merely as a way for employees and early stage investors to cash in their shares.
“The paradox is that stock markets are not a means of putting money into companies, but a means of getting it out,” he says.
Published last July, the Kay Review proposed a number of principles to restore trust in the financial system and align shareholders' interests with companies.
“A lack of trust and poorly aligned incentives have helped create a culture of short-termism in our financial markets,” said Kay, when launching the report. “This is undermining their role of supporting innovative, sustainable long-term business performance.”
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