Summer Staycation | IFA90 | July/August 2020

For today’s discerning financial and investment professional

Summer Staycation Key Questions and Answers on Impact Investing

Synthetic Vs Physical Replication for ETFs

July/August 2020

ANALYSIS

REVIEWS

Managed Portfolio Services

IFAM90

COMMENT

INSIGHT

Change makes us determined

Previously Investec Asset Management

Ninety One is authorised and regulated by the Financial Conduct Authority.

Change is everywhere.

Sometimes it’s positive.

Sometimes it’s confusing.

Sometimes it’s so extraordinary that it challenges everyone, and everything.

But in one shape or another, change is inevitable.

The question is how we all respond to it.

Whether it makes us more resourceful or resilient.

Whether it pushes us apart or brings us closer together.

Ninety One was born during times of great change.

So we understand it.

We’ve learned how to respond and adapt to it.

To be inventive, stay determined and never lose our focus.

So whatever is happening now and whatever changes come next, we will do everything possible to manage the outcomes.

For our clients.

And for the world we live in.

Investing for a world of change Investments involve risk; losses may be made.

M AGAZINE

CONTE NTS

CONTRIBUTORS

July/August 2020

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Welcome

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News

Richard Harvey A distinguished independent PR and media consultant.

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Insurance Doctor Daniel West of Apex Insurance on the FCA's decision to ban contingent charges on DBTs

Tracey Underwood Founder of PACE Solutions

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M&G Investments Veronique Chapplow, Investment Director, M&G Investments, answers our questions about impact investing

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M&G Investments John William Olsen, Fund Manager, on the M&G Positive Impact fund

Andrew Sullivan Editor GBI andrew.sullivan@cliftonmedialab.com

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Tony Catt Our second extract from the MPS Report: Tony Catt discusses MIFID II and PROD

18 Sue Whitbread Editor sue.whitbread@ ifamagazine.com

GB Investments & EISA Present the Advocate Webinar Series Fostering the continued investment in SMEs and Start-ups

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Invesco

Alex Sullivan Publishing Director alex.sullivan @ ifamagazine.com

Chris Mellor, Invesco, on why synthetic replication has gained equal footing with physical replication for index (ETFs)

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Growth Invest This is a watershed moment for adviser businesses, and nowhere more so than in the world of alternatives and taxefficient investing, says GrowthInvest’s David Lovell

Kim Wonnacott Technical Sales and Marketing kim.wonnacott@ifamagazine.com

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Vanguard Andrew Patterson, Senior Economist at Vanguard discusses inflation amid the pandemic and what lessons might be learnt from the US

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Tony Catt The financial professional’s guide to Managed Portfolio Services

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Sparrows John Bennett, Head of Adviser Proposition at Sparrows Capital outlines the efficiency of MPS and the cost of delivery for advice firms

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CoInvestor CoInvestor CEO Chris Sandfield gives us a peek under the bonnet of their digital investment platform

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Richard Harvey Reputational issues are on his mind

Designed by: Becky Oliver IFA Magazine is published by IFA Magazine Publications Ltd, Arcade Chambers, 8 Kings Road, Bristol BS8 4AB Tel: +44 (0) 1173 258328 © 2020. All rights reserved ‘IFA Magazine’ is a trademark of IFA Magazine Publications Limited.

No part of this publication may be reproduced or stored in any printed or electronic retrieval system without prior permission.

All material has been carefully checked for accuracy, but no responsibility can be accepted for inaccuracies. Wherever appropriate, independent research and where necessary legal advice should be sought before acting on any information contained in this publication.

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IFA Magazine is for professional advisers only. Full details and eligibility at: www.ifamagazine.com

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Career Opportunities From Heat Recruitment

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July/August 2020

WE LCOM E

WELCOME

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very warm welcome to IFAM90 our summer issue for July/August.

I suspect that by our next issue many of the questions we are pondering at the moment (about the impact on the economy, relaxing of social distancing, get-together bubbles and pubs and restaurants reopening) will have been answered for us. I am sure many of us with families will have already eyed up some “staycation” destinations, especially given that security and health checks at airports - for those braving flights to destinations abroad - are expected to be even more of a trial than usual. That said, spending money at home to boost those independent hoteliers and holiday centres seems like a good idea. The cover photo, in case you are wondering, is the glorious Kynance Cove in Cornwall and there are so many other stunning locations around the country for us to explore over the summer, so enjoy, wherever you choose to holiday!

Back to our packed magazine this month and continuing with our Insurance Doctor series, in this issue Daniel West takes a look at the implications of the FCA’s decision to ban contingent charging on defined benefit transfers (DBTs). Veronique Chapplow, Investment Director at M&G Investments, has provided answers for us to the key questions advisers and planners have around impact investing. John William Olsen, Fund Manager at M&G, explains in detail how investors can use the M&G Positive Impact Fund for social and environmental benefits.

We bring you the second extract from our MPS report, authored by Tony Catt, and in this issue we look at MIFID II and PROD. Later in the magazine, John Bennett, Head

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of Adviser Proposition at Sparrows Capital explains the efficiency of MPS with a focus on the cost of delivery for advice firms.

GrowthInvest’s David Lovell offers a timely and topical take on what he describes as a watershed moment for adviser businesses, especially in the world of alternative and tax efficient investing. Chris Mellor, Invesco, gives us a detailed overview of why synthetic replication has recently gained equal footing with physical replication for index exchange-traded funds (ETFs). Inflation prospects amid the pandemic is the subject of Andrew Patterson’s (senior economist at Vanguard) interesting take on what we might learn from the US economy.

Richard Harvey paints a picture of reputations crashing all around us in recent months and while he thinks some of these are ultimately redeemable, he believes advisers who don’t “fess-up” to the FCA on mis-selling final salary pension scheme opt-outs, won’t get off so lightly. We get a peak under the bonnet at CoInvestor’s digital investment platform as we talk to CEO Chris Sandfield, who explains the joined up thinking behind its genesis.

Stay safe and have a wonderful summer.

With very best wishes, Alex Sullivan IFA Magazine

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IMPACT OF COVID-19 ON THE FINANCIAL PLANNING SECTOR NMG Consulting survey uncovers how the pandemic is affecting adviser businesses

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ccording to a recently released NMG Consulting survey*, the impact of COVID-19 market volatility on UK advice practices has been dramatic and it could reshape the UK advice market in coming years. As the economy emerges from COVID-19, advisers who have performed well during the crisis will be in a much better position to retain clients and generate referrals for new clients. Although the crisis has created opportunities for advisers to deliver value to their clients those who haven’t performed as well may find themselves under pressure.

Analysis of the survey suggests that the Covid-19 crisis has done more damage than many expected with 64% of the respondents said the impact was in-line with expectations, 6% said it was worse than expected but 20% cite the impact as much worse.

The recent market volatility has led to a major leap in the communications workload for advisers. Over 60% of advisers are experiencing higher in-bound enquiries.

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Advisers have also ramped up their outbound client communications to help clients respond to Covid-19 volatility with investment discipline. Nearly 60% of advisers have increased their activity in these areas.

Some clients will find it harder to afford advice, but the crisis may lead others to seek advice for the first time.

According to Mark Fox, Principal Consultant “we have seen this in markets such as the US, where the increase in inbound communications has been from new clients, some of whom are seeking advice for the first time and a freeze in sourcing new clients is a potential missed opportunity”.

As social distancing continues to challenge face to face advice, a renewed focus on service models is likely. The disruption will emphasise the need for greater efficiencies in service and communications, even for those advisers that have been reluctant to consider video technology. According to the report, the crisis has exposed advisers’ reluctance to embrace new communication technologies. According to the survey, 91% rely on the phone to maintain client contact and 26% said they would not even consider video conferencing.

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The need for efficiency will become greater than the upfront cost and the effort required to change. Fox believes that platforms should consider identifying these advisers and helping them, both with the provision of new technology and the tools and the support to make the transformation a seamless one for both the advisers and their clients.

While asset managers have generally responded well, results from the survey show that platforms have come in for some criticism, and a suggestion that advisers feel let down. Servicing delays and the provision of adequate communications are the two of the most problematic areas.

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and changed client expectations will put pressure on their business models. For other advisers it presents clear opportunities for growth.� * NMG Consulting UK Adviser Market Volatility Pulse survey covered 209 UK financial advisers, (70% independent/30% networked) between April 1st and April 13th, 2020.

All this leads Fox to suggest that the twin forces of a revenue crunch and the requirement to upgrade communications and technologies could have long-running consequences for the industry; “for some financial advisers this combination of revenue pressures

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July/August 2020

I NSU RANCE DOCTOR

INSURANCE DOCTOR THE INSURANCE DOCTOR WILL SEE YOU NOW Continuing our series on the IFA’s guide to Professional Indemnity insurance, Daniel West of Apex Insurance looks at the implications of the FCA’s recent decision to ban contingent charging on defined benefit transfers (DBTs)

On 4th June, The Financial Conduct Authority (FCA) published a statement confirming their decision to ban contingent charging on defined benefit transfers (DBTs) in almost all scenarios.

With effect from 1st October this year, only consumers with certain identifiable circumstances, such as those suffering from serious health conditions or having serious financial hardship, will be exempt.

In these circumstances, advisors will be required to charge the same amount, in monetary terms, for advice to transfer as they would were the advice be non-contingent.

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By introducing this ban, the FCA is removing the potential conflict of interest where a financial adviser would only be paid should the transfer go ahead.

This can be seen as great news for those advisors who are currently finding it difficult to compete in the market when advising clients not to transfer.

Abridged advice, a process aimed at filtering out clients for whom a pension transfer is unlikely to be suitable and save them paying for full advice, would fall outside the proposed ban on contingent charging.

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The FCA’s final rules confirm that a pension transfer specialist must give or check the abridged advice.

“As abridged advice could represent the first stage of full advice, we believe it is more cost-effective to have a consistent approach, using a [pension transfer specialist ] across both abridged advice and full advice.”

“We recognise that, while abridged advice will not appeal to all consumers, firms may be able to attract clients who would otherwise be unwilling to pay for full advice.”

To assist those advisers giving transfer advice, the FCA has issued a guidance consultation designed to help them put in place better processes to ensure consumers get suitable advice.

This guidance should identify good and poor practice and will help firms detect any potential weaknesses in their existing advice processes.

FCA interim chief exec, Christopher Woolard, stated: “The proportion of customers who have been advised to transfer out of their DB pension is unacceptably high” “While much of the advice we looked at was suitable, we are still finding too many cases in which transfers were not in the customer’s best interests.”

"What we have set out today builds on the work we have been doing and reflects our determination to improve standards in this market. Customers need to have confidence that the advice they are receiving is right for them.”

“The steps we are announcing today will drive up standards."

WHAT IMPACT ARE DBTS HAVING ON INSURANCE? For those advisors with no exposure to DBTs, there may still be an increase in premium due to the overall rise in insurer claims costs. IFAs who have undertaken pension transfers, even those with little involvement, appear to be incurring increased excesses, higher premiums and in most cases, a complete blanket exclusion on all DBT activities.

More worrying are the difficulties facing those firms promoting themselves as ‘Pension Transfer Specialists’. Very few insurers are willing to provide Professional Indemnity insurance for IFAs full stop, but those firms with a history of predominantly engaging in these pension transfers are now facing an incredibly difficult predicament. Many insurers, including existing providers, are now restricting cover to such an extent that the policy is no longer suitable for the needs of

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the business, regardless of premium spend, resulting in more firms having to close their doors permanently.

HOW BEST TO BE PREPARED USE A SPECIALIST PI BROKER, PREFERABLY ONE WITH EXPERIENCE IN PLACING COVER FOR IFAS. A specialist broker will be able to provide best advice when negotiating a potentially difficult renewal, have access to more insurer markets and be best positioned to assist in the event of a claim or circumstance.

LOOK TO REVIEW YOUR INSURANCE WELL IN ADVANCE OF THE RENEWAL DATE. Should your insurer impose certain restrictions or decide not to offer renewal terms, you will require additional time to look for alternative options.

BE WARY OF UNRATED OR UNTESTED MARKETS. With the collapse of three unrated insurers in the last two years, it’s important you have confidence in the financial security of your insurer. If you are uncertain or have concerns over the insurer’s financial ratings, ask for written verification from your broker.

DON’T BE PUT OFF FROM ASKING QUESTIONS. If you have any concerns over endorsements or exclusions applying to your policy, make sure to ask your broker to provide a full and clear explanation. The same applies to unfamiliar terminologies. It’s imperative you have confidence in the cover provided, the strength and capacity of the insurer and the experience and knowledge of your insurance broker.

About Daniel West Cert CII – Associate Director Daniel has been with Apex Insurance Brokers for 5 years and specialises in the placement of IFA and Financial Institution Professional Indemnity Insurance (PI).

As an independent broker, Apex can offer one of the most extensive choices of IFA insurers available, with specialist sector and product knowledge to offer their clients some of the best terms available in the market.

Their extensive IFA insurance experience allows them to fully understand your business, advise how to best present your risk and what insurers are best suited to your firm.

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M&G I NVESTM E NTS

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M&G POSITIVE IMPACT FUND: COMPANIES’ RESPONSE TO COVID-19

Veronique Chapplow, Investment Director, M&G Investments, answers our questions about impact investing

WHAT IS IMPACT INVESTING? WHY IS IT RELEVANT TO THE CURRENT CRISIS? Impact investing is about investing with the intention of generating positive societal impact alongside a financial return. It is often perceived as a ‘nice to have’, or something which is really only appropriate for the ‘responsibly minded’. However, as Covid-19 severely disrupts markets and society, priorities are being reset, and viewpoints reframed, out of sheer necessity. This shift in focus could see impact investing move into the mainstream, as a world in lockdown focuses on the problems we are facing, and the need to find solutions.

WHERE CAN IMPACT INVESTING MAKE A DIFFERENCE? The social and human costs of the pandemic have made it obvious that more resources must be deployed in many areas targeted by the Sustainable Development Goals (SDGs) as a matter of urgency, not least of which is SDG 3, Good Health and Wellbeing.

This is where we believe impact investing can really make a difference, supporting companies who have at their

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core the intention to make a positive impact on society and the environment. This is not to say that these are philanthropic organisations – on the contrary, they will be judged on their ability to produce financial returns, aligned with the positive impact they are producing.

At times like these, many of them will display a more inclusive version of capitalism by putting in place special measures to support their employees, their customers and the wider community.

CAN YOU GIVE AN EXAMPLE OF A COMPANY WHICH HAS GONE THE EXTRA MILE? On the healthcare side, at the time of writing (20 April 2020), US diagnostics leader Quest has managed to perform more than 940,000 Covid-19 tests since 9 March.

Over that short period, it has grown its testing capacity from 10,000 to 50,000 a day, with testing performed across 12 different sites. And solutions are not just confined to healthcare. Another of the fund’s holdings, recycled packaging specialist DS Smith, has collaborated with food retailers across Europe to design and produce emergency provision or essential boxes that can be delivered to the doorsteps of the most vulnerable.

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WHAT HAPPENS IN A POST COVID-19 WORLD? DO WE GO BACK TO OUR OLD WAYS? Hopefully not. The immediate effects of this pandemic are horrifying, from a human as well as an economic point of view. But there might be a silver lining to the crisis, as we are reminded of the importance of a well-functioning healthcare system. Moreover, climate change, pollution and inequality will sadly still be with us on the other side of Covid-19. We hope that governments and industries will step up their efforts to find solutions to our all too obvious societal challenges, and we are convinced that the commitment of impactful companies to combat them will remain firmly in place.

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About Véronique Chapplow, ESG & Impact Investment Director, M&G Investments Prior to joining M&G, Véronique worked as product specialist at Zadig Asset Management for two years and Deutsche Bank for six years, servicing institutional equity clients specialised in the insurance sector. Before this, she worked at GAM, initially in the capacity of equity analyst before becoming deputy fund manager of GAM’s European Equity Funds. Véronique started her career at NatWest Securities as equity analyst covering the oil and gas sector. She is an Associate member of the Institute of Management and Research, the precursor of the CFA Institute. Véronique graduated from French business school EPSCI and obtained an MBA from Heriot Watt University.

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M&G I NVESTM E NTS

WHY IMPACT AND

PROFITABLE GROWTH CAN GO HAND IN HAND Fund manager John William Olsen explains how investors can use the M&G Positive Impact Fund to help solve major social and environmental problems whilst aiming to outperform the global equity market

HOW DOES THE M&G POSITIVE IMPACT FUND OFFER ACCESS TO IMPACT INVESTING AS AN EQUITY FUND? The fund invests globally in equities of companies that have a positive impact on society involved in some of the world's major social or environmental problems. The impact must be fully aligned with the company's strategy and account for the majority of its business activities. We focus the fund on six areas of impact, three environmental and three social.

DO YOU HAVE AN EXAMPLE? ALK-Abellรณ is a specialist in allergy immunotherapy.

The treatment not only addresses the symptoms, but also the triggers. Over 500 million people suffer from allergies such as hay fever, which is closely linked to allergic asthma. However, there are only 4.5 million people, less than one percent, in treatment. ALK has the potential to improve the lives of a significant proportion of the world's population.

ARE THE TWO CATEGORIES ENVIRONMENT AND SOCIAL IMPACT EQUALLY WEIGHTED IN THE FUND? We don't have a hard division rule. So far, however, the categories have each accounted for around half of the portfolio, with a slight overhang in the social segment.

This is mainly due to the fact that our "Better Health" impact area accounts for about one third of the total portfolio. Our focus is not on the large pharmaceutical groups, but niche companies with innovative approaches.

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YOU ADDRESS THE UNITED NATIONS SUSTAINABLE DEVELOPMENT GOALS. HOW IMPORTANT ARE THESE FOR YOUR STRATEGY?

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a strong tailwind. Especially companies whose products or services meet acute social or ecological needs are likely to show strong growth characteristics. Our fund therefore aims to outperform the broad global equity market over a five-year period.

The SDGs are a solid and accepted framework for identifying key areas of impact, and it helps measure how the positive impacts have been achieved. We use the SDG framework for the fund. We assign all our investments to an SDG and define specific key performance indicators to measure the impact achieved.

DO YOU SEEK A DIALOGUE WITH COMPANIES TO INFLUENCE THEIR BEHAVIOUR IN TERMS OF SUSTAINABILITY? We believe that through engagement with the portfolio companies, impact investors can bring a variety of changes, not only promoting responsible behaviour and long-term thinking, but also pushing them towards greater transparency or stronger sustainability goals. Even companies with a strong positive impact can improve.

For example, a wind turbine manufacturer that has a clear environmental goal may have a relatively large CO2 footprint, or may need to improve workers' rights or address safety concerns.

IS THERE A COMPROMISE ON PERFORMANCE WHEN IT COMES TO IMPACT INVESTING? On the contrary, we believe that companies that achieve a positive social impact as well as a return on equity have

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About John William Olsen, M&G Investments John William Olsen, a Danish national, joined M&G in April 2014, and was appointed fund manager of the M&G Global Select Fund and M&G Pan European Select Fund in July 2014. He was later appointed deputy manager of the M&G Pan European Select Smaller Companies Fund in July 2016 and the M&G Positive Impact Fund in November 2018. John William joined M&G from Danske Capital, where from 2002 he had managed non-domestic equity portfolios, including the Global Stock Picking and Global Select equity funds, and also the European Select strategy. He joined Danske Capital in 1998 as a fund manager on the domestic Danish equities team, and in 2000 also became a global sector analyst focusing on technology and telecommunications stocks. John William gained a BA in business economics and then an MSc in finance and accounting from Copenhagen Business School.

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TONY CATT

July/August 2020

MIFID II & PROD RULES The second extract from our MPS Report

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hile it could be argued that a Centralised Investment Proposition (CIP) may not be considered a product for MiFID II purposes and so does not directly fall under the PROD rules, the elements contained within the CIP appear to fall under PROD rules.

DISTRIBUTION OF PRODUCTS AND INVESTMENT SERVICES

A distributor should consider what impact the selection of a given manufacturer could have on the end client in terms of charges or the financial strength of the manufacturer, or possibly, where information is available to the distributor, how efficiently and reliably the manufacturer will deal with the distributor or end client at the point of sale (or subsequently, such as when queries/complaints arise, claims are made, or a financial instrument reaches maturity).

OBTAINING INFORMATION FROM MANUFACTURERS

A distributor must: • understand the financial instruments it distributes to clients • assess the compatibility of the financial instruments with the needs of the clients to whom it distributes investment services, taking into account the manufacturer’s identified target market of end clients • ensure that financial instruments are distributed only when this is in the best interests of the client.

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Distributors must obtain from MiFID manufacturers information to gain the necessary understanding and knowledge of the financial instruments they intend to distribute in order to ensure that the financial instruments will be distributed in accordance with the needs, characteristics and objectives of the target market.

In ensuring that they have obtained sufficient information about the financial instruments they distribute and in ensuring they understand the financial instruments or investment services distributed, distributors:

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TONY CATT

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• should consider whether they understand the materials provided by the manufacturer or distributor earlier in the sales chain • should ask the manufacturer to supply additional information or training where this seems necessary to understand the financial instrument or investment service adequately • should not distribute the financial instrument or investment service if they do not understand it sufficiently • when providing information to another distributor in a distribution chain, should consider how the further distributor will use the information, such as whether it will be given to end clients. Firms should consider what information the further distributor requires and the likely level of knowledge and understanding of the further distributor and what medium may suit it best for the transmission of information.

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IFA Magazine will be running a webinar on 7th July, to discuss the pros and cons for advisers in using an MPS. For more information contact kim.wonnacott@ifamagazine.com

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GB I NVESTM E NTS & E ISA

M AGAZINE

GB INVESTMENTS AND EISA PRESENT THE

ADVOCATE WEBINAR SERIES FOSTERING THE CONTINUED INVESTMENT IN SMES AND START-UPS

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he impact of Covid 19 and the government’s fiscal interventionism has tilted the normal expectations around the tax year end of 2020 in our investments sector. Yet the effectiveness of tax incentive led schemes for investment in SMEs and Startups has been proven over the last 40 years and will continue to play a pivotal role in how we rebuild our economy once the crisis has passed.

As part of our strategic relationship with EISA, GB Investments presents a new essential webinar series we are

calling ADVOCATE to build knowledge and confidence for advisers across a broad range of related topics affecting us right now.

We will be joined by leading industry experts who will discuss the existing state of play and the key issues for advisers to consider for their clients around approaches to risk, IHT and tax planning, in a forum designed to be both educational and insightful. We have invited IFAs who collectively have extensive experience in investments in this area to join us and share their expertise in the discussions.

GBI

ADVOCATE EIS STATE OF PLAY 10AM TUESDAY 2ND JUNE

• A review of the tax year end, the current state of play and approaches to risk

Why now is the right time to be looking at EIS

Chaired by Mark Brownridge, Director General of EISA, we will be joined by industry leaders to discuss opportunities for advisers and their clients in the space.

ADVOCATE TECHNICAL 10AM TUESDAY 23RD JUNE - IHT, BR AND TAX PLANNING

• The discussion will include Case studies, Insight from leading solutions providers, Solutions for clients whose estates put them over the residence nil rate band taper threshold, and clients with large ISA portfolios along with inheritance tax considerations.

SEPTEMBER (DATE TBC) EIS - UNDER THE BONNET

• The discussion will include detailed insight into some of the leading fund managers in the space; Fees; Due Diligence; Platforms; Objectives to consider (growth, capital preservation, income, or a combination of all three, and the targeted level of annual returns) and how fund managers provide detail on the proposed underlying investments: how will they generate returns and how is liquidity achieved.

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SYNTHETIC REPLICATION MAY OFFER A

STRUCTURAL ADVANTAGE Chris Mellor Head of EMEA ETF Equity & Commodity Product Management at Invesco Ltd

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n brief: For index exchange-traded funds (ETFs), synthetic replication has recently gained equal footing with physical replication and, for tracking some indices, prominence at their expense. After briefly describing the two concepts, we compare them mainly from a taxation perspective. It turns out that synthetic replication can be more tax efficient in some cases, which may explain why it has achieved more widespread adoption even though physical replication could be more straightforward and easier to understand.

Synthetic replication appears to be gaining ground as the method of choice for passive index ETFs. Take, for example, Europe-listed ETFs that track the S&P 500: funds using synthetic replication accounted for nearly all of the USD 6.9 billion in net new assets in 2019 (figure 1). This is quite different from 2018, when synthetic and physical replication contributed more or less equally to asset growth.

FIGURE 1

Synthetic replication appears to be gaining ground as the method of choice for passive index ETFs

Cumulative NNA (US$, bn)

Synthetically replicated S&P 500 ETFs saw an upturn in demand 2019

18 16 14 12 10 8 6 4 2 0 -2

Over the 20 years that ETFs have been listed in Europe, investors have learned to understand and appreciate the two primary methods used to replicate an index. While ETFs using physical replication may have accounted for the lion’s share of assets in the early years, the synthetic replication model has gathered more acceptance in recent times. We’ve compared the two methods and find that synthetic replication can offer a structural advantage in some cases.

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Jan 18

Apr 18

Jul 18

Oct 18

Jan 19

Physically replicated ETFs

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Jul 19

Oct 19

Jan 20

Synthetically replicated ETFs

Source: Bloomberg and Invesco, showing S&P 500 UCITS ETFs domiciled in Europe to end-Feb 2020

Both synthetic and physical replication aim primarily to match as well as possible the performance of a specific reference index. The effectiveness of the replication method chosen can be measured by the tracking error (the volatility of the daily returns of the ETF versus the index) and tracking

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difference (the difference between the ETF’s return and the index return over time). Assuming perfect tracking, this tracking difference will be equal to the index return minus management fees. But, in reality, many ETFs will lag behind the index either by more than the amount of ongoing fees, or in some cases by less.

When structuring even the simplest passive product, an ETF issuer has several tools available, some of which depend on whether the index is going to be replicated physically or synthetically.

Full physical replication involves holding all the index securities in the same proportion as the index and rebalancing whenever the index does. Some physically replicating ETFs may use sampling techniques, which involves holding only a subset of the index that the portfolio manager hopes will offer a risk and performance profile similar to the index, but in a more cost-effective way than holding all the securities.

The second method is synthetic replication, which also involves holding a broad basket of securities, although not being limited to those of the index being replicated.

The ETF issuer will have a list of securities it will accept into the basket. To match the index performance, the ETF uses swaps, whereby the swap counterparty agrees (via the derivative contract) to pay (or receive) any difference between the return of the index and the return of the basket of securities held.

HOW TO IMPROVE PERFORMANCE Using the example of the S&P 500, a physically replicating ETF may be able to improve performance relative to the standard net return index via certain tools or capabilities: · The fund may be able to achieve lower withholding tax rates depending on where the fund is domiciled and what tax treaties are applicable. For example, an Irish-domiciled ETF pays 15% withholding tax on dividends received by the fund (instead of the normal 30% assumed by the net return index) due to a tax treaty between the US and Ireland. · If the fund engages in stock lending, the level of revenue earned from the practice depends on how indemand the index stocks are for borrowing and what portion of the revenue generated is passed on to the ETF. While offering a potential boost to performance, there is counterparty risk for the stocks on loan.

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· Trading more intelligently around index rebalancing and corporate actions can deliver some improvement in performance, although mistakes or misjudgements in trading can result in underperformance.

ETFS AND COUNTERPARTY RISK Both replication methods may have exposure to counterparty risk, if the physical model includes securities lending. The issuer of a synthetically replicating ETF can mitigate counterparty risk by resetting the swaps to zero when certain conditions are met, such as excessive market movements or changes in the NAV of the ETF. In practice, these resets may occur daily. For issuers of synthetic and physical ETFs alike, risk of default can be reduced by dealing only with creditworthy counterparties.

STRUCTURAL ADVANTAGES OF SYNTHETIC REPLICATION There are many benchmarks for which synthetic replication has clear structural advantages over physical replication, often resulting in material performance gains versus the index. The replication of the MSCI World Index provides a useful case study given the sheer number of stocks and countries covered. The advantage available to synthetic replication models is due to the way that tax authorities in some countries treat physical investments versus derivatives. This section focuses on three areas: US dividend taxation, European dividend taxation and Stamp Duty / financial transaction taxes.

US DIVIDEND WITHHOLDING TAX The MSCI World Index is weighted by market capitalization with shares of US companies comprising approximately 64% of the benchmark, making any efficiency gains through US tax treatment much more material to the overall effectiveness of the replication model. Foreign investors in US stocks are generally subject to a withholding tax on dividends of up to 30%, although many can reduce this to 15% through the application of tax treaties as was highlighted in the case of physically replicated ETFs domiciled in countries such as Ireland.

Under US tax law, certain types of derivatives are subject to an equivalent withholding tax rate if they pass through

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“dividend-equivalent� payments. Specifically, when a US bank writes a swap on an index with a non-US counterparty, it is generally required to withhold US dividend tax at the same rate as would apply to a physical investment by that same counterparty.

Total Return Index, which assumes a 30% withholding tax rate. However, the average of the synthetic funds is 26 basis points higher than the average of the physical funds over the one-year period, in line with expectations.

This would seem to level the playing field between physical and synthetic replication strategies, but the same rule that imposes this tax treatment on derivatives also specifies certain exemptions, and the MSCI World Index meets the criteria for these exemptions. Namely, section 871(m) of the HIRE Act explicitly excludes swaps written on indices with deep and liquid futures markets from the requirement to pay dividend withholding taxes.

FIGURE 2

We can see the impact of this difference more clearly if we look at ETFs tracking a US-focused bench-mark such as the S&P 500. The following chart shows the one-year performance of the five largest S&P 500 ETFs listed in Europe, two of which use physical replication and three which use synthetic. In figure 2, the dark blue line shows the average performance of the three synthetic funds while the light blue line shows the average of the two physical funds.

All five funds outperform their benchmark, the S&P 500 Net

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Performance relative to S&P 500 NTR

This means that, while a European-domiciled physically replicating ETF will generally be able to achieve a maximum of 85% of the dividend yield of the US holdings in their MSCI World portfolio, a synthetically replicating ETF can achieve up to 100% of the full gross dividend amount.

With an average dividend yield for US large-cap stocks of approximately 2%, this exemption means synthetically replicating funds can potentially achieve up to 30 basis points of additional performance on US exposures, which equates to around 19 basis points on the MSCI World Index1.

Relative performance differential of synthetic and physical S&P 500 ETFs

0.60% 0.50% 0.40% 0.30% 0.20% 0.10% 0.00% Feb 19

May 19

Synthetic ETFs

Aug 19

Nov19

Physical ETFs

Source: Bloomberg 12 months to end-Feb 2020, in USD, average of largest synthetic and physical S&P 500 ETFs in Europe.

For illustrative purposes only NON-US DIVIDEND WITHHOLDING TAX Tax authorities in Europe and many other countries take a similar approach to dividend withholding tax on foreign holders of shares. However, we can see that ETFs tracking the MSCI World Index are generally able to achieve better performance than would be assumed under application of these rates.

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For physically replicating ETFs, withholding tax rates can once again be improved depending on fund domicile.

Furthermore, some select investors may be able to obtain lower withholding tax rates and, if the physical ETF engages in stock lending, borrowers of shares may pass on a higher dividend percentage than the lender would receive on a physical holding. For ETFs that use synthetic replication, the index swap market will generally reflect the same enhanced economics available in the stock lending market. As such, the two models both can achieve outperformance, but neither model has an advantage.

STAMP DUTY AND FINANCIAL TRANSACTION TAXES The synthetic advantage re-emerges in the application of financial transaction taxes. An ETF that physically replicates the MSCI World Index will buy most or all the stocks in the index. When buying shares in the UK, the ETF will generally be subject to a 50 basis-point Stamp Duty. There are also financial transaction taxes applied to the purchase of shares in Italy (10 basis points if traded on-exchange, 20 basis points off-exchange) and France (30 basis points). These costs are reflected in the price of creating shares in the fund.

For a synthetically replicating ETF, the swap counterparties purchase the replicating portfolio, not the fund. As this transaction is executed as part of the hedging of a derivative, i.e. the swap with the fund, the banks are generally exempt from both UK Stamp Duty and the financial transaction taxes imposed by France and Italy. Being exempt from paying taxes on these shares means an up-front cost advantage to the end-investor.

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CONCLUSION Physical and synthetic replication models both have merits as well as potential drawbacks. The preference of one over the other will vary between investors and may even change over time. A huge number of investors still prefer physical replication regardless of any advantages to be gained elsewhere, due partly to the simplicity of the structure.

A physical model is easy to understand and explain to clients.

Physical and synthetic replication models both have merits as well as potential drawbacks

However, investors have started to adopt a more pragmatic stance, which may be leading to a preference for synthetic replication in certain situations. Depending on the indices replicated and the country of domicile, synthetic replication may result in lower withholding taxes, Stamp Duties and financial transaction taxes, structural advantages to which investors are increasingly drawn. i Based on the impact of the difference in withholding tax rates on dividends given the 10-year average yield on US large caps (using the S&P 500 as a proxy), and the allocation of US equities in the MSCI World Index (64% as at 1 April 2020).

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July/August 2020

GROWTH I NVEST

NO GOING BACK This is a watershed moment for adviser businesses, and nowhere more so than in the world of alternatives and tax efficient investing, says GrowthInvest’s David Lovell

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he ease with which children have taken to Google classrooms, Zoom meetings and online learning over the last few weeks seems extraordinary, until you realise that they were born into a world where iPhones and video calls were already the norm.

The current situation is merely an extension of this and a pretty logical and seamless one to them. Aside from the missed friends and teachers, from a technology perspective this is not a new normal - it’s just normal.

This is, of course, not the case for huge swathes of UK businesses for whom this really will be a watershed moment in a number of ways. This is certainly true for the financial adviser marketplace and ecosystem, where we are now witnessing years of legacy systems and traditional business practices being swept aside in an accelerated tide of digitisation.

Financial advisers, like those in every business sector, have had to quickly adopt new practices in a matter of weeks. Those advisers who can do so the quickest, with the least disruption to their business and clients, have got a real chance to thrive in the coming weeks and months,

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rather than merely tread water. These are likely to be those who had more fully embraced technology into their businesses, and were more prepared for the current situation than others with robust business continuity plans, employees set up and comfortable with remote working, and a suite of technology solutions that are fit for purpose and fully integrated into the business. Firms that were not already there, now seem to be getting the type of support that they need from their networks and service providers in order to quickly close the gap.

Any business that relies on client relationships and face to face meetings will have been fundamentally impacted, but financial advisers have the ability to use technology to make real positive changes to their businesses over

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the next twelve months, and use the time saved by travel, conferences, meetings and lunches to really take stock of their business and drive efficiencies into every corner.

This will almost certainly mean careful communication with their clients via Zoom or similar platforms, many of whom will be themselves more available and open to discussions. However, it might also mean taking the time to assess new technologies and offerings that could be seamlessly integrated into the business, including a review of entire client investment portfolios, going beyond just the core focus areas.

ADVISERS HAVE NEVER BEEN BETTER POSITIONED TO RESEARCH, INVEST AND MONITOR ALTERNATIVE INVESTMENT PORTFOLIOS FOR CLIENTS Tax efficient and alternative investing has almost certainly not been the focus over the last few weeks for most advisers, and for most advisers it will be relevant for only a small percentage of their wealthier clients, but there is much to commend it as an area of review over the next stage of our nationwide lockdown, not least that great progress has been made over the last few years in improving the accessibility of tax efficient investments, and the means of accessing them. An adviser’s ability to research, invest and report on and monitor client alternative portfolios has never been better, and can now be approached in a similar manner and with the confidence with which advisers look at traditional main market funds.

The importance of uncorrelated (or partly uncorrelated assets) in client portfolios, and how alternatives can play a part, is an important topic and one that merits its own separate discussion. That aside, the ability to consolidate client assets and interact with

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July/August 2020

An adviser ’s ability to research, invest and report on and monitor client alternative portfolios has never been better

these as part of a wider portfolio, in a similar manner to that which advisers have become accustomed to over the last two decades on main market independent platforms, is worth a closer look.

CLIENT-LED AND INTUITIVE: THE NEW WAVE OF TECHNOLOGY WITHIN THE ALTERNATIVES SPACE The new wave of technology within the alternatives space has the advantage of having no archaic legacy systems and is much more akin to the client-led independent wraps than the unwieldy supermarkets that preceded them. The best of these alternative asset technologies provide a great platform with which advisers can interact and share with their clients, delivering the type of intuitive functionality and customer experience that they are well used to (and now expect) from their own personal banking.

Whether the adviser takes a look at the individual fund manager portals, independent third-party research firms such as MICAP and MJ Hudson Allenbridge, or specialist platforms such as GrowthInvest, they will now find high-quality and detailed information on products, and a near-complete coverage of the tax efficient market.

This sits alongside flexible portfolio analysis tools and, in the case of our platform, the ability to invest quickly and easily into a wide range of products.

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July/August 2020

GROWTH I NVEST

Within the world of tax efficient investing, things moved very quickly in March, when the traditional end of tax year rush was inevitably impacted. Fund managers acted fast to add additional flexibility to their offerings, many VCTs allowed subscribers to re-evaluate and remove their subscriptions (many re-evaluating at a lower NAV). Some managers and custodians who had not offered the ability for digital application forms moved swiftly to accept digital signatures or scanned copies. Previous preferences for cheques and physical application forms (understandable in the 1990s, but unnecessary now) have been quickly replaced by digital applications and bank transfers. There is no possibility of a return to only ‘wet’ signatures being accepted now. This is a significant market shift, freeing up advisers and their clients to access the whole market via a fully digitised solution for the first time.

WHAT NEXT FOR THE TAX EFFICIENT INDUSTRY? There is a huge amount that still needs to be improved and worked on within the world of tax efficient investments: there is a need for much greater transparency on fees, where it is often still difficult to line up and evaluate the impact of the different structures and terms on the client. There is a need to create better liquidity in the secondary market, across both unlisted equities found

In years to come, we will never forget these times, and the impact to society will be extraordinar y and will remain difficult to discern for some time

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in EIS and SEIS structures, and in the VCT market.

There is a need for both the industry and government to find a way to take these investments to a much wider audience of HNWIs than the current pool of 30,000. There is work to be done on the frequency of reporting and the ability to see real-time changes in valuations and portfolio monitoring. The continuing improvement of the adviser and client experience will all be driven by technology, and some of the last residual barriers are no longer in place.

In years to come, we will never forget these times, and the impact to society will be extraordinary and will remain difficult to discern for some time. We would of course never wish for a cataclysmic event, but it is a watershed moment and as such it provides some opportunities for reflection and change.

As I spend more time than I had ever imagined in a small part of South West London (and a lot more time interacting with Google classrooms) it is perhaps fitting that to end, I turn to a local hero and school pupil Tim Berners-Lee, inventor of the World Wide Web to look forward: “The Web as I envisaged it, we have not seen it yet.

The future is still so much bigger than the past.”

About David Lovell, Chief Operating Officer at GrowthInvest David is the Chief Operating Officer at GrowthInvest. He has worked in the UK financial services industry for over 20 years, holding a variety of strategic director roles. David has held roles at FT.com, and played a key role in the development, growth and subsequent sale of Matrix Solutions. As well being part of several successful disruptive product launches, over the last decade David has provided consultancy and advice on distribution and fundraising strategies to a wide range of clients looking to approach the UK’s financial intermediaries and high net worth investors.

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Discover the power of light speed The new Prudential ISA online service We’re making it easier for you to do business with us with our new Prudential ISA online service. 3-minute end to end application processing, easy control over client management, and a broad choice of risk managed fund options - all in one place.

Boost your ISA process at pruadviser.co.uk/isaonline This is just for UK advisers – it’s not for use with clients.

The value of any investment can go down as well as up so your customer might get back less than they put in.

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Prudential is a trading name of Prudential Distribution Limited. Prudential Distribution Limited is registered in Scotland. Registered Office at Craigforth, Stirling FK9 4UE. Registered number SC212640. Authorised and regulated by the Financial Conduct Authority.

July/August 2020

VANGUARD

INFLATION PROSPECTS AMID THE PANDEMIC;

WHAT WE CAN LEARN FROM THE U.S. ECONOMY Commentary by Andrew Patterson, Vanguard senior economist

A

mid the challenges brought about by the COVID-19 pandemic and the stringent measures taken to contain it, inflation concerns are surfacing.

This is understandable, given potential disruptions to the supply of a range of goods and given the trillions of government dollars being employed to stabilize global economies.

For now, though, the greater likelihood is disinflation-a slowing in the rate of inflation. The data underlying a 0.4% decline in April in the U.S. core consumer price index, the largest monthly drop on record, hinted at what we could see in the months ahead. Vanguard expects that, in the near term, the effects of diminished demand will outweigh upward pressures on inflation given increased unemployment and consumers’ general reluctance to spend. But eventually, any lingering impact on supply chains, a sizable government debt overhang and a U.S. Federal Reserve willing to tolerate somewhat higher inflation could win out and push prices higher.

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UNLOCKING LOCKDOWNS The question now being posed to governments around the world is how and when to reopen their economies without spurring second waves of infection. The answer will inform when economic recovery can begin to take hold, the depths from which economies must return, and when prices might start to rise toward or above central bank targets that are typically at or just below 2%.

This is all contingent, of course, on health outcomes. Any progress made would be tempered by another surge in cases of the coronavirus. This may well be a two-steps-forward, one-step-back approach for some time. We can hope it is more like three or four steps forward before any step back.

Weighed against that unknown, consider these observations about the prospects for inflation in our current context: This isn’t a 1970s supply shock. Arab nations’ oil embargo of several primarily Western nations famously played a role in the double-digit inflation of the 1970s, as

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wages spiralled higher amid expectations of ever higher prices. Supply disruptions related to the pandemic, on the other hand-most recently threats to the meat supply as COVID-19 outbreaks have closed some U.S. packing operations-are likely to affect a broader array of goods but are set against a different backdrop. Weaker demand could counter the inflationary effect of reduced supply. Although inflationary pressures could arise if demand returns before supply does, we can’t say with certainty when consumers may be ready to spend as they did before the crisis or when suppliers may be able to resume normal operations.

Central banks have upside credibility. Central banks, particularly the Bank of England and the Fed, have learned valuable lessons since the 1970s about fighting high inflation and, in doing so, have built up credibility that helps maintain reasonable inflation expectations. The Fed’s dual mandate is price stability and maximum sustainable employment. Most other central banks have price stability as their sole mandate, so they’ll be even more focused on inflation.

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Central bank credibility and capabilities play a big role.

The period since the global financial crisis has shown that central banks can credibly keep inflation from rising precipitously even in a period of strong fiscal support, high debt levels, and large central bank balance sheets.

That said, given that most central banks have fallen short of their targets in recent years, they are likely to tolerate above-target inflation-not 1970s-style double-digit inflation, but inflation reasonably above 2% for a time.

And should it start breaking higher, they would have the ability and tools (such as raising policy rates) to combat it. In recent years-and, we would expect, for the rest of this year-it’s on the downside where they’ve struggled, as interest rates have fallen toward or below zero even as the banks have implemented extraordinary measures to try to bring inflation to more reasonable levels. It’s just one more reason we’re more concerned for now with disinflation rather than high inflation.

As for leading indicators, we’ll be paying close attention to the prices that producers must pay for their raw materials.

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VANGUARD

July/August 2020

As those prices go up, because of either increased demand or supply-chain issues, consumer prices are likely to follow.

The figure below considers the relationship between U.S. consumer and producer prices.

EFFECTS OF COVID-19 ARE PUSHING PRICES DOWN-FOR NOW 3.5% 2.5

3.0

1.5

2.5

0.5

2.0

-0.5

1.5 1.0

-1.5

0.5

-2.5

0.0

-3.5 2005

2007

2009

2011

2013

2015

2017

2019

Core U.S. consumer price index, year-over-year percentage change Principal component, U.S.producer prices Note: The figure plots the change in the core U.S. consumer price index—consumer prices minus the impact of volatile food and energy prices-relative to a principal component measure (a statistical technique that extracts a common signal from the data) of producer price surveys.

Sources: Vanguard analysis of data, as of April 30, 2020, from the U.S. Bureau of Labor Statistics; the Federal Reserve Banks of Dallas, Philadelphia, Kansas City, Richmond, and New York; and the Institute for Supply Management.

As the figure shows, producer prices have been falling despite recent COVID-19 supply-chain issues. We expect consumer prices, at least in the near term, to follow a similar trend.

The global policy efforts of the last few months have been unprecedented, appropriately so given the unprecedented nature of the challenges that the global economy and health officials face. When the immediate challenge is over, getting central bank balance sheets and fiscal budgets back toward

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normal will take some doing and may involve somewhat higherthan-target inflation. With more information about the trajectory of recovery, we’ll shape our longerterm view. But as the experience of the global financial crisis shows, 1970s-style runaway inflation need not be part of it.

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July/August 2020

THE MPS REPORT

BY TONY CATT The financial professional’s guide to Managed Portfolio Services

I

work as an independent compliance consultant working mainly with IFA firms around London and the South-East. I have several firms for whom I undertake different duties. I have previously undertaken platform research and distributed it among my client firms.

One of the firms asked me to undertake research on Managed Portfolio Services (MPS) as they had been running their own portfolios and were looking to move to a third-party arrangement.

I looked around the market for reports and found Defaqto, the Langcat and Next Wealth reports. The first two were commissioned by OMW WealthSelect and unsurprisingly focussed on that. When I looked at the reports, they had a core of MPS providers but they each had some that did not appear on the other reports. I went onto FE Analytics where I found a lot more. But none of them had as much detail as I wanted or the breadth of providers, so I thought that I would just have to do it myself.

This research is to show the MPS that are currently available for IFAs to use for their clients’ investment strategies.

There are many providers in the market offering MPS. It is an extremely competitive market. Many Discretionary Fund Managers (DFM) offer managed portfolios for investors who want their money managed professionally, but do not have the size of investment that would warrant the expense of a bespoke discretionary fund management service, which is used for High Net Worth (HNW) investors. Rather than miss out on the Mass Affluent (MA) market of people who want to invest, but not the same magnitude, the Managed Portfolio Services have been introduced.

I am looking to provide information on a wider range of providers to show how any Managed Portfolio Service chosen by a firm is competitive in the market and why it may be chosen to suit the clients of the advising firm.

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The more I looked into the MPS, the more I realised that there are a lot of very good practitioners in the field - all apparently with their own views on investment and how much better they were than their competitors.

This report can only be considered to be a snapshot of the market in April 2020. Whilst I have a wider range of providers than any other report that I have seen on MPS providers, there are still a lot of providers that are not in this report, simply due to the numbers available.

It just proves that there is an investment strategy to suit every investor. They just need to be discovered and identified.

With all these managed portfolio services providers available, it is a mystery why any financial planning firm would want to devote so much of their valuable time running their own portfolios.

The full MPS IFA Annual Report is available to purchase for just ÂŁ249.99 +VAT* To request your copy visit www.ifamagazine.com/ *For professional advisers only.

IFA Magazine will be running a webinar on 7th July, to discuss the pros and cons for advisers in using an MPS. For more information contact kim.wonnacott@ifamagazine.com

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July/August 2020

SPARROWS

MODEL PORTFOLIO SERVICE John Bennett, Head of Adviser Proposition at Sparrows Capital outlines the efficiency of MPS and the cost of delivery for advice firms

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n its 2017 Asset Management Market Study the FCA drew attention to “weak price competition leading to sustained high profits over a number of years.” The finger had been firmly pointed at the industry.

Subsequently, in its 2019 Global Wealth Management Report, EY warned that “firms must recalibrate their pricing models and do a better job of communicating value to clients.” The findings were startling: - Nearly half of discretionary clients are dissatisfied with the fees they are paying - There is growing concern among clients that fees based on assets under management (AUM) are unfair - Only 7% of discretionary clients expect their fees to reduce in future

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Value is not just about cost, but cost is clearly fundamental. Investment performance against objectives is notoriously unpredictable, and so cost and service are among the few things an adviser can control for clients with any degree of certainty.

The good news is that the industry’s value proposition is beginning to shift at last. Everybody is now under the value spotlight.

When looking for opportunities to lower the cost of the advice process, top of the list for me must be the provision of model portfolios. I should declare my hand here since I have been taken on by Sparrows Capital to deliver a price disruptive model portfolio service (MPS). We launched our proposition, SCore MPS, on 20/02/2020, the day the Bank of England released the

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Model portfolios are a very efficient way of delivering a diversified portfolio mix for every type of client attitude to risk (ATR) outcome. They come in many guises and span active management, index tracking and combinations of the two. Model portfolios are effectively “oven ready” and are easy to access via investment platforms. The level of ongoing activity depends on strategy, fund performance and rebalancing policy.

“Will investor ATR change forever after coronavirus? It’s never a good idea to make snap decisions in the teeth of a crisis in fact it’s the worst time. Review your plans with your adviser by all means especially if a significant event has occurred - otherwise keep calm and carry on.”

It is completely inappropriate for managers to charge assetbased fees for a service that is constant in terms of workload and which does not scale with AUM. Asset-based fees for MPS disproportionately penalize the very clients advisers value the most, namely those with above average wealth. It is these clients who are beginning to realise, post MiFID II, that they have been subsidizing smaller sub-optimal clients through an inequitable fee structure.

Research conducted recently by the lang cat for Sparrows Capital among adviser firms revealed that: - Over 80% of respondents support the concept of a fixed or capped fee structure for model portfolios - Of those who expressed a preference, 73% preferred a capped arrangement with an asset-based charge for smaller portfolios and a monthly cap befitting larger clients

Advisers and their clients clearly value the predictability, transparency and simplicity that a low-cost capped fee structure provides.

On the basis of this research, Sparrows Capital launched its SCore MPS with a price point of 0.1% pa capped at £20 per client per month. We have espoused an evidencebased investment approach since 2008 and this is reflected in our offering.

So how does this help advisers with their client value proposition? Discretionary Fund Manager (DFM) fees excluding fund ongoing charges figure (OCF) tend to range between 0.08% and 0.6% per annum with the average DFM fee in the UK estimated at 0.36% per annum*. When viewed on top of adviser fees of up to 1.00% per annum, taken together with the OCF of a typical active fund portfolio, the client’s total cost of investing mounts up rapidly.

The illustration below shows the cost difference versus typical DFM fee structures for different value portfolios over a 7-year period.

The Cumulative Effect of Asset-Based Fees vs Capped Fees £30,000

Fees paid over 7 Years

new £20 note. The relevance of all the twenties will soon become clear.

July/August 2020

£24,195

£25,000 £20,000

£10,000

£8,771 £4,839

£5,000 £0

£14,619

£14,517

£15,000

£2,924 £852

£1,680

£1,680

£100,000

£300,000

£500,000

Initial Investment Amount 0.1% Capped at £20pcm

0.3% DFM Fee

0.5% DFM Fee

In response to the launch, many advisers have remarked that with a maximum annual cost of only £240 they can easily incorporate the SCore MPS cost within their ongoing adviser charges and reframe their value proposition quite dramatically.

The capped fee SCore MPS supports a very powerful value statement that advisers can use to cement relationships across their client base at a time of increasing scrutiny.

- When offered a monthly price cap range between £10 and £50, 66% of respondents suggested a level between £20 and £30

John Bennett is Head of Adviser Proposition at Sparrows Capital

- 88% of respondents said they would consider reviewing their existing central investment proposition (CIP) arrangements in favour of a capped fee alternative.

*the lang cat – The Value Myth, State of the Platform Nation 2019

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July/August 2020

COI NVESTOR

COINVESTOR MAKING THE CONNECTION CoInvestor links sophisticated investors, financial advisers and fund managers through one digital investment platform.

CEO Chris Sandfield gives us a peek under the bonnet.

WHAT IS COINVESTOR’S APPROACH IN 2020 AND FURTHER INTO THE FUTURE? We continue to scale quickly as we capitalise on the 4 years of technology we have built. Since launching our platform in September 2019 we have been delighted by the engagement we have seen between what is effectively the three sides of the market - direct investors, advisory firms and fund managers.

WHAT IS COINVESTOR’S USP? Specialising in the tax efficient sector, we are first to market with a digital investment platform that connects all sides of the market.

With our technology, we are aiming to not only digitise all pockets of the tax efficient industry but connect them together. From the initial investor or adviser making an investment, right through to the processing of that investment by the fund manager and associated custodian. Our technology eliminates the challenges the industry previously faced, which in turn will hopefully

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encourage more investment in the many innovative and unique early-stage businesses the UK has to offer.

HAS COINVESTOR CHANGED IN ANY WAY DURING THE YEAR? We continue to evolve. We are expanding and are always looking for smart, driven individuals to join our team.

We have a number of launches over the next 18 months to ensure that CoInvestor is the platform for alternative investing. We started with tax efficient products, but by working closely with all sides of the market we will continue to add professionally managed investment opportunities and new platform features based on what our users value most.

THE UK APPEARS TO HAVE A STRONG START-UP/ENTREPRENEURIAL CULTURE WHAT DO YOU PUT THAT DOWN TO? I think we are, at heart, a nation of creative problem solvers. Add this to a strong technology sector this creates

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July/August 2020

a low barrier to entry to turn ideas into businesses. The capital flow that is provided by fund managers under the Government’s tax efficient investment schemes provides the opportunity to evolve from an idea to a series A investment.

This support to fledgling businesses is both critical and a strong driver to enable entrepreneurs to turn the dreams into a reality. Ultimately all good companies start by solving a problem. I know we did.

WHAT ARE YOUR VIEWS ON THE GOVERNMENT’S RECENT CHANGES TO EIS? The structure was put in place to provide a vehicle to support entrepreneurs and provide much needed funding to companies that need it. Somewhere along the way this got lost and I think the Government has simply provided the navigation to put the vehicle back on the right

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July/August 2020

COI NVESTOR

HOW CAN EIS INVESTMENTS CONTINUE TO HELP DIVERSIFY CLIENT PORTFOLIOS?

“My first investment was when I was around 13 or 14; I worked in a tropical fish shop as a Saturday job; I used to purchase the fish that were clearly in mating pairs from the shop, provide some midwifer y services to them at home and then sell the fr y back to the shop once they were large enough.”

track. This should also then provide some continued longevity to the scheme and I am fully supportive of anything that ensures this valuable contribution to business continues.

DO YOU HAVE ANY FEARS THAT FUTURE GOVERNMENT CHANGES COULD UNDERMINE THE SCHEME’S EFFECTIVENESS? It would be foolhardy to think that a government won’t change something that is already in place, even a successful scheme such as this. However without any other realistic means of supporting what is becoming an ever larger and more successful component of ‘UK Inc’ and with small businesses becoming the large employers and tax payers of the future, one would hope they simply work to improve the scheme and make it easier for suitable investors to invest in companies and funds that they wish to see grow into successful companies.

With the improvement of access, we can simplify investing. This in turn enables the investor to diversify their portfolio and manage this all in one place. In the future, we will continue to work with all sides of the marketplace to provide further diversification tools enabling people to create and manage a fully diversified portfolio of alternative investments, all in one place.

ARE ADVISERS BECOMING MORE RECEPTIVE TO THE SCHEMES? Increasingly so. With our Transparency Initiative we are opening up the market, enabling advisers to make easier, more informed decisions on behalf of their clients. This in turn will support the next generation of fund managers and companies that their clients wish to invest in.

“At CoInvestor we have built a team of creative problem solvers, I enjoy working through these challenges with the team and our clients and solving problems.

To see the development of features that clients have requested go live on our platform is rewarding and I get a buzz most from the team I work with and seeing their hard work come to fruition.”

IF YOU COULD INFLUENCE CHANGES TO THE SCHEMES, WHAT WOULD YOU SUGGEST?

ARE CLIENTS MORE SAVVY ABOUT EIS AND SEIS NOWADAYS?

I would simply improve access, accountability, reporting and engagement - something our platform is here to solve.

Not as much as we would like them to be. The market is still falling short of where it could be, the number of

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July/August 2020

investors participating is still too low compared to what I see as some of the brightest new fund managers and exciting investee companies that are entering the market and looking for investment. Our platform exists to connect this market.

transformation is something the team here at CoInvestor are rightly proud of.

“I think what classifies someone as an entrepreneur is to not have the data available but to still execute based on incomplete information. When you are creating something that didn’t exist before, the evidence may be against you, or simply may not yet even exist yet but you need to drive forward and then evolve and adapt as the evidence comes in.”

It does and we are. We are all working ever closer together to ensure that the opportunities meet the capital and can be administered in a simple, digitally led world. Lengthy paperwork and an opaque market are now things of the past. We have made investing in these types of products simple and by taking the administrative burden away we, perhaps, have enabled you to put the words fun and investing into the same sentence.

ARE THERE MORE CLIENTS BECOMING INTERESTED IN THE SCHEMES? Time will tell what the pandemic has done to medium and long term investor confidence. However, by their very nature the investee companies are small and many can adapt to change fast. If I was investing in these turbulent times, this is where I would be looking.

HOW CAN ADVISERS CONTINUE TO EDUCATE THEIR CLIENTS ABOUT THE INVESTMENT OPPORTUNITIES IN EIS? I think first and foremost having an understanding of what is available and what type of investment do their clients wish to make. Historically it was all about investing in the biggest fund manager and getting the tax break; increasingly now it’s about the potential of the fund manager and the companies within their portfolio. This is exciting to see evolve and to be able to deliver the marketplace that is at the heart of this

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DOES THE INDUSTRY NEED TO DO MORE TO PROMOTE THE SCHEMES TO A WIDER INVESTOR BASE?

HAS THE CONTINUED CONFUSION OVER BREXIT AFFECTED THE FUTURE OF EIS? No. ARE THERE ANY CLOUDS ON THE HORIZON THAT MIGHT SPOIL THE PARTY? I think we have already entered uncharted waters for the global economy. Without wishing to predict the future we are clearly entering one of history’s most interesting times at the very least from an investor’s perspective. This can be and should be a time for any investor to take stock and above all to take caution.

However, with some of the brightest young companies being supported by these schemes, many of them being pre revenue let alone pre profit they may yet turn out to be the ones to back as they do not have large inventory, are yet to be reliant on existing supply chains that may be broken and short term cash client flow. They are potentially the companies that will be able Chris Sandfield, to operate in the new normal, Chief Executive whatever that is. We will see.

Officer at CoInvestor

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July/August 2020

RICHARD HARVEY

TERMINAL REPUTATIONAL DAMAGE? Exalted reputations may be crashing at a surprising rate in recent months, says Richard Harvey, although some of these are ultimately redeemable, others are definitely not

K

errranggg! What was that? No, not the opening chord of a heavy metal anthem, but the sound of exalted reputations hitting the concrete.

I hope that hasn’t added to your Covid Lockdown Blues (which, maintaining the musical theme, sounds rather like a John Lee Hooker track). But it’s quite remarkable the number of individuals and corporates who have recently suffered catastrophic, and in some cases terminal, damage to their standing.

From Prince Andrew to Harvey Weinstein, Facebook to Uber, anyone in government involved in the coronavirus crisis to Lance Armstrong, the once-mighty have suffered a salutary come-uppance in the court of public opinion. The financial advice industry is

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no exception, to wit Neil Woodford and Unregulated Collective Investment Schemes.

For individuals, it is perfectly possible to rebuild a damaged reputation, as Boris will doubtless be hoping. For business it is far more difficult – as Warren Buffett once said: “‘Lose money, and I will forgive you. But lose even a shred of reputation, and I will be ruthless”.

A sentiment which will never be lost on Gerald Ratner, whose chain of 330 jewellery shops went bust after he famously described one of their decanter sets as “total crap” And if you’re in the mood for a bit of knuckle-chewing, buttock-clenching embarrassment, go onto YouTube and key in Alasdair Thompson, who was head of a New Zealand employers’ association and gave a TV interview

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RICHARD HARVEY

in which he expounded his Neanderthal views on ‘ladies’ problems’, completely trashing his credibility and subsequently losing his job.

There will be more than a few IFAs who will wonder if a recent report from the FCA applies to them. It highlighted those who advised clients to transfer out of final salary pension schemes into the bracing climes of the open market. In an FCA survey of 235,000 savers, 69% had been recommended to walk away from a guaranteed retirement income when, in the Authority’s judgement, it was not in their best interests to do so.

That will be no surprise to thousands of British Steel workers who were persuaded to switch out of their defined benefit pension scheme. And you really don’t want to give duff advice to the sort of character who knows how to handle a large vat full of molten metal.

It’s not necessary to be a sophisticated investor to understand the potential risks, and possible rewards, of moving, for instance, into a well-managed SIPP.

July/August 2020

property. Not where you want to be when it seems likely that big, glitzy offices will be distinctly passé now employers realise they don’t need all their staff working on site. One of the few upsides revealed by Covid and the dawn of the Zoom age.

The FCA has told a number of IFA firms to look at their client book, and ‘fess up to those who may have been mis-sold. Which will be painful, but far better than being exposed down the line as an outfit which really doesn’t care about reputational damage.

Consumers may be prepared to forgive a company which occasionally transgresses (Ryanair, anyone?) but when it comes to looking after a lifetime’s savings, IFAs who let their clients down will suffer terminal damage to their reputation.

Not a jolly thought as they embark on their summer hols.

Enjoy yours.

Indeed, my own IFA spotted that a pension scheme held outside my SIPP was rather heavily invested in commercial

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CAREER OPPORTUNITIES Position: Paraplanner Job Ref: 59524 Location: MANCHESTER Salary: £30,000 - £40,000 The Client The opportunity for an experienced Paraplanner to join a fantastic Financial Services firm who focus on providing a high quality financial planning and investment management service.

The Opportunity During a period of key expansion, our client is looking for an experienced Paraplanner to support the successful Financial Planners of the business. The firm has the flexibility to mould the perfect opportunity around each person’s specific skillset, so the role can be tailored to exactly what you want. You will have the opportunity to prepare suitability letters, reports and recommendations and provide technical support to complex client queries. You will be working in a strong team-focused environment where you can develop your career within a prestigious firm.

What’s needed to be considered?

In order to be considered for this unique opportunity, candidates need to have •

Level 4 Diploma qualified or working towards this

•

Previous experience within a fast-paced IFA Practice

•

High level of analytical capability and good communication skills

Position: Financial Planning Administrator Job Ref: 59477 Location: NORWICH Salary: £20,000 - £30,000 The Client The opportunity for a financial planning administrator to join a well-established financial services practice which provides a highly personalised financial planning and investment management service..

The Opportunity During a period of growth, our client is looking for someone to provide high quality technical administration and analytical support to the successful financial planners of the business. The firm has the flexibility to mould the perfect opportunity around each person’s specific skillset, so the role can be tailored to exactly what you want. You will have the opportunity to work in a supportive team environment where progression is strongly supported.

What’s needed to be considered?

In order to be considered for this unique opportunity, candidates need to have – •

Previous experience within a financial planning or insurance role

•

Professional communication manner, both written and verbally

•

Any financial services qualifications are desired

Position: Paraplanner Job Ref: 59458 Location: WALLINGTON Salary: £30,000 - £40,000 The Client The opportunity for an experienced Paraplanner to join a fantastic Financial Services firm who focus on providing a high quality financial planning and investment management service.

The Opportunity During a period of key expansion, our client is looking for an experienced Paraplanner to support the successful Financial Planners of the business. The firm has the flexibility to mould the perfect opportunity around each person’s specific skillset, so the role can be tailored to exactly what you want. You will have the opportunity to prepare suitability letters, reports and recommendations and provide technical support to complex client queries. You will be working in a strong team-focused environment where you can develop your career within a prestigious firm.

What’s needed to be considered?

In order to be considered for this unique opportunity, candidates need to have • Level 4 Diploma qualified or working towards this • Previous experience within a fast-paced IFA Practice • High level of analytical capability and good communication skills

Position: Practice Manager Job Ref: 59487 Location: CARLISLE Salary: £25,000 - £35,000 The Client The opportunity for a Practice Manager to join a well-established Financial Services Practice which provides a highly personalised financial planning and investment management service.

The Opportunity Ensuring that practical and operation aspects of the business are properly attended to in a timely and pragmatic manner.

Providing an efficient and timely HR service to the management in order to ensure staffing is aligned with the key aims of the organisation.

Maintaining office services by organising office operations and procedures, to include the Mortgage Administration, IT, Health and Safety and Telephones.

Handling general day to day queries to ensure they are dealt with efficiently and in a timely manner.

Manging and develop the website, social media, marketing and branding in line with the company’s objectives.

Establishing and maintain robust procedures for the retention, protection, retrieval, transfer and disposal of in line with legislative requirements.

What’s needed to be considered?

In order to be considered for this unique opportunity, candidates need to have – •

Previous experience within a Financial Planning role

•

Knowledge and experience of regulatory frameworks

•

Delegation skills

•

Confident when communicating with board level directors

Position: Financial Planning Administrator Job Ref: 59571 Location: SALE Salary: £18,000 - £25,000 The Client The opportunity for a financial planning administrator to join a well-established financial services practice which provides a highly personalised financial planning and investment management service.

The Opportunity During a period of growth, our client is looking for someone to provide high quality technical administration and analytical support to the successful financial planners of the business. The firm has the flexibility to mould the perfect opportunity around each person’s specific skillset, so the role can be tailored to exactly what you want. You will have the opportunity to work in a supportive team environment where progression is strongly supported.

What’s needed to be considered?

In order to be considered for this unique opportunity, candidates need to have – •

Previous experience within a financial planning or insurance role

•

Professional communication manner, both written and verbally

•

Any financial services qualifications are desired

Position: Technical Paraplanner Job Ref: 59600 Location: PONTYPRIDD Salary: £30,000 - £45,000 The Client There is a fantastic opportunity here to for a successful Technical Paraplanner to join an award winning practice, in the beautiful area of Pontypridd. Our Client is a growing practice with a fantastic industry name, whom focus on providing a highly personalised financial planning service, ensuring the Client is at the heart of everything they do.

The Opportunity During a period of key expansion, our client is looking for a technical Paraplanner to support the successful Financial Planners of the business.

The firm has the flexibility to mold the perfect opportunity around each person’s specific skill set, so the role can be tailored to exactly what you want. You will have the opportunity to work in a supportive team environment with a great office atmosphere, where progression is strongly supported.

For the right candidate, there is the chance here to gain CF30 sign off, and attend a number of Client Meetings, with the exciting opportunity of transitioning in to Financial Advice yourself one day…

What’s needed to be considered?

In order to be considered for this unique opportunity, candidates need to have – • Minimum Level 4 Diploma qualified and working towards Chartered status • Previous experience within a fast-paced IFA Practice • High level of analytical capability and good communication skills • Good Pensions & Investments product knowledge

Position: Paraplanner Job Ref: 59360 Location: ABERDEEN Salary: £30,000 - £40,000 The Client The opportunity for an experienced Paraplanner to join a fantastic Financial Services firm who focus on providing a high quality financial planning and investment management service.

The Opportunity During a period of key expansion, our client is looking for an experienced Paraplanner to support the successful Financial Planners of the business. The firm has the flexibility to mould the perfect opportunity around each person’s specific skillset, so the role can be tailored to exactly what you want. You will have the opportunity to prepare suitability letters, reports and recommendations and provide technical support to complex client queries. You will be working in a strong team-focused environment where you can develop your career within a prestigious firm.

What’s needed to be considered?

In order to be considered for this unique opportunity, candidates need to have – • Level 4 Diploma qualified or working towards this • Previous experience within a fast-paced IFA Practice • High level of analytical capability and good communication skills

Position: Financial Planning Administrator Job Ref: 59486 Location: LEEDS Salary: £20,000 - £30,000 The Client The opportunity for a Financial Planning Administrator to join a well-established Financial Services Practice which provides a highly personalised financial planning and investment management service.

The Opportunity During a period of growth, our client is looking for someone to provide high quality technical administration and analytical support to the successful Financial Planners of the business. The firm has the flexibility to mould the perfect opportunity around each person’s specific skillset, so the role can be tailored to exactly what you want. You will have the opportunity to work in a supportive team environment where progression is strongly supported.

What’s needed to be considered?

In order to be considered for this unique opportunity, candidates need to have – • Previous experience within a Financial Planning or Insurance role • Professional communication manner, both written and verbally • Any Financial Services qualifications are desired

Position: Financial Advisor Job Ref: 59569 Location: MANCHESTER Salary: £35,000 - £50,000 The Client Our Client is a bespoke, Chartered independent Financial Planners, who are looking to bring in new talent,. Our client is now looking to expand by adding a new member to the Financial Planning team. Our clients main focus is on providing bespoke advice to High Net Worth clients, ensuring all clients receive an exceptional level of service.

The Opportunity The opportunity here is for a Financial Advisor, with a professional and level-headed approach to come in and help provide advice to the clients generated through the firms lead source. This opportunity would be suitable for any Level 4 Diploma qualified professionals, whether you be an existing IFA with a strong book of business, or a newly qualified Adviser looking to work in a highly professional environment.

What’s needed for me to be considered?

• Hold previous experience within an IFA / Financial Planning Practice • Must be qualified to a minimum industry standard of Level 4 Diploma Qualified • Previous experience dealing with High Net Worth Clients desirable but not essential • A strong understanding of Pensions and Investment products advantageous

Position: Paraplanner Job Ref: 59515 Location: CHESTER Salary: £30,000 -£40,000 The Client We are currently recruiting for an experienced Paraplanner on behalf of a firm of Independent Financial Advisors based in Chester. Ideally you will be Diploma qualified or close to it, and will be responsible for assisting the IFAs within the business.

You will be given the opportunity to implement your own ideas and grow your own team.

Duties and Responsibilities: • Ascertain that procedures followed by the company are Compliant and follow the guidelines set out by the FCA • Process and deliver Suitability reports for 2 IFA's • Provide recommendations to clients on Investments, Pensions and Mortgages based on your own research and to be able to support these recommendations with a coherent explanation • Work effectively autonomously or as part of a team • Respond efficiently and effectively to requests from Company advisers and Management • Assist in analytic work, including cash flow forecasting and investment analysis • Use of financial planning software tools • Develop productive working relationships with colleagues and clients

Skills • Previous experience within an IFA practice environment • Ideally you will be Diploma Qualified in Financial Planning or will have made significant progress towards this qualification • Good technical knowledge of Pensions, Investments and Mortgages • Knowledge and practical experience in the application of the rules of the FSA/FCA

Dan Gratton - Specialist Financial Planning Recruiter I have been recruiting within the financial planning field for just over 2 years now, largely specialising within the placement and recruitment of financial planners and senior back office roles. Prior to this, I was working in the industry for 5 years, as an Associate Financial Planner, so like to think I am somewhat knowledgeable on both the industry and those in it!

A lot of people believe that the job hunt on the build up to Christmas can be quite slow, however we have found quite the opposite, with last December being our busiest month to date. It seems companies are very keen to get their recruitment needs in order, prior to the new year, so there may never be a better time for you to start your search.

You will see below that we have a number of opportunities that we are working on at present and many more on our website should you be open to new opportunities.

Furthermore, should you just wish for further information on the IFA job market at present, opportunities locally or industry information on qualifications etc, please do not hesitate to be in contact. You can reach me on 0117 922 1771 or feel free to email me at dan.gratton@heatrecruitment.co.uk.

What’s next?

If you are interested in any of the above opportunities, please contact us directly. If suitable, one of our specialist consultants will be in contact with you to discuss the opportunity in detail prior to submitting your Curriculum Vitae to the client. During this discussion, we will aim to identify your specific skills and motivations and, where appropriate, can also recommend other relevant opportunities to you that match your requirements.

And finally…

If these specific vacancies are not exactly what you are looking for, please contact us to discuss other opportunities we may be recruiting for that aren’t necessarily advertised.

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+44 117 922 1771

+44 203 207 9075

Visit the Heat Recruitment website for more details of these and hundreds of other jobs too www.heatrecruitment.co.uk

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