PIMFA Journal - Spring 2021 by PIMFA

The Personal Investment Management & Financial Advice Association

JOURNAL SPRING 2021 HOW OUTSOURCING YOUR MARKETING COULD REDUCE YOUR RISK Outsourcing certain activities essential to the day-to-day running of a company, whether through necessity or by choice, is a common practice in any business sector.

IF WOMEN ARE GOOD FOR BUSINESS, WHY ARE SO FEW GETTING TO THE TOP? It’s ten years since the publication of the Davies Report, which asked why there weren’t more women in leadership, given the compelling evidence that women are good for business.

HOW LONG DOES IT TAKE TO BUILD NEXT-GENERATION DIGITAL WEALTH CAPABILITIES As the second year of the pandemic unravels, technological innovation remains the key focus, as stated by Capgemini, Accenture, and Oliver Wyman.

BUILDING PERSONAL FINANICAL FUTURES

CONTENT PAGE

HOW OUTSOURCING YOUR MARKETING COULD REDUCE YOUR RISK

IF WOMEN ARE GOOD FOR BUSINESS, WHY ARE SO FEW GETTING TO THE TOP?

ANATOMY OF AN AML FAILURE – WHY ARE SO MANY FIRMS INCURRING FINES?

HOW LONG DOES IT TAKE TO BUILD NEXT GENERATION DIGITAL WEALTH CAPABILITIES?

S&P: A MORE BALANCED APPROACH TO LARGE-CAP U.S. EQUITIE

WHY HUMAN ERROR IS STILL YOUR TOP CYBERSECURITY RISK

CORPORATE ACTIONS FINANCIAL ADVICE: YOU ARE NOT ALONE… PREPARING FOR THE BUT SHOULD YOU BE? HEADWINDS YET TO COME

CYBER DOCTOR

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PIMFA JOURNAL

SPRING 2021

HOW OUTSOURCING YOUR MARKETING COULD REDUCE YOUR RISK

o most business owners, outsourcing is a familiar concept.

Outsourcing certain activities essential to the day-to-day running of a company, whether through necessity or by choice, is a common practice in any business sector. Hiring external agencies to manage operations such as accounting, distribution, or payroll, is common amongst small businesses. Many simply cannot afford the extra costs associated with keeping these processes in-house; employment costs and overheads, like the rental fees on larger premises, soon mount up. Many large or global companies also outsource services to strategically reduce overall running costs. But aside from cost, what are the benefits of outsourcing services, such as marketing, to an external agency? Few businesses, especially those that only do so through necessity, understand the full benefits that outsourcing can provide. Here are a few good reasons why outsourcing your marketing (and other services) could be beneficial to your business and reduce your overall risk:

THE PRICE OF LABOUR

You may only require a single marketer, or you may need an entire marketing department to fulfil your company’s needs. If you need monthly newsletters, email campaigns, a social media presence, website content and a Google Ads campaign, with ad-hoc marketing tasks thrown in every now and again, then you could employ a single member of staff. The average salary for a marketing graduate in the UK is between £20k and £25k per annum. You would need to ensure they have a good knowledge of the different

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disciplines required of them, as well as good understanding of the software and platforms they will be required to use, which can sometimes be a lot to expect of a single person. If your marketing requires multiple POS items on a rotational basis, multiple email marketing campaigns running concurrently, a strong social media presence and engagement campaign, full website design and management with at least 1 blog per month, multiple Google Ad campaigns, full SEO, branded sales and internal business collateral, maybe videography and photography and more, then you’d need a full team of marketing specialists. Marketing specialists can earn anything between £30-£45k and upwards depending on their specialism, experience, ability, and reputation. Let’s say you’d need a team of five - copywriter, graphic designer, website manager, social media executive, and marketing manager - and between them they have the necessary skills to meet your marketing requirements. This will cost in excess of £120k per annum in salaries alone, not to mention the cost for materials, software, ad spend, and more. You must also take into consideration costs for staff training, HR resources, and the potential costs to replace staff that either leave or aren’t quite the right fit. When you outsource to an external agency, your labour costs are greatly reduced. You get the same knowledge, experience, quality, and output for around the same price as a single graduate marketing executive. If the agency doesn’t quite suit your brand or business, produces unsatisfactory results, or doesn’t meet your service expectations, you can part ways and find another agency with much less difficulty than is possible with internal staff. The risk of hiring an agency, rather than internal staff, is much lower in terms of HR obligations and costs.

CAPITAL COST, CONTROLLED

By outsourcing your marketing requirements, you not only reduce your labour costs but also free up capital for potential investment in other areas, especially in the early stages if your business is still young. Your business will also become more attractive to potential investors for further growth, as you can inject your capital directly into the revenue-producing areas of your business, rather than tying it up in staff costs.

EFFICIENCY IS INCREASED

When you do everything in-house, your expenses are much higher in terms of R&D, marketing, development, and distribution. These expenses need to be factored into the pricing of your products or services. If you charge too much, to increase profits, then fewer people will buy from you; if you price too low, your profit margins are depleted. When you outsource your marketing, and/or other requirements, you still get the same output, but for a much lower cost. Your profit margins have the potential to increase as a result. The economies of scale as a result of outsourcing can provide certain competitive advantages.

CORE BUSINESS COMES FIRST

All businesses have finite resources, and managers have a finite amount of attention and time to give those resources. Outsourcing your requirements to an external agency gives focus back to your business. By allowing someone else to manage your marketing, you can switch your attention to work that better serves your customer, giving your managers the ability to set their priorities in line with your business’ growth.

If you were to do it in-house it could take weeks, or even months, to recruit staff with the right skills and experience, train them, and induct them properly, in-line with your company’s policies. You also need to provide them with the support they need to carry out their tasks efficiently and effectively. This process can take even longer for larger projects that require serious capital investment.

THINK SMALL, ACT BIG

Many large corporations have internal marketing departments, even multiple departments for separate areas of their business. Smaller businesses simply cannot afford to have similar in-house support. By outsourcing your marketing department, you gain access to similar levels of expertise, efficiency, and even economies of scale that large corporations enjoy – for a fraction of the cost!

REDUCED RISK

Any business decision you make involves risk, and any investment has inherent risk associated with it. The market that you inhabit will fluctuate, financial conditions will change, and technology develops at a rapid pace, making it difficult to keep up. When you outsource certain activities to an external partner, that agency shoulders and manages the associated risks on your behalf. They are also likely to be knowledgeable and experienced in handling the risks associated with their own market. Rosie Reynolds, Director Rosie Reynolds Marketing www.rosiereynolds.co

SPEEDY START

If you outsource to an external partner with the right skills and experience, they can begin working on your objectives straight away.

@PIMFA_UK

PIMFA JOURNAL

SPRING 2021

IF WOMEN ARE GOOD FOR BUSINESS, WHY ARE SO FEW GETTING TO THE TOP?

t’s ten years since the publication of the Davies Report, which asked why there weren’t more women in leadership, given the compelling evidence that women are good for business.

Since then, many companies have introduced structural changes to facilitate leadership opportunities for women. And, within the financial services sector, the launch of initiatives like the Women in Finance Charter to build a more balanced and fair financial services industry have been welcome steps in the right direction.

LEADERS ARE FRUSTRATED However, despite these efforts, progress has been surprisingly slow. Research in 2019 by the FCA showed that the proportion of women in approved person roles (typically more senior positions) was just 17% in UK financial services - almost unchanged since 2005 (1). Many of the leaders I speak to - men, in particular - are frustrated with the slow progress of women into senior leadership positions. They know that women are good for business, recognise the value they bring and are keen to see them progress. Yet, their experience is that women who are ready for more senior roles often hold themselves back while men who are less experienced and not sufficiently qualified will put themselves forward. Research backs this up and shows that, in order to apply for a job, women think they need to meet 100% of the criteria while men usually apply after meeting about 60% (2).

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THERE ARE HIDDEN BARRIERS My experience is that there are hidden barriers blocking the leadership pipeline for women. Barriers that are fundamentally attitudinal. Attitude is the invisible force that drives our behaviour more than any other factor - comprising our values, beliefs, judgements, purposes, fears, assumptions. Our attitudes dictate how we behave, what results we get and how successful we are. One prevailing attitude amongst women who are recognised as highly competent is attributing their achievements to luck, discounting their capabilities and fearing being exposed as frauds. Otherwise known as the Imposter Syndrome, this is experienced by 75% of female executives at some point in their career, according to a recent KPMG study (3). The self-doubt that has high-achieving women feeling like imposters can lead them to burn-out from an overly driven need to succeed. Or prevent them from reaching for senior positions for fear of being found out as a fraud. It isn’t that men don’t have self-doubt. It’s just that they don’t let their doubts stop them as much as women do. I know - because it was my story. On paper, I had what looked like a successful life and career. Co-founder and Director of a successful start-up. A beautiful home in a very desirable part of London. Money in the bank. Able to afford pretty much whatever I wanted - clothes, cars, holidays abroad. And yet, I was struggling.

MY 'IMPOSTER GREMLINS’ WERE HOLDING ME BACK I didn't realise it at the time but I was struggling with the belief that I was an impostor. All this apparent success – yet, I didn't think I deserved it, didn’t think I'd earned it. And, my overarching fear was that this would be found out. This impacted everything. My ‘imposter gremlins’ had me working all hours and never properly switching off. Weekends became about recovery time and yet more work. My social life dwindled away. I wouldn't ask for help because I thought that would be seen as a sign of weakness. I would prioritise and over work and over deliver on what was in my comfort zone while shying away from stretch challenges that would have helped me to learn and grow. So, I kept struggling on and playing small; too scared to admit that I wasn’t coping. I was crippled with anxiety and fear. It started to affect my health, my relationships, my happiness and, ultimately, my performance. I was fortunate. I negotiated an exit package from the business and was able to take a year out to learn how to step free of the self doubt and manage my imposter gremlins. What I now know is that many women struggle in the way that I did. Especially those in the traditionally maledominated sectors such as wealth and finance. I believe it’s a major reason why progress in achieving gender balance within leadership has been much slower than expected. Women face a unique set of challenges, as they progress in their careers. The good news is that it doesn’t need to be this way. I’m currently delivering a leadership programme for PIMFA that equips women to step free of self-doubt and other limiting ways of thinking and develop the attitudes, behaviours and skills required for them to unleash their full potential and embrace and enjoy success. This group coaching programme - Authentic Leadership: how to thrive as a female leader in wealth and finance uses a powerful and unique methodology which consists of simple, practical, transferable tools for transforming attitudes, behaviour and results.

(1) Karen Croxson, Daniel Mittendorf, Cherryl Ng, Helena Robertson. “Financial Services senior jobs are still mostly for the boys” FCA Insight 25 October 2019 (2) Tara Sophia Mohr. “Why Women Don’t Apply for Jobs Unless They’re 100% Qualified.” Harvard Business Review. August 25, 2014 (3) “Advancing the Future of Women in Business: The 2020 KPMG Women’s Leadership Summit Report”

Caroline Holt, Attitude Coach attitudecoach.co.uk

Uprooting the attitudes that undermine women’s aspirations and unleashing the attitudes that underpin them is key to unlocking the potential of women within the wealth and finance sector. If you want to know more about how this programme could help your female talent to thrive and your business to flourish, get in touch.

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PIMFA JOURNAL

SPRING 2021

ANATOMY OF AN AML FAILURE – WHY ARE SO MANY FIRMS INCURRING FINES?

ecent fines imposed by both US and UK regulators indicate that the authorities are cracking down on inadequate anti-money laundering controls, even when no evidence exists of firms actually handling laundered proceeds. In 2019, the last full year of available data, the UK and US issued 37 AML fines totalling nearly £3bn, and 2020 certainly appeared to continue the trend. The message to banks and all regulated firms in the UK and Ireland is loud and clear – get your house in order, or risk being fined if your controls aren’t up to scratch. But, given that AML regulation has been with us for over twenty years, just what is behind this and why now? First off, it should be noted financial crime in general continues to rise, costing the UK economy an estimated £37bn a year, according to the National Crime Agency. The situation is much the same in Ireland and estimates from as long ago as 20161 claimed that money laundering was costing the country over 5bn euros annually. Yet detection rates remain incredibly low, with less than 1% of illicit money ever recovered. Globally the figures make for more grim reading, with global money laundering activities valued at between 2% and 5% of total GDP according to the Financial Action Task Force (FATF), making it a trillion Dollar industry. Pressure is cascading down from governments and policy makers, via the regulators, onto organisations to get on top of the problem. In the UK, Money Laundering Regulations have been strengthened several times in recent years, most recently with the implementation of the 5th Money Laundering Directive (5MLD) in January 2020, and 6MLD across EU member states, including Ireland in December. And this trend is set to continue. Regulatory pressure to comply is consequently a major concern for most firms who are, rightly, now asking ‘are we doing enough?’

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UK and Irish firms would do well not to wait until the horse has bolted, but act now before they get caught out and risk reputational, as well as financial harm. Considering in more detail some of the recent AML failures and the fines levied, a number of familiar themes emerge. It’s rare to find that failures boil down to wilful negligence; regulatory reports clearly show that the vast majority of firms are committed to doing the right thing, or at least strive to do so. Staff on the frontline of AML efforts are rarely morally bankrupt individuals themselves. Like most employees, they simply conform to the established organisational culture - ‘the way things are done around here’. By and large they follow the corporate guidance, either formalised in print or set by example, if at all, by those leading the organisation. So, when it comes to institutional failings and the consequential AML fines, it’s often the organisation’s moral compass that needs resetting, rather than that of its employees. The Solicitors Regulation Authority (SRA), regulator of most Law firms in England and Wales stated in its November 2020 report on the findings from its AML visits over 2019-2020; “When reviewing firms’ files, we found that in a large number there were differences between policies, procedures and what the money laundering compliance officer (MLCO) said should have happened, and what actually happened on the ground.” In other words, whilst the procedures and systems are clearly in place, it’s questionable as to whether they are being followed in all cases. Anecdotally we know that the picture is similar in most regulated sectors across the UK and Ireland.

staff not being properly trained in AML processes, short cuts being taken or not even existing, compliance teams failing to hold the frontline staff to account, or an anti-compliance culture that actively laments due process as 'business prevention.' Whatever the failings, they can typically be traced back to a failure to manage from the top.

So, what's the moral of this tale? It's really about CEOs and their boards appreciating the importance of a compliance culture that is ingrained throughout the organisation, from the top table, right down to the reception desk. Hearts and minds must be awoken to the risks and implications of processing the proceeds of crime and allowing illicit monies into the financial system, not just to their own organisation, but to society as a whole.

TIME AND AGAIN, SIMILAR PATTERNS OF ISSUES ARE

Putting the moral imperative aside, the stakes for noncompliance are high for any firm. Providing a somewhat stark warning to companies, HMRC says its fines are imposed at a level that is ‘both proportionate to the failure and that deters non-compliance’, not to mention that breaches can also carry a two-year prison term.

FOUND DURING REGULATORS’ AML VISITS:

1 2 3 4

A failure of staff to report anything 'suspicious' which usually stems from inadequate KYC and AML procedures and therefore a lack of recognition of something actually being suspicious. Poor identity verification and risk assessment checks, allowing known criminals through the door. Poor Customer Due Diligence – usually due to an absence of proper risk assessment or an effective risk-based approach. This easily allows ‘risk’ through the net and combined with a lack of internal investigation of suspicious activity, results in inadequate SARs reporting. A lack of understanding or appreciation of money laundering risks throughout the organisation as a result of inadequate ongoing training programmes.

Leaders of Financial Institutions need to make it their mission to root out sources of laundered and illicit monies from their institution and create a culture that considers doing so to be a good thing. That collective willpower, combined with best possible technology-led data and analytics tools for effective customer authentication and enhanced due diligence checks, will put any organisation in the best possible position to avoid AML misdemeanours and the inevitable wrath of the regulator. So, the message is clear: whether you’re a behemoth of the financial world, or a fintech challenger, the same regulatory and moral responsibility lies on you to keep on top of both new AML regulations and the rapidly changing and newly emerging forms of financial crime that misuse the system to launder the proceeds of serious crime. Michael Harris, Financial Crime Compliance Consultant LexisNexis Risk Solutions www.lexisnexis.co.uk

The pursuit of profit is almost always found to be the Achilles’ heel in failures of this kind. Whether it’s front line

1 Grant Thornton report, 2016: view original

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PIMFA JOURNAL

SPRING 2021

HOW LONG DOES IT TAKE TO BUILD NEXTGENERATION DIGITAL WEALTH CAPABILITIES?

eading wealth industry experts have reached a consensus on their wealth management trends in 2021. As the second year of the pandemic unravels, technological innovation remains the key focus, as stated by Capgemini, Accenture, and Oliver Wyman. Sustainability is another overarching trend highlighted by the experts, followed by an impending restructuring of fees and the rise of digital analytics, capable of capturing a holistic view of the customers' financial situations. Analysing industry trends, telling them apart from fads, and designing a suitable corporate strategy is not easy. Whichever direction your organisation identifies as a priority, the implementation of innovative capabilities would require considerable resources in terms of time, talent and technology. However, executives' biases can distort this decision-making, especially in technology-driven extensions of service functionality. In the evolving technology space, the industry perception of how long it takes to extend an app's capabilities or add another customer journey can become outdated quickly. The bad news is that outdated beliefs on how much time and effort it may require to update a business model may limit wealth managers' ambitions regarding innovation. The good news is that time to market for innovative technology may be shorter than expected, as we will see from three of Kidbrooke’s recent case studies concerning integrating APIs driving digital analytics for wealth managers. Our stories concern institutions of different sizes and ambition, helping you benchmark how much time it might take to upgrade your services with advanced tools for your financial advisors or to create self-service digital customer journeys.

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BACKGROUND AND THE NATURE OF

EVIDA: BUILDING NEXT-GENERATION

ENGAGEMENT

ANALYTICAL CAPABILITIES FOR AN ASPIRING FAMILY OFFICE

Kidbrooke offers OutRank, an API that powers financial analytics capable of simulating and visualising a holistic picture of the end customers' financial situation at any point in time. OutRank enables financial institutions of any size to build nextgeneration digital wealth experiences. In this article, we briefly summarise Skandia's story of utilising our API to create their new pension advisory tool. We touch upon the experience of Evida, a small Swedish family office equipping their toolkit with next-generation financial analytics. And finally, we describe how TietoEVRY, a leading wealth platform provider, expanded its offering with customer journeys for goal-based investments.

Evida is a smaller Swedish financial advisor. Its founders utilise advanced analytics to turn their customer meetings into enlightening, visual, and transparent experiences, which they believe is a key differentiating factor of their business. Collaboration with Kidbrooke has helped Evida transition from a costly and unreliable Excel model to a next-generation software tool capable of simulating the most intricate financial events in the lives of the customers. Today Evida is nearing the end of a seven-month journey from idea to realisation of their vision.

SKANDIA: DIGITAL PENSION PLANNING FOR ONE

TIETOEVRY: INTEGRATING SAVINGS JOURNEY

OF THE LARGEST LIFE INSURERS IN THE NORDICS

FOR A LEADING WEALTH PLATFORM

In summer 2020, the Swedish financial services corporation Skandia released a new digital pension planning tool running on Kidbrooke's backend APIs. Skandia valued its centuries-old track record of providing reliable and high-quality services, so the expectations were high. Kidbrooke and Skandia spent about four months seamlessly integrating OutRank with the incumbent’s infrastructure and frontend. Such a project's success not only depends on the state of legacy IT systems but also on the requirements of complex decision-making structures, involving teams responsible for compliance, user experience, marketing, frontend and backend development. You can read more on Skandia's journey in the Stockholm FinTech Guide (page 24-25).

PROVIDER IN THE NORDICS Kidbrooke's OutRank API has been used to complement TietoEVRY's WealthMapper platform with predictive insights on the expected performance of customer investments across several parameters. "With these predictive analytics included within the portfolio management capability of TietoEVRY's core systems, financial institutions can offer their customers sophisticated goal-based savings as well," said Sameer Datye, Head of Insurance and Wealth Solutions at Tieto. The use case covers goal-based savings, where the customer can create savings goals, get investment product recommendations, an

expected outcome, create scheduled buy orders and track savings goals. “The integration took only a couple of days, and it was an easy REST-based call intuitive enough to perform the integration without any issues.” said Hanna Viitanen, the Lead Enterprise Architect at TietoEVRY. Read more about TietoEVRY’s case in the recent article by the FinTech Times.

THE IMPLICATIONS OF THESE CASE STUDIES The main implication of these described cases is of a practical kind. Digital transformation is a challenging task in general, but upgrading your existing infrastructure with advanced technology can be a fast, affordable and straightforward journey given the right vision and mindset. Skandia and TietoEVRY are massive organisations with thousands of people in headcount. And yet, it took them from just a few days to a few months to integrate Kidbrooke's OutRank API and complement their offerings with next-generation digital wealth capabilities. The fast and intuitive transformation is not reserved for only large players with unlimited resources either – Evida, a small financial advisor without a development team, anticipates building its entire platform from scratch in under seven months.

Zaliia Gindullina, Head of Business Development, Kidbrooke kidbrooke.com/products

@PIMFA_UK

PIMFA JOURNAL

SPRING 2021

CORPORATE ACTIONS YOU ARE NOT ALONE… BUT SHOULD YOU BE? 73% OF THE INDUSTRY THINK

CORPORATE ACTIONS ARE A CHALLENGE

And if you are one of the 73% you are not alone. If you look around, the chances are that you will see most of your competitors here. This is not surprising. Corporate action processing is not very exciting, and unlike customer engagement and other front office tools, it is unlikely (in isolation to all the other services that you provide) to create a unique selling point, attracting new customers and assets under management. It is however a source of considerable cost and risk regardless of where you sit in the corporate event daisy chain. Additionally, its complexity has historically made it difficult to negate these through automation, resulting in poor straight through processing, especially in the management of voluntary events.

54% OF THE INDUSTRY

PERCEIVE CORPORATE ACTIONS TO BE POORLY AUTOMATED It’s not really anybody’s fault! Historically data was either not available, or expensive, or inconsistent in content / format, or all three. Add in the complexity of many events and it was unsurprising that applications capable of managing even some of the processes were sold at a premium, viable only for the larger players with the scale to

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make them economic. This left the remainder, the majority, to fall back on people… manual processing! But today this it is not the case. Yes, there are still challenges with the data, but new technologies are better able to manage notifications and their amendments from multiple sources, creating flexible workflows and digitising tasks, including election / options capture. STP rates of 80 – 90% or more should now be possible, even for voluntary events. And the new technology has brought other advantages. It is now possible to measure the effort needed to complete events, and project this into the future, identifying possible bottlenecks and allowing periods of high activity to be smoothed by managing internal deadlines or temporarily transferring resources from other teams.

80% OF THE INDUSTRY

CONSIDER CORPORATE ACTION PROCESSING TO BE A RISK There are many risks inherent in corporate action processing. Whether you are talking about operational, reputational or regulatory risk, all start with missing an event, missing a date, misinterpreting / mismanaging an event, or miscalculating an entitlement. Most of these can be mitigated with a combination of more data and modern technology, automating processes and bringing best practice.

More data is counterintuitive. More notifications from more sources would normally increase the complexity, increasing risk. However, as long as you have the means to effectively manage the extra data, it goes without saying that the more people you have telling you about an event, the less chance you have of missing it. And if one of those people is a market data vendor, you are likely to get much earlier notice of events. However, receiving more notification from more sources will lead to more conflicting data, especially in dates and default options. Custodians routinely manipulate ex dates of voluntary events by differing amounts to facilitate their own processing. This creates the possibility of missing one or more custodians’ deadline if the wrong date is chosen. To simplify the challenge often the earliest of custodian deadlines is chosen, but even this is difficult and subject to error if managed manually. Modern applications use rules to deconflict data including dates or can even apply different deadlines for holdings held by different custodians. These same applications apply workflows and tasks on the basis of event type, or even the specific security to facilitate complex events such as the Rolls Royce dividend. These workflows and tasks, once configured, engender consistency and best practice, ensuring events are not misinterpreted and/or mismanaged and that all regulatory requirements are met.

73% OF THE INDUSTRY THINK

CORPORATE ACTIONS ARE A CHALLENGE

So, if you are one of the 73% you are not alone. But I think I would prefer to be in with the 27% who are confident in their corporate action processing, achieving high rates of STP, reducing costs and risks, whilst providing a better service and positive image to internal and external stakeholders. Especially when today, this is now available off the shelf, scalable for the largest and economical for the smallest. The figures used in this article are taken from multiple industry sources and independent research.* Amrik Sanghera Senior Solutions Consultant, Contemi Solutions www.contemi.com

About Contemi Contemi Solutions has been driving digitisation in the wealth management, insurance and capital markets sectors for more than 25 years. Contemi’s mission is to develop innovative solutions on the frontier where industry experience meets cuttingedge technology, in a world of constant change and evolution. Contemi is laser-focused on ensuring its partners have all the tools necessary to run every element of their businesses effectively, so that they can maintain immaculate compliance amid significant regulatory change, constantly gain efficiencies and fulfil their growth potential. Contemi aims to make “do more with less” a reality. To learn more, visit www.contemi.com or email info@ contemi.com

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PIMFA JOURNAL

SPRING 2021

FINANCIAL ADVICE: PREPARING FOR THE HEADWINDS YET TO COME

ccording to the latest ONS data for Q4 2020, the UK economy experienced its largest annual contraction since 1709, with GDP growing by just 1%. But despite reimposed lockdown measures to battle rising Covid-19 cases and allow businesses to open, the nation narrowly avoided a double-dip recession. However, BNY Mellon’s Pershing warns that we are not out of the woods yet, and the wealth management industry cannot rely on lessons learned from the turbulent period of 2008. The current headwinds pose a different set of challenges. But despite this forewarning, Pershing believes wealth managers and advisers can rise out of this crisis if the following set of rules are adhered to.

CONTINUE TO DEMONSTRATE YOUR VALUE Since March 2020, wealth managers have consistently proven their value to clients. While many high-earning professionals have been able to work from home, retirees and young savers have required professionals to reposition their portfolios and essentially ‘batten down the hatches’, eking out income at a time when companies have cancelled or cut dividends altogether. And while the market uncertainty of March 2020 may be behind us, the road ahead is by no means transparent. The wealth management industry must continue to prove its worth in a post-pandemic setting and be one step ahead by identifying the operational threats coming down the line.

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LOOK BEYOND COVID-19 The events of the last 12 months have taught us that a virtual working environment – to some extent – is here to stay, requiring permanent changes to the business model to make way for a hybrid way of working with clients. The hybrid model is characterised by a blend of in-person meetings augmented with virtual meetings and digital interactions. The idea being that firms can take advantage of the cost efficiencies associated with a virtual format while maintaining the trust and relationship-building faceto-face communication. And while the ongoing shift has, and will continue to be, more burdensome for some, all firms should be asking: is my business model in the right shape? And have I made the necessary investments in technology that will prevent my business from falling behind? Procrastination is the trap to avoid here, but an operational overhaul isn’t necessarily the way to go. Instead, incremental changes could be the optimal way to build scalability and resiliency at a time when firms – and their clients – need these core capabilities most. This, in turn, allows change to be carried through the business without the risk of ‘capability gaps’ becoming exposed.

operations and assuring safety of assets. In addition to swapping paper-based processes for digital solutions, firms should also consider handing personal data and clientsensitive information in a work from home environment. Firms will still need to comply with regulatory requirements and will need access to secure systems to do this. The drive to increase the front to back ratio in the industry is a historic tension. But it is one that could flare again under the pressure of economic uncertainty and decline. However, operational transformation in the back office does not have to be a ‘big bang’ type of event. Instead, the idea of small scale, incremental changes can be revisited to keep costs down while improving agility across the business model.

RECOGNISE THE VALUE OF COST ANALYSIS

Back office investment is a key component of business model development but can be somewhat overshadowed by front office transformation.

The market volatility of March 2020 may be behind us, but economists have predicted that UK GDP will take up to two years to reach pre-pandemic levels. And although the FTSE 100 is up around 30% from its lowest point during 2020, it is still 13% down on its price from a year ago. With this in mind, and the difficulty of acquiring new clients during a lockdown, it is not unreasonable to assume that some wealth managers charging ad valorem fees will endure a decline in their income.

It may appear sensible to invest in the revenue-generating part of the business, but for wealth management firms the back office operations are a key cog in the wheel and a crucial part of the business when it comes to efficient

However, wealth businesses operating with a variable charging structure are less dependent on asset-based fees. Therefore, a mix of ad valorem charges and fee-based advice may provide the solution.

DON’T NEGLECT THE BACK OFFICE

While the current climate has pulled costs into focus, analysis should be ongoing. With costs rising, wealth managers will inevitably be forced to assess which expenses are entirely necessary and where sacrifices can be made. Nevertheless, cost slashing comes with a consistent warning – it should never be at the expense of transformation and innovation. Paring back expenses can be done in tandem with investment in capital projects if managed correctly. In reality, no wealth manager can be fully prepared for the headwinds to come, with uncertainty still masking the road ahead. Instead, these firms must reflect on the lessons already learnt and use the little clarity they have to make meaningful decisions in real time that allow for change and disruption down the line.

Matt Lonsdale, Relationship Manager, EMEA and Geoff Carpenter, Treasurer, EMEA BNY Mellon Pershing www.pershing.com/emea

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PIMFA JOURNAL

SPRING 2021

S&P: A MORE BALANCED APPROACH TO LARGE-CAP U.S. EQUITIES

s the economic and market trends have ebbed and flowed over the decades, a few companies often enjoyed periods of extraordinarily fast growth. If such trends extend, it is possible for the allocations of capital across the equity markets (and the benchmarks that reflect them) to become relatively concentrated. At such times, other approaches, such as equal weighting, can offer a more balanced benchmark alternative. Blue-chip U.S. equities currently provide a leading example of higher-than-usual concentrations. A look at the S&P 500®,

as a reflection of the overall US equity market, demonstrates this development. One company, Apple, now has a 6% weight in the S&P 500, larger than the combined weight of 169 smaller constituents. Added to other “Big Tech” names of Microsoft, Amazon, Alphabet, Facebook and Tesla, six companies compose 23% of the index, outweighing 358 smaller names in aggregate. Driven by the performance of the largest companies in particular, the overall concentration of large cap U.S. equity market has risen since 2016 to levels not seen since the tail end of the “Nifty Fifty” era in the mid-1970s.

CURRENT WEIGHTS IN THE S&P 500

S&P 500 CONCENTRATION (HHI)

(As of February 26,2021)

companies whose valuations typically depend more heavily on the hope of future profits.

Over the last five years, a larger allocation to larger companies has contributed to the S&P 500’s 1.7% p.a. outperformance of its equally weighted equivalent. But when larger companies outperform, their benchmark weights rise, increasing concentration and making ongoing index performance increasingly dependent on a select few constituents.

Evidencing a change in the winds, so far in 2021, and even more so over the past six months, the S&P 500 Equal Weight Index has outperformed its capitalizationweighted equivalent by a considerable margin, while the performances of S&P Dow Jones Indices’ benchmarks for U.S. mega-, large-, mid- and small-cap equities have aligned inversely with their size.

There is a natural dynamic that drives an eventual ‘reversion to the mean’ in concentration: by way of example, Apple may have the best return of any major listed U.S. equity since December 31, 2000, with a total return of over 52,397% compared to the benchmark’s 429%.2However, a similar degree of outperformance in the future could be a challenge: in that case, theoretically its weight would rise to well above 99% of the U.S. large-cap universe; a situation that might draw regulatory and political objections along the way.

It is too early to say whether the performance of “Big Tech” has gone into long-term reverse, but the answer may prove of particular importance to U.S. equities: despite the more recent leadership from smaller companies, by historical standards, S&P 500 concentration remains relatively high. By assigning less weight to the very largest companies, alternatively weighted indices such as the S&P 500 Equal Weight can offer an option for strategies seeking to limit concentration within a large-cap equity allocation, while still being reflective of the overall opportunity set in largecap equity markets.

The immediate response in the equity markets to the COVID-19 pandemic was to extend the outperformance by the tech titans, whose business stood well-placed to benefit from the ‘work from home’ phenomenon and, in relative terms, were less sensitive to a slowdown in the domestic economy. However, with trillions of U.S. dollars now anticipated in ongoing fiscal and monetary stimulus and a vaccine program gaining pace, smaller companies, which are typically more domestically focused and have a larger representation in more cyclical sectors, may take a turn in the lead. Meanwhile, an increase in longer-dated bond yields has had the effect of lowering discount rates, to the detriment of “growth”

Tim Edwards Managing Director, Index Investment Strategy S&P Dow Jones Indices https://www.spglobal.com/spdji/en/

CHANGING WINDS: LARGER U.S. EQUITIES HAVE LAGGED IN 2021

(As of each year-end 1967-2020)

200 20% 150 15%

S&P 500 Top 50

Index Total Retrun

HHI

S&P 500 Index Weight

250 25%

43% S&P 100 30%

S&P 500 S&P 500 Equal Weight

21% S&P MidCap 400

100 10%

14% 6%

10% 50

S&P SmallCap 600

5% 0% 1%

0% Apple

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Bottom 168 socks

Top 6

Bottom 358 socks

Graph 1,2,3 S&P Dow Jones Indices. Data as of February 26,2021.

196 7 197 0 197 3 197 6 197 9 198 2 198 5 198 8 199 1 199 4 199 20 7 0 20 0 0 20 3 06 20 09 20 12 20 15 20 18

0 YTD as of Feb 26,2001

3 As of February 26, 2021. Source: S&P Dow Jones Indices.

Past 6 months

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PIMFA JOURNAL

SPRING 2021

WHY HUMAN ERROR IS STILL YOUR TOP CYBERSECURITY RISK YOU NEED A LAYERED APPROACH TO CONTROL THE “HUMAN FACTOR”.

e are called in to deal with countless emergency cyber incidents every year and most of them have one thing in common - human error. A common example is of staff falling for a phishing campaign and giving away secure login credentials that allow the criminals to gain access to your business. System administrators can also be the root cause - we see examples of bad configuration and disabled security controls, which leave the business wide open to attack.

THE SIGNIFICANCE OF REMOTE WORKING We are finding that remote working together with the increased use of cloud based systems, is consistently creating vulnerabilities which can result in serious cyber incidents. Important technical controls which are run centrally in the office do not operate when working away from the office network. Cyber criminals have had a field day compromising poorly set up remote connections. What is more, staff tend to behave differently in a more relaxed, home based environment and may let their guard down. They are also more likely to blur the distinction between business and personal use of their devices. Cyber criminals know all this, and attack using mass phishing emails, trick text messages and impersonation phone calls. They gather information and exploit vulnerabilities. Defending against this requires a far more sophisticated approach than technology alone.

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POLICIES The starting point is to agree what is allowed and what is not allowed. Are your staff aware of your policies and processes? That is not to say that everything should be banned, far from it, but understanding the risks attached to your policies allows you to put in place appropriate mitigations. A common example is staff using company computers to login to personal accounts such as Google. Another is allowing the use of personal mobile phones to access work emails. If uncontrolled, these two things can cause significant issues. Does this sound like your business? If so, we recommend you do something about it.

PREVENTATIVE CONTROLS.

PEOPLE COMPETENCE. It is not enough just to tell people to be careful and to look out for “dodgy emails”. Cyber awareness training, testing, simulated phishing attacks, and good communication are the tools required to improve staff competence against these threats. Typically, we find 20%-25% of untrained staff will fall for a simulated attack but this can be addressed by implementing a proper cyber awareness programme. Effective training and improved communications really will start to change culture.

GOVERNANCE. This final layer is mainly about some proportionate measures to make sure you stay in control and to help you sleep at night. How often do you check that staff are complying with your policies? Do you have any kind of independent assurance that the configuration and controls that you have set-up actually provide protection, continue to work, and are not becoming ineffective over time? At its core this is all about risk management. You need to make yourself aware of the cyber threats facing your business and the likely consequences of successful cyberattacks. The layers above should be used to mitigate and control the risks to reduce them to an acceptable level. David Fleming Chief Technology Officer pimfa@mitigogroup.com PIMFA has partnered with Mitigo to offer member firms a trusted cybersecurity solution to help them protect against cyberattacks and business disruption. Take a look at Mitigo’s full service offer at https://www.pimfa. co.uk/firm/mitigo/. For more information contact Mitigo on 0208 191 9913 or email pimfa@ mitigogroup.com

Only when you understand what your policies are, can you begin to consider how you configure the technology that you already have in place. Your software and systems will have controls that can dramatically reduce the risk if you get a cybersecurity specialist to properly configure them. From web browser settings, through antivirus configuration, to laptop configuration, getting these working together coherently, reduces your reliance on staff.

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PIMFA JOURNAL

SPRING 2021

Cyber Doctor Powered by

WHAT IS THE DARK WEB? The dark web is an online blackmarket place, where criminals can operate, buying and selling illegal goods, services and data. It works on the principle of “onion routing”, where anonymity is achieved by re-routing someone’s internet activity through many dispersed IP addresses, which hide the identity of the computer which the traffic originates from. It has been estimated that there are over 2 million individual connections on the dark web per day, with the majority of sites being used for illegal purposes.

FASCINATING. BUT WHY SHOULD THAT BOTHER THOSE OF US RUNNING A NORMAL BUSINESS? Because it helps to facilitate cybercrime. It provides a busy market in stolen personal and other confidential data, details of compromised servers etc. Data purchased can be aggregated with other information acquired illegally, or publicly available information such as social media posts by your staff. Criminals use this to undertake more sophisticated focused attacks on your business, such as socially engineered phishing. Trade on the dark web has meant that cyberattack tools are now freely available, as are Ransomware as a service (Raas) kits. Websites offering ransomware to “affiliates” (a franchise model) are thriving. These provide market entry to more junior criminals, who no longer need high levels of technical ability to get involved. They can earn a commission by passing on opportunities to more sophisticated criminal gangs, often in Eastern Europe, to fully exploit the financial blackmail potential.

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DARK WEB

OK, SO WHAT’S TO BE DONE? Well, you can’t prevent the activity on the dark web, but you can and must protect your business and your client relationships from these attacks. Cyberattack is a very real risk to all regulated firms, and it should be governed like any other serious business risk. Which is why the FCA expects someone at Board level to be responsible for cybersecurity and operational resilience, and for leading a “security culture” from the top down. You must start with a cyber risk assessment. Then proportionate management of the risks must include periodic vulnerability assessments of technology; dedicated cybersecurity awareness training for staff; policies and control framework; all reviewed on an ongoing basis with independent assurance. The FCA’s Cyber Resilience Questionnaire (CQUEST), provides a starting point. How do you measure up against it?

CYBER DOCTOR POWERED BY MITIGO To get your question featured in the next edition of Cyber Doctor email your questions to cyberdoctor@mitigogroup.com. Mitigo provides specialist cybersecurity services to the financial services sector, covering technology testing, people training and governance, and ensuring legal and regulatory compliance. All for an affordable monthly fixed fee. http://www.mitigogroup.com/pimfa

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PIMFA has partnered with select product and service providers to offer member firms a suite of membership enhancements. Find out more at www.pimfa.co.uk/become-a-member/pimfaplus-promo

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PIMFA JOURNAL

SPRING 2021

PIMFA ONLINE SAFETY BILL S

ince the start of this year PIMFA, alongside consumer groups such as Which?, other trade associations such as UK Finance, and charities and think tanks like the Money and Mental Health Policy Institute and Carnegie Trust have been stepping up our efforts to lobby government to include financial harm within the scope of its forthcoming Online Safety Bill. Through this work we are also looking to bolster our long running campaign on improving the financial and mental wellbeing of UK consumers. Due to be announced in the Queens Speech in May, the Bill aims to prevent certain harmful content from being disseminated on online search engines and social media platforms. It will place a duty of care on those entities to ensure that such harmful content is restricted. Disappointingly however, when the government published its White Paper in December last year, financial harm was conspicuously absent among the list of harms the Bill placed within its scope. This feels like an opportunity missed given what we already know about the growing menace of online scams to our industry and to consumers alike. Attempts to defraud consumers are becoming ever more sophisticated, so much so that it is possible for any one of us to become the victim of a scam. Action Fraud recently said that it received up to 350 fraud reports a week - or 18,000 a year - causing victims to suffer severe emotional distress. While each case was reviewed by trained staff to identify a course of action, the most extreme cases included dispatching emergency services to the victim’s home. In fact, between January and November 2020, Action Fraud said it received 241 phone calls where there was deemed to be a “threat to life” and call operatives were required to keep callers talking until an ambulance crew, or police, arrived. At PIMFA’s recent Virtual Fest 2 Caroline Rainbird, Chief Executive of the Financial Services Compensation Scheme, told delegates that the FSCS was reporting one new fake investment website and at least one phishing attempt every day to the authorities. The FSCS believe this is just the tip of the iceberg and that the true amount of harm is likely to be much higher than it knows about. Moreover, Detective

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Inspector Steve Jackson of the National Fraud Intelligence Bureau (NFIB) told Virtual Fest 2 delegates that the online space had “become a new crime scene” which had been exacerbated by the COVID-19 pandemic, creating a “digital adventure playground for serious or organised crime groups”. Sadly, none of this comes as much of a surprise and it is a sad fact that those that can least afford to lose money are the ones that seem to be the most at risk from scams, and in many cases lose their entire life savings as a result of online fraud. Moreover, according to the Financial Conduct Authority it is those in the front line for the past year; nurses, police officers and members of the armed forces, that appear to be most at risk from fraudsters. Victims are rarely foolish or greedy. Where once fraudsters were easy to identify, they have increasingly become better at what they do. How is the victim of a cloned website scam supposed to know? Do any of us really check that the URL of a website we find on an online search platform to make sure it is legitimate? Scams have become so sophisticated that they often combine impersonation fraud with cloned website fraud, only for the victim to find out too late they have been dealing with criminals.

PIMFA, Which?, UK Finance, the Carnegie Trust and the Money and Mental Health Policy Institute, among others, are all calling for action to be taken to address the fake and fraudulent content that leads to scams online. We, along with MPs such as those sitting on the Work and Pensions Select Committee led by chair the Rt. Hon. Stephen Timms MP and a broad cross section of back bench MPs from all parties, believe the UK government has a golden opportunity to prevent online exploitation and must give online platforms legal responsibility for preventing content appearing on their sites that leads to scams. Frustratingly, most online scams could be prevented with greater cooperation from Domain Name Registration Services, Internet Service Providers and online platforms such as social media and search engines. That’s not to say these firms are idly standing by while organised crime flourishes, but we need a legal framework and genuine enforcement procedures if we are stop online fraud becoming pervasive. To do that we must include financial harms within the Online Safety Bill. PIMFA

It is also a common misconception that these kinds of frauds are perpetrated by lone criminals sitting in their bedrooms engaged in petty online theft. The truth is far more sinister: they are organised, highly skilled criminals that use online scams to fund their other illegal activities. To protect the public from these threats, it is necessary to cut these criminals off from their access to finance by preventing them from scamming the public out of their savings. Recently published research from Which? has found that almost one in 10 people (9%) have fallen victim to online scam ads via social media sites, and the same percentage (9%) via search engines, as online search platforms and social media fail to tackle a flood of bogus ads posted by fraudsters - suggesting that millions of people are at risk of facing these devastating emotional consequences.

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Would you like to contribute an article? Alongside updates from PIMFA, the Journal includes several useful inputs from our associate member firms. These articles are an excellent opportunity to gain interesting insights into the wider industry and to learn more about PIMFA associate members. If you are an associate member who is interested in contributing to future editions of the Journal then please contact: Richard Adler, Director of Strategic Partnerships (richarda@pimfa.co.uk) or Sheena Gillett, PR & Communications Director (sheenag@pimfa.co.uk)

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