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February 09, 2009

What Iggy Pop Says About the Financial Crisis
by Adrian Ash

Take a gaggle of celebrities, mix into mis-guided ad campaigns, and sprinkle liberally over the financial crisis...

JUST HOW MUCH LONGER and deeper can this crisis in finance keep running from here?

Given how the crisis' sole purpose is to burst the bubble in finance, there looks to be a whole lot of trouble to come yet.

Just ask Iggy Pop. Go ahead - ask him.

"I haven't seen my birth certificate in years," says the Idiot in a TV commercial currently running here in the UK.

"And his friend Mr. Car Insurance Policy? They got their own little hide-outs...

"But I got it Swift Covered!" the pocket-rocket exclaims, stripped to the waist and looking every inch a writhing iguana. The Passenger then mutters something about the joys of keeping his insurance documents online, rather than losing them down the back of the sofa. And so, apparently, "I got insurance on my insurance!" he cries.

Okay, so it's a crappy advert with crap copy and an even crappier premise. (The "bulls-eye" demographic of attention-deficit teenagers can barely drive, let alone recognize Jimmy Osterberg.) But the real-wild-child's latest gig says a lot about how much money financial providers are still willing - and able - to throw at advertising. Money that will have to be returned to customers before the financial crisis is spent.

For now, the crashing deflation in financial assets remains just a distant rumble for financial margins. But the down-sizing will only end when it catches up with the returns-paid-to-nonsense.

As a whole, the financial services industry accounted for £1 in every £10 of GDP here in the UK last year. It earned more than one-fifth of the total US economy in 2007, picking up a neat 2% of GDP as net profit. Yet despite global equity values shrinking by one-half so far in this crisis - and putting Wall Street's sorry sops to anti-banking sentiment to one side for a second - the marketing departments are still burning cash.

Just ask Iggy's fellow shock-rock Detroit alumni Alice Cooper. Long before he discovered eye-liner and pythons, Cooper was born Vincent Furnier...making him the perfect hire for a rebranding advert. And as luck should have it - and again here in the UK - boring old Norwich Union wants to catch up with the rest of the world, where it's already known by the far funkier name of Aviva.

Never mind the 1,800 staff lost to redundancy in 2008. For this momentous occasion, the Soho ad agency employed by Aviva - the absurdly named AMV BBDO - couldn't stop at hiring just one celebrity shill. So alongside Alice Cooper they also bought Bruce Willis (née Walter Willis)...Elle Macpherson (née Eleanor Gow)...Dame Edna Everage (played by Barry Humphries) and Ringo Starr, too.

"Would any of this happened to me if I'd still been Richard Starkey?" drones the Beatles' fifth-best drummer, flogging the brand - rather than the pricing or service - of the UK's leading insurance provider.

"Sometimes a change of name is more than just a change of name," the celebrity sales-team blather at the end. "It's a chance to show the world who you always wanted to be."

And it's also a chance to throw £10 million ($15m) of your customers' money up the wall, too. Which is beautifully timed, coming as it does next to Aviva back-tracking on a previous offer to return £1 billion ($1.5bn) to policy-holders with an extraordinary pay-out, despite the 9% growth in global sales just reported for 2008.

Now don't get us wrong. We're not simply bemoaning the sorry state of Soho creativity (maybe the coke's not as good as it was now the financial bubble's burst two miles to the east). Nor are we sniveling about once-great rebel icons selling their soul just to cover the alimony. (Lou Reed and Miles Davis shattered that illusion back in the '80s by flogging scooters for Honda.)

No, the problem BullionVault spies in this latest splurge of financial excess is what it means for customers. Y'know, those savers and schmucks still trying to put a few pennies aside for their retirement. Because every penny spent on advertising is a penny earned from the punters. And faced with a collapse in his pension savings, Joe Public will soon demand tighter pricing for those few financial services he decides he still can't live without. The sooner financial service providers wake up to this fact - and began targeting it in their ad campaigns - the sooner Joe will start investing again.

Take asset management, for example. In the five years to June-2008, some 70% of actively managed equity funds failed to beat the S&P 500 index. So a simple "tracker" fund, in other words, would have out-performed 7-in-10 fund managers, but at one third the cost or less. No wonder long-term equity funds suffered an outflow of $121 billion in the last 3 months of 2008. Less costly, more caution-friendly money-market funds gained more than that in December alone!

In the rarefied air of hedge fund management, the same story. One group of HNWs and UHNWs (that's high net-worth and ultra-high net-worth investors in the jargon of financial marketing) here in London claims that its members have slashed their hedge fund allocations from 11% last year to less than 3% in 2009. But the hedge fund industry's response? Word reaches us here at BullionVault that "The old 2-and-20 model is dead," as one practitioner put it last week.

"Now we're going to deliver value by charging costs only...plus 10% of performance."

Wow! Ten per cent fees, do you say? Paid out of performance, thereby rewarding risk over security - which is in fact the No.1 concern of wealthy investors? The finance industry still has a lot to learn about pricing and sales amid this financial deflation. Which means the financial deflation still has a long, long way to go.

Only when fees are priced to reflect consumer demand and ambitions...and only when financial advertising reverts to promoting value and safety (which is all we offer or promise here at BullionVault, by the way)...will the big-bonus culture of excessive rewards to financial middlemen truly reach its end, replaced at last by the hope of decent returns to investors.

Adrian Ash
BullionVault.com

Head of research at BullionVault.com, the fastest growing gold bullion service online, Adrian Ash is also City correspondent for The Daily Reckoning in London, and a regular contributor to MoneyWeek magazine.

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