PIMFA Journal - Spring/Summer 2020

The Personal Investment Management & Financial Advice Association

JOURNAL SPRING/SUMMER 2020 CLIMATE CHANGE RISK Climate change has become a defining factor in companies' longterm prospects…

THE GENERATION GAP Regulatory change, technological advancement and the needs of different generations of investor...

INDUSTRY VIEW ON REMOTE WORKING From London Royal. While many of us are working remotely as a matter of necessity...

BUILDING PERSONAL FINANICAL FUTURES

CONTENT PAGE

24 Are you letting

your newest clients down?

6How a cyber

4Cyber doctor

insurance policy responds and protects

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4

6

Cyber doctor

How a cyber insurance Don't ignore share class conversions policy responds and protects

Climate change risk

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18

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Providing a retirement Why wealth managers windfall for your child should understand the FCA's alternatives strategy

Client's view: the generation gap

The Generation Gap

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22

24

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An effective board makes morally right decisions

Are you letting your newest clients down?

Industry View on Remote Working

PIMFA Virtual Fest

30 New MSCI PIMFA equity risk index series launch 2

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Cyber Doctor Powered by

I HAVE HEARD EMAIL ACCOUNT TAKEOVER IS AN INCREASING THREAT FOR IFAS. WHAT DOES THIS MEAN AND WHAT ARE CYBER CRIMINALS TRYING TO ACHIEVE? We are seeing really concerning levels of email account takeover. It is particularly prevalent in IFAs who have moved to the cloud-based email facilities (e.g. office 365). It is where a cyber criminal has been able to sign into your email account as you.

Typically, the criminal will try and stay hidden, logging in as you and looking at email traffic searching for an opportunity to commit a crime.

Most often they are looking for movements of money/payments.

They will attempt to divert the payment into their fraudulent bank account, money that is then moved quickly and rarely retrievable.

To avoid being hit, you must ensure you are set up to be resilient against these automated attacks.

We recommend making sure your email account password is completely unique, strong (with numbers, symbols and capitals) and not related to anything that can be discovered about you on your social media. Ensure strong authentication is switched on, email alerts and forwarding rules are reviewed, and that your systems are properly configured to be more defensive including alert set-up, switching audit logs on and reducing the number of administrators.

Email account takeover is on the rise. Please do not wait for an attack to test that you have the right cyber protection in place!

I AM A WEALTH MANAGEMENT FIRM AND I DO AN ANNUAL PENETRATION TEST, IS THIS ENOUGH TO PROTECT ME? No. It’s nowhere near enough. Putting to one side the fact that we find many firms paying over the odds for it, it usually only looks at one part of the technology within a defined scope, and usually only tells you whether the pen tester has been able to break in. Crucially, it is not assessing, or addressing, your real business risks. A proper vulnerability assessment needs to be broader than that, and investigate things such as access controls; remote working arrangements; mobile phone security; the transfer of data; the configuration of backups; and so much more. Plus, usually the pen testing only leaves you with a technical report, but does not prioritise (within the context of your business) the remedial actions or help you with them. And of course pen testing only looks at some part of the technology. It does not help with training or governance.

MY BIGGEST CLIENT HAS RECENTLY BEEN IN TOUCH TO INFORM ME THEY ARE UNDERTAKING AN AUDIT ON MY FIRM, WHAT SHOULD I PREPARE? Supply chain risk is a growing cyber issue, and organisations are now looking to find out whether their service suppliers, and those on whom they rely, are a vulnerability. The FCA has highlighted the risks to both operational resilience and data security posed by an unsecure supplier.

EXAMPLES OF THE TYPE OF THINGS YOU MAY NEED TO SHOW INCLUDE:

1 2 3 4

your documented risk assessments; vulnerability assessments undertaken on your technology; details of your staff cybersecurity training; and the documented cybersecurity governance you have in place and the way adherence to it is monitored.

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_UK

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HOW A CYBER INSURANCE POLICY RESPONDS AND PROTECTS 6

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A

s the new kid on the block, cyber insurance has, for several years now, been viewed as only necessary for large organisations who are perceived to be the natural target for hackers and cyber criminals.

This perception has led to a number of smaller organisations not making the appropriate investment in IT security and cyber insurance and thus leaving themselves vulnerable.

However, this mindset is starting to shift, albeit slowly, as it is widely acknowledged that the combination of the indiscriminate nature of cyber attacks and the importance of being able to get operations up and running again quickly following a breach – regardless of the size of the business – makes it a high risk to all.

First and foremost, investment in robust cyber security, having strict IT protocols, and improving staff training and awareness ought to provide the protection firms need. However, should the worst happen, cyber insurance and the associated breach response services can pick up the pieces and get a firm operational again.

The true value of a cyber insurance policy is often little known until an organisation has experienced a cyber event themselves. Therefore, the following scenario outlines a fictional but feasible cyber event and how a cyber policy might respond.

spent his whole 20 year career at XYZ. Guessing that this had been a possibility for a few weeks now he slowly launched a campaign of both stealing and systematically destroying 2 sensitive staff and client information as a way of reprisal.

The abundance of cyber and GDPR related stories in the news meant Oliver understood the value of personally identifiable information 3 (PII). As a result, he set himself up with a Tor browser account, giving him access to the Dark Web and the marketplaces therein. These marketplaces are typically where leaked data finds itself, looking for the highest bidder.

Oliver’s final day arrives and he leaves the company, handing in his laptop and security credentials.

Meanwhile, staff members are beginning to notice that files are missing. Over the coming days this continues to escalate, culminating in a companywide investigation with the board receiving regular updates from the IT and Compliance departments. At the same time, the company receives a tipoff that sensitive information relating to XYZ has been found on the Dark Web 4 .

Fearing the worsening situation, the nominated data protection officer (DPO) suggests calling the breach response 5 number in their cyber insurance policy to obtain advice from the incident response manager. The manager assesses the situation and advises that this should be a claims notification and immediately triages the risk, initiating the response services most applicable to the situation.

Over the comings days a number of experts are deployed to investigate the cause, restore data files, offer credit monitoring services to those whose information was leaked, and provide legal advice to XYZ relating to lawsuits potentially arising from staff and clients. The cyber security experts identify Oliver as the culprit, allowing XYZ to begin their own legal proceeding against him.

The matter is resolved in a timely manner and XYZ is able to continue trading with minimal impact to the firm.

Although this is a very brief example of how a policy responds, it illustrates the breadth of coverage and the assistance and support available in times of crisis. As cyber attacks become more sophisticated and regulations tighter, it is going to become paramount to have both robust front-end protection combined with the appropriate tools to successfully resolve a cyber incident.

Tom Malcolm Head of UK Cyber New Dawn Risk Tom.malcolm@newdawnriskcom

1 Malicious Insider – this acts as a ‘trigger’ for a cyber insurance

XYZ INVESTMENT MANAGER: MALICIOUS INSIDER Following a recent restructure at XYZ Investment Management, several staff members have been made redundant as the firms looks to consolidate the business. One employee, Oliver, is particularly aggrieved 1 having

In the midst of the crisis the story is leaked forcing, the CEO to make a public statement 6 in order to quash false rumours as well as try to restore confidence in the firm’s ability to operate and safeguard sensitive information.

policy 2 Data Restoration – cover for the cost to restore and, in some instances, recreate data 3 PII – information that can identify an individual - email addresses, bank account details, home addresses, passport numbers etc.

4 Privacy Liability – a policy will cover privacy liability whereby third party claims are made against the policy holder. In this instance resulting from PII found on the dark web 5 Breach Response – access to a 24/7 hotline which triages the risk and engages a panel of pre-approved vendors. These could be and not limited to legal services, forensic accountants, IT forensics, PR experts, credit monitoring services 6 Public Relations – cover for advice and support to protect or mitigate damage to XYZ’s reputation.

Breach Response – just a few of the many services provided

@PIMFA_UK

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DON’T IGNORE SHARE CLASS CONVERSIONS

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ealth managers could be forgiven for thinking that the FCA’s Policy Statement on ‘Making Transfers Simpler’ does not concern them. But, looking beyond the title, wealth managers need to take notice.

Altus explains in more detail.

The FCA has announced in its December 2019 policy statement (PS 19/29) that share class conversions must be supported. Whilst the implementation has been delayed from its original date of July 2020 to February 2021 because of the Covid-19 pandemic, this will have an impact on wealth managers. How exactly?

WHAT IS THE PROBLEM WITH CONVERSIONS?

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The conversion challenge has its origins in the Retail Distribution Review (RDR), from the then FSA, which came into force at the end of 2012. The RDR banned cash rebates from fund managers and consequently fund managers started introducing discounted share classes as an alternative way of giving certain

distributors discounts on fund charges.

For a while it seemed possible that only a few of these restricted, or ‘super-clean’, share classes would emerge but over the years more and more have been launched.

Today there are hundreds of restricted share classes available and many funds have multiple levels of discounts. The challenge comes when an investor wants to transfer their holdings from one investment manager to another who doesn’t hold or have access to the share class held by the current investment manager. It is then not possible for the fund to be transferred in-specie and the holding must instead be sold, transferred as cash and, finally, bought again. It is ironic that the RDR supported inspecie transfers and at the same time prompted the introduction of restricted share classes which made it increasingly difficult to do so.

WHAT’S BEEN DONE ABOUT IT? The conversions challenge is being addressed as part of the TeX open transfers framework and consequently the key steps in providing the solution have been taken by the various organisations which constitute that framework. The component parts of the solution have gradually been emerging over the last few years:

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TISA SHARE CLASS CONVERSIONS, STATEMENT OF RECOMMENDED PRACTICE

2014

UKFMPG ELECTRONIC CONVERSIONS MARKET PRACTICE FOR FUND MANAGERS (ISO 20022 MESSAGING STANDARDS)

2018 TEX LEGAL FRAMEWORK, CONVERSION UPDATES

WHAT’S THE ANSWER? Customers should be allowed to convert their holdings to access the best share classes. If necessary, to effect a transfer, the ceding party should convert the holding to a share class available to the acquiring party, and following a transfer, the acquiring party should also allow the customer to convert the holding to the best available share class.

It should also be emphasised that a conversion is not a switch. Nothing is sold or bought, the units held are simply converted from one share class to another in the same fund. Consequently, unit groupings are preserved and Capital Gains Tax does not apply.

WHAT DOES THE REGULATOR SAY? The FCA believes that lack of support for conversions makes transferring to a new investment manager less appealing to investors. And if investors are less likely to transfer then this will undermine one of its key objectives: to ensure there is healthy competition between financial services providers. Consequently, ceding parties must support conversions when requested by the acquiring party in order to effect an in-specie transfer, and acquiring parties must allow investors to convert to the best available share class post transfer. The rules will apply to wealth managers and any firm providing similar services, and the FCA has made it clear that it expects custodian and fund managers to play their part too. The new policy was confirmed in the December 2019 policy statement and the new rules come into effect in February 2021. come into effect on 31 July 2020.

2019

UKFMPG ELECTRONIC TRANSFERS MARKET PRACTICE, CONVERSION UPDATES

2019 TEX COMPLIANT SYSTEMS UPGRADE 2021

UKFMPG ELECTRONIC TRANSFERS MARKET PRACTICE, ADDITIONAL CONVERSION UPDATES In short, all the supporting agreements, standards and technology are already in place to support conversions.

WHAT ARE WEALTH MANAGERS DOING? Some wealth managers are already handling conversions for customers as part of the transfer process, although this is currently a rather timeconsuming, paper-based process. All have accepted that the anticipated volume of conversions will require the support of new electronic conversion requests rather than existing paper processes. Electronic solutions for conversions are already available.

HOW WILL IT BENEFIT THE END INVESTOR? The hope is that investors will find it easier to access the cheapest share classes. They won’t need to suffer the risks and costs of selling and rebuying the same funds.

The FCA’s expectation is that this will encourage more investors to switch for better deals and lower costs, and consequently that competition in the industry will increase. And ultimately, therefore, that investors get even better deals in future.

Ben Cocks, Director, Altus Business Systems, www.altus.co.uk @PIMFA_UK

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have regard to the financial implications of their decisions. In addition to liability risks, the pricing implications of climate change could include higher capital expenditure, insurance premiums and operational costs, and a decrease in liquidity and pricing.

CLIMATE CHANGE RISK

Whilst diversifying portfolios away from traditional "polluting" industries is one factor, it does not remove investors’ exposure (and, consequently, potential exposure to asset managers) to broader climate change-related risks. Most companies now face some exposure, even if not in the energy sector or other carbonintensive industries. It is vital, therefore, for asset managers to understand that addressing stranding and other financial risks and opportunities of climate change is not a oneoff process. It needs to become a permanent part of everyday decision-making, through an evolution of investment beliefs and strengthened governance and risk management, including working with clients on sustainable investment strategies and increasing due diligence into underlying investments. The widely embraced Task Force on Climate-related Financial Disclosures (TCFD) regime will be integral to this.

THE RESHAPING HAS BEGUN

"T

Climate change has become a defining factor in companies' long-term prospects… awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.

hese words were spoken before the onset of Covid but they are not the words of a climate activist. They are taken from Larry Fink's letter to CEOs on 14 January 2020. Fink is the CEO of BlackRock, the world's largest asset manager, with nearly US$7 trillion in investment. Mr Fink's letter described; a path of divestment away from fossil fuels, investing in funds that ban fossil fuel stocks, a deeper embracing of climate-related disclosure and an intention to use BlackRock's vote against managers who are not addressing climate change.

What this demonstrates is the increasing awareness, and acceptance, of climate change and the financial implications of its risks. And the clear message from the investment community, governments and prudential bodies is that rebuilding economies post Covid must have the clearest regard for climate change. Indeed, what Covid has demonstrated is that systemic risks which can go to the heart of the global economy are very real and need to be managed and mitigated.

And the implications are not confined to the largest asset managers. The rapidly changing climate landscape will increasingly impact financial and investment advice to individuals, families, charities, pension funds, trusts and beyond. This is particularly so as ethical considerations and financial awareness of the implications of climate change take firmer root in the relationship with financial advisers and investment managers. Societal, political, regulatory and governmental pressures are going to shape investment decisions and the way in

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which sustainable asset classes are built and promoted.

A note of caution - this shift must reflect the true position and not just be “greenwashing” i.e. dressing something up as green for PR reasons when it is, in fact, not. If discovered, this can have a detrimental impact on the business. It is inevitable that "greenwashing" will be the subject of increasingly robust regulation. As if to demonstrate this point, there have been two related developments. In May 2020, Jay Clayton, Chairman of the Securities & Exchange Commission, urged caution and clarity when analysing ESG metrics and raised specific concerns over the potential for greenwashing. In the same week, Germany's highest Civil Court ordered Volkswagen to pay more than Euro 28.000 to an owner of a diesel minivan, constituting a landmark judgement of precedent value in respect of others impacted by "Dieselgate".

With this increased focus, a greater emphasis on ESG considerations and a public desire for change, there are also reputational factors to consider. Many major institutions are beginning to publish their investment decisions around climate risks to demonstrate that they are addressing sustainability and there is a growing expectation that businesses will operate in a way that does not negatively impact the environment. The shift by asset managers is already occurring and is spreading across the boards of pension funds, charities and trust companies.

To compound the above pressures, investor awareness and engagement is growing and the failure to consider and actively mitigate these risks may expose asset managers to liability. Specifically, investment managers could face claims if they have purchased stocks without fully considering the risks of a changing climate to their portfolios, or if they are deemed to have held onto assets too long, where climate change risks subsequently result in sharp price corrections. The outgoing chairman of the Bank of England, Mark Carney, gave a stark warning to the industry that they could have stranded assets of as much as £15.3tn rendered worthless if they are reliant on fossil fuel industries. Research

by Cornerstone in 2019 estimated that $3-24 trillion, or 2-17%, of global financial assets are at risk of loss from climate change.1

In addition to potential civil claims, regulatory requirements are tightening. In June 2019, the FCA brought in rules that asset managers must disclose their policies on how they engage with their invested companies and how their investment strategies create long-term value. Whilst not specifically addressing climate change, long-term strategies will, without question, need to factor in sustainability and climate risks. There is also a move towards mandatory climate change financial disclosures.

Simon Konsta, Partner, Clyde & Co, www.clydeco.com

With financial advisers, asset, investment and wealth managers being at the centre of investment decisions, it is crucial that they 1

However, it should be remembered that the changing landscape also opens up opportunities for those asset managers who are early adopters and who adapt their investment strategies; they could potentially limit their exposure to climate-related losses and gain an important lead on competitors.

‘No Place to Hide? Climate Change and Systemic Financial Risk’, Cornerstone Capital Group, 2019

@PIMFA_UK

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PROVIDING A RETIREMENT WINDFALL FOR YOUR CHILD

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lanning ahead and starting early can really help when it comes to building up a financial future for the children in your life. The Junior ISA (JISA) is a popular choice for many, but one often overlooked investment option is the ability to open a pension for your child, to help set them up for retirement.

INCREASINGLY POPULAR CHOICE Although retirement is a very long way off for your child, putting some money aside now means they can be one step ahead when they come to plan their retirement. Any parent or legal guardian can set up a pension, which will automatically transfer to your child once they reach the age of 18, at which time they can continue to contribute or leave the savings invested. Under current rules (which may be subject to change in the future) they can access the pension from age 55.

A VALID OPTION, WORTH CONSIDERING In addition to your own pension contribution allowances, people often don’t realise that they can also put money into someone else’s savings.

If the recipient is a non-taxpayer, as most children are, they are still entitled to tax relief on any contributions made. Pension rules allow anyone to pay contributions on behalf of a child,

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so other family members such as grandparents can get in on the act too.

HMRC data indicates over 60,000 families have opened pension plans for their children. As personal pensions come with no minimum age restriction, many people opt to open one when their child is born.

KNOW THE NUMBERS Current pension rules allow you to put up to £2,880 per tax year into a pension for a child. Tax relief of 20% means that this is then topped up to £3,600. No further Income Tax or Capital Gains Tax will be payable on the investments held in the personal pension, until your child starts taking benefits, (which currently cannot be before age 55). If you start pension contributions once a child is born and used the full allowance, the contributions would cost just under £52,000 over 18 years, and this, under current rules would be topped up by around £13,000 in tax relief.

Assuming growth in investments over the period, when the child reaches age 55 currently, they would have a sizable pension pot to draw upon, the spending power of which will of course depend on the passage of inflation over the intervening years.

GETTING THE BALANCE RIGHT Aside from retirement provision, you also need to consider providing financial assistance for more pressing priorities, such as university fees or money for a house deposit, or a wedding perhaps. Any pension savings won’t be available to help children with these financial priorities earlier in their adult lives.

So, ideally a pension for your child should be regarded as part of a wider plan, rather than the only investment embarked upon.

START A PENSION FOR YOUR CHILD TODAY With the full State Pension currently £168.60 a week, this is certainly not enough on its own to provide a comfortable retirement, so why not set the wheels in motion to provide a retirement windfall for your child? It’s also a great way to introduce your child to the concept of long-term saving.

Families thinking about how to save and invest most efficiently during 2020 shouldn’t overlook pensions for children. Even if the full allowance isn’t contributed, any money saved could still provide a valuable nest egg at retirement.

If you would like to know more about investing for children, please get in touch.

Setul Mehta, Head of Sales Operations Mortgage & Wealth, Openwork, www.openwork.uk.com The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

@PIMFA_UK

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WHY WEALTH MANAGERS SHOULD UNDERSTAND THE FCA’S ALTERNATIVES STRATEGY

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n a recent flurry of activity, the FCA has released a series of Dear CEO letters setting out its supervision strategy to address the key risks of harm to customers and markets that the regulator sees in the Asset Management, Financial Advisory, Platform and Alternatives sectors.

These letters come on top of the Dear CEO letter sent to Wealth Managers last June where the FCA, in a rather convoluted manner, established Suitability, Best Execution and Transparency as regulatory priorities, including fraud, market abuse, financial crime, conflicts of interest, client money and assets and others, thrown in for good measure.

selling, and claims the appropriateness of investment products is not always considered in retail distribution, citing inadequate controls and oversight over client money and assets, market abuse, market integrity, risk management, money laundering and financial crime and the impact of EU withdrawal as areas of concern.

The FCA recognises that its sectoral approach means there will be risks which are common to firms and business models across sectors.

Building on that acknowledgement, it is also possible that risks may be identified in one sector but should in fact resonate in another.

Most asset managers would want to consider the extent to which this broad set of risks is relevant both directly and indirectly to their business models, not just Alternatives. While the FCA focuses on retail mis-selling of alternative investments, alternative investment managers do not typically provide services to retail investors.

So, by adopting a principles-based approach consistent with Product Governance and the FCA’s focus on supervisory “outcomes”, the flip-side to the FCA’s concerns with Alternatives is those who distribute them and who do have retail relationships, advisers, wealth managers, platforms and administrators.

Take the FCA’s Dear CEO letter to the Alternatives Sector. The FCA describes its alternatives portfolio as predominantly managers of alternative investment vehicles like hedge funds or private equity funds, managers of alternative assets directly, or advisors on these types of investments or investment vehicles. Amongst this group, the FCA identifies the key risks as mis-

The promotion of non-mainstream pooled investments (“NMPI”), as the FCA refers to alternative investments, has always been highly restricted for retail investors. Rules introduced in 2014 require distributors to make a suitability assessment where the NMPI is sold under advice or managed under a mandate, or an appropriateness assessment where it is sold on a nonadvised basis. The same rules place

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significant evidential requirements on the promoter’s determination of high net worth or sophisticated investor status, amongst the other exemption categories permitted by the rules from the general prohibition on promoting NMPIs to retail investors. The latest FCA Sector View 1 shows that nearly 20% of wealth management investment assets, £181 billion, are “execution-only”, i.e. non-advised.

The FCA, however, does not provide a justification for its view that “far too often, the appropriateness of investment products for (retail) investors is not adequately considered”. Analysis of the European Securities & Markets Authority (“ESMA”) recently published “Annual Statistical Report EU Alternative Investment Funds 20202 ”, based on over 30,000 reports from authorised EU alternative investment fund managers, suggests that hedge funds and private equity are not the problem.

Whilst the report places the UK as the largest EU state for marketing on non-EU AIFs and where 80% of hedge fund managers, by NAV, are established, ESMA’s report suggests that hedge funds and private equity have a low level of retail investors compared to other types of alternative funds.

AIF Investors Mainly professional Investors Total EU Other AIF Real estate Private equity Hedge fund FoF 0%

20%

40%

60%

80%

100%

Liquidity risk for AIF with no arrangement AIF type

AIF with liquidity mismatch

AIF with no liquidity mismatch

Yes

No

Yes

No

FoFs %

10.3

11.1

20.7

57.9

HFs (%)

10.1

2.4

61.4

26.0

RE funds (%)

9.1

8.2

14.0

68.7

PE funds (%)

1.0

5.5

3.8

89.9

Other AIF (%)

11.8

16.9

25.1

48.3

Total AIFs (%)

10.1

12.9

22.6

54.4

Total NAV (%)

17

17

28.3

37.7

Interestingly, these other types of funds – fund of funds, real estate and a significant sized category of “other” funds - tended to have weaker arrangements to manage liquidity risk than hedge funds and private equity, which increases the importance on the distributors suitability or appropriateness assessment when the product is sold, as well as the products alignment with the investors risk profile.

If, as a wealth manager, adviser or platform, you are involved in the distribution of alternative investment funds to retail investors, and your business model contains distribution on a non-advised basis, the message from the FCA’s Alternatives Sector supervision strategy and the published ESMA data is that, to identify mis-selling of these products, the FCA may need to look in an alternative place.

Jon Wilson, Director, Ellis Wilson, www.elliswilson.co.uk 1 https://www.fca.org.uk/publication/corporate/sectorviews-2020.pdf 2 https://www.esma.europa.eu/sites/default/files/library/ esma50-165-1006_asr-aif_2020.pdf

@PIMFA_UK

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CLIENT’S VIEW: THE GENERATION GAP

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egulatory change, technological advancement and the needs of different generations of investor all present challenges for wealth management firms in providing the best services for their clients, and for clients in choosing the best wealth manager for their needs.

Compeer’s Clients’ View survey delivers unique analysis of the opinions of end investors. We present our research to the industry at an annual conference, which is attended by senior representatives of UK wealth management firms. Below, we will draw out some key themes from our most recent results and suggest what actions firms can take to attract and retain clients.

Our latest research, presented in December 2019, covers the opinions of 1,000 affluent and high net worth investors. This sample represents all age groups (average age: 52) and portfolio values (average investable assets: £670k).

The gender split in the sample is 58% male, 42% female.

The services provided by wealth management firms should, in theory, be developed around the clients’ needs. However, Compeer’s data shows that not all clients believe this is the case. 39% of investors would not describe

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their wealth management firm as client-centric. That such a large proportion feel this way should worry firms; clearly there is plenty more they could do to put client needs first.

Failure to address these concerns could quickly lead to a frustrated client base. Our research shows only 15% of clients feel their relationship is with the firm, whereas 43% say their loyalty is to their individual advisor.

Incidentally, this may explain the limited impact of robo-advisors, as investors demonstrably value human contact over reduced fees.

In any case, if client concerns are not dealt with by the firms, it could result in outflows: 39% of investors say they would follow their advisor to another firm.

There is good news for firms, despite these concerns. 52% of clients felt that value for money had increased over the past 12 months, with only a small number (6%) feeling a reduction. Value for money, which includes general service quality and investment performance, is ultimately the factor which will attract and retain clients. MiFID II resulted in increased transparency in costs and charges: clients are more aware than ever about the money they spend on wealth services.

With a growing demand for tech, a slick digital offering can play a significant role in attracting new clients, especially younger investors. While our investors have an average age of 52, there is a generational gap on the importance of digital services. By sectioning the data for those under the age of 40, we see that factors such as available technology, wealth planning services and ESG offerings are almost twice as important to the younger cohort.

Firms are already adopting tech such as mobile apps and secure messaging systems to enhance the level of communication between the advisor and their clients.

However, few firms in the industry offer well-developed ESG services, so those who make the first move are guaranteed to catch the eye of younger prospective clients.

Improvements in ESG and wealth planning services were requested by 49% of clients under 40, with over 70% saying they would change their firm if these services were not developed further. Sustainability, for both the environment and their own financial position, is clearly a priority for the next generation of investor.

52% of clients felt that value for money had increased over the past 12 months, with only a small number (6%) feeling a reduction.

The aggregate data also highlights a lack of patience in the younger client. On average, investors under the age of 40 are 10% more likely to change their firm than the total sample. This should be a warning sign to firms that the next generation are less tolerant of poor quality service.

is where most improvement is requested; 38% of clients looked for significant or very significant improvement, with 70% of these likely to seek another provider if no improvement was seen. While there is a demand for more digital services, such as client portals or mobile apps, a failure to develop these is less likely to result in a mass exodus of clients. A failure to improve the overall quality of service seems more likely to initiate client outflows and, given the rates clients pay, there’s little excuse for poor responsiveness or a lack of politeness from staff at the firms.

It is clear that wealth management firms could make positive changes in order to attract and retain clients. A common request from the investors in our sample (and crucially, one that should be simple to implement) is for more formal client surveys, which would go a long way to improve client satisfaction. Listening to client feedback and taking action to meet their requirements should be the first step. Developing an investment offering which appeals to the priorities of the next generation of long-term clients is also vital, as is ensuring that digital engagement is an enhancement to client service and not a replacement for face to face meetings with the client’s advisor.

Tom Thwaites, Compeer Analyst, Analyst, www.compeer.co.uk

Client feedback should be used not only to upgrade existing services but also to demonstrate how firms value their client’s opinions. Due to the considerable drop in asset values in Q4 of 2018, it comes as no surprise that investment performance

@PIMFA_UK

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THE GENERATION GAP IN NUMBERS

DO YOU BELIEVE YOUR RELATIONSHIP LIES WITH YOUR INDIVIDUAL ADVISOR OR THE FIRM THEY WORK FOR?

Our latest research, presented in December 2019, covers the opinions of 1,000 affluent and high net worth investors. This sample represents all age groups (average age: 52) and portfolio values (average investable assets: £670k). The gender split in the sample is 58% male, 42% female.

42%

15%

43%

Both the firm and the individual advisor

The Firm

The Individual Advisor

SAMPLE BREAKDOWN BY AGE Average age = 52

123

97

86 Under 30

31-35

71

36-40 41-45

72

85

46-50 51-55

Average Investable Assets = £670k

£10 million+ 18

www.pimfa.co.uk

153 13 £5m£9.99m

55-60 61-65

66-70

291

SAMPLE BREAKDOWN BY INVESTABLE ASSETS

11

117 123 103 123

7 £2.5m£4.99m

213

71+

237

75 £1m£2.49m

£500,000- £250,000- £100,000- £50,000£999,999 £499,999 £249,999 £99,999

% suggesting significant or very significant improvements are required

Of those suggesting improvements are required, % that are likely to switch provider if improvements are not made

Client Portal or Website

Mobile Application

Investment Performance

Formal client Surveys

ESG and SRI services

Wealth Planning Services

Total Sample

31%

32%

38%

33%

27%

29%

Younger Investors

52%

53%

55%

53%

49%

51%

Total Sample

44%

48%

70%

51%

60%

63%

Younger Investors

56%

66%

72%

65%

70%

74%

@PIMFA_UK

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PIMFA JOURNAL

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On 3rd & 4th June we ran the inaugural PIMFA Virtual Fest to ensure that, regardless of COVID-19, our members has access to expert information and insights on the latest topics affecting our industry and access 10 hours of CPD – all entirely free for members only.

Held entirely online over 2 days the virtual conference showcased 30+ speakers including Mark Carney, exGovernor of the Bank of England, The Rt Hon Baroness Morgan of Cotes (Nicky Morgan), John Glen MP, Economic Secretary (HM Treasury) and FCA’s Megan Butler.

All sessions were broadcast live online over the 2 days and attendees watching were able to pose questions via the online platform and covered an array of topics including the impact of COVID-19, cyber resilience, ESG investing, resilience and more. The response was fantastic with over 500 delegates registered to date and this continues to rise for the on demand content.

We have made every session available to view on-demand for 2 months after the fest, so if you couldn’t make the live event, you can catch-up until 4 August – still free for members.

Just register your details here: https://www.pimfa.co.uk/event/virtual-fest/

THANK YOU TO OUR SPONSORS

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www.pimfa.co.uk

@PIMFA_UK

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PIMFA JOURNAL

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AN EFFECTIVE BOARD MAKES MORALLY RIGHT DECISIONS A year since Woodford was hot news, its flagship fund frozen - and yet the FCA has still not published any findings or lessons to be learned.

But let’s not kid ourselves here.

We don’t need to wait: the real issue is Corporate Governance. It doesn’t matter whether everyone acted within the rules, or not; good governance is supposed to promote a company’s long-term health. It failed. And the root cause of failure is ineffective leadership.

Wealth managers can learn from this crisis. Even before the regulator declares its hand, we have a golden moment to get ahead and make corporate governance fit-for-purpose and Boards truly effective.

The Board is a team, and the primary mechanism for implementing corporate governance. It performs four key functions, which can be both complementary and conflicting, as illustrated in Peter Tunjic’s DLMA analysis model:

1

Direction – determining what’s possible.

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3

2

Leadership – inspiring a team to realise company purpose.

4

Management– driving and monitoring actions to achieve the stated direction.

Risk Assurance – monitoring that the company’s actions are in line with its stated risk-appetite.

Value Creation

Non-executives

Direction "What could be"

Leadership "What will be" Executives

The good news is that there are a few, key actions that can get you back on the right path. The 2018 Financial Reporting Council (FRC) guidelines already focus on the softer aspects of governance, and whether your company is a large group or a small independent, the principles for board effectiveness are the same. principles for board effectiveness are the same.

Leadership

Direction

Our studies, however, show a common theme where ‘Directing’ and ‘Leadership’ capabilities of wealth manager boards underperform compared to UK corporates overall:

Management

UK corporates overall UK wealth Management firms Sionic observation Risk Assurance

MAKING TEAMS WORK

Sionic works with wealth managers to increase Board effectiveness. What we often find is that while many firms have risk controls and regulatory compliance in place - as you might expect – all too often this is at the expense of softer issues: • fully defining company purpose and vision - beyond “growth” • meaningful stakeholder engagement - beyond shareholders • cultural leadership - making the right decisions

In effective boards, the roles of Executive Directors and Non-Executive Directors (NEDs) work in harmony, providing checks and balances (value protection) at the same time as promoting the long-term health of the company (value creation).

Risk Assurance "What if"

Management "What to do"

Value Protection

GETTING THE RIGHT MIX

To be truly effective, a Board needs actively to tune these dynamics and review them periodically. Too many firms don’t look at their Board composition holistically, but rather as a collection of (albeit talented) individuals.

As an industry, we need a breadth of skills to make effective decisions that consider employees, clients, society and the environment, as well as the growth of the firm. We need a dynamic across the team that supports all four functions of the Board. Successful Boards understand that: • diversity matters, not as a tick box exercise but to ensure critical thinking and appropriate challenge from members who bring a breadth of skills and different professional and life experiences; and • continuous succession planning is essential. The skills and experience the Board needs will change over the company’s lifecycle.

CHANGING ROLES

NEDs often start as ex-Executives and many Executive Directors are promoted internally to a Board from the management team. What’s lost in translation is that a management role is different from a Board role, just as a Non-Executive is different from an Executive one. While subtle, these differences matter. We often observe

individuals stepping ‘out of role’ during Board meetings. Firms should not shy away from re-training senior individuals to understand their Board role fully.

Even for those with experience, an effective Board needs a structured onboarding process specific to your firm. Again, our reviews show few wealth managers onboard new members effectively. All new Board members should be fully briefed in their role requirement, board processes, company articles, company purpose and risk appetite at the outset. And for board members new to a firm, walking the floor to meet the team, understand the culture and the stakeholders (employees and clients, not just shareholders) is invaluable.

MAKING TIME

Our reviews also reveal that wealth management firms are not spending sufficient time, beyond quarterly meetings, to: • understand each other – particularly where new members are joining an established Board; • determine / refresh company purpose, vision and strategy – at least annually • develop a stakeholder accountability framework; • research the impact of major decisions, including engagement with

management in advance of the decision-making; • define the desired culture, and to put in place incentives that drive behaviours to support it.

Too little time is spent on ‘Direction’ and on nurturing company culture in particular. This is not just a mistake; it could prove an existential risk. Culture is a key component in making the right decision and your greatest protection against making a bad one. The Board must embed a culture where, if a course of action doesn’t feel morally right, it almost certainly isn’t.

If the Woodford fund had had a clear company purpose (clarifying whether liquidity was appropriate); clear accountability to stakeholders (retail vs. institutional); and a board able to say “no” on the basis of what was right, not just within the rules, things might have been very different.

It’s time wealth managers learned that lesson – and acted on it.

Gilly Green, Managing Partner for Wealth Management and Private Banking, Sionic, www.sionic.com

@PIMFA_UK

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PIMFA JOURNAL

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ARE YOU LETTING YOUR NEWEST CLIENTS DOWN? FIRST IMPRESSIONS SET THE TONE FOR THE REST OF YOUR RELATIONSHIP The onboarding process is the ultimate first impression to your clients and your first opportunity to win them over; as the old saying goes, you never get a second chance to make a good first impression.

Get the basics of your onboarding process right and set the tone for the entire client lifecycle. If you were to open a Bank account and they said it would be weeks before you started earning interest would you walk away or carry on?

WHY IS EFFICIENT, SEAMLESS CLIENT ONBOARDING SO VITAL? Onboarding is one of the most important aspects of a client-wealth manager relationship and a critical first step in the advisory journey.

With stiff industry competition in the digital era, customer expectations are higher than ever and customer satisfaction/

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experience is a key differentiator for firms. HNWIs and the younger generations of clients who are inheriting and creating the next vast wave of private wealth demand express, transparent experiences.

Many wealth managers are losing revenue opportunities because they don’t understand the importance of onboarding. Unfortunately, onboarding done badly drives clients away because the process begins the moment a prospect becomes a client. Perhaps wealth managers make the mistake of turning the client onboarding process over to clerical staff, or worse a legacy platform, rather than making it a personal service. The manual processes and legacy platforms are cumbersome, complex and confusing, and can take several weeks to complete.

Here’s why efficient and seamless client onboarding is more important than ever.

KEEPING IT PAPERLESS IN THE AGE OF SOCIAL DISTANCING

A survey from Thomson Reuters showed – about 92% of firms estimated that current Know Your Customer (KYC) on boarding processes cost roughly $28.5 million each year.

— SURVEY, THOMSON REUTERS

If the environment itself was not a compelling external factor to your digital transformation, the COVID-19 crisis certainly is. Automating and digitising some or all of the client onboarding process has become more vital to maintain social-distancing measures as it reduces the number of touch points.

Your new customers are spending much more time at home and online and need your support to manage their finances and ease the financial pressure. Financial Institutions need a full range of digital tools to acquire and manage their customers; not just those who are used to digital channels but also those who would previously have preferred to use a branch.

ONBOARDING FOR INTERGENERATIONAL WEALTH MANAGEMENT GlobalData estimates that $8.6tn of global HNW wealth will change hands over the coming 10 years.

One in four new HNWIs or holders of ‘new’ money will change wealth managers when they inherit a

portfolio. Thus, new money is a great prospect for new business as younger investors don’t prefer to stay with the same relationship manager as their parents because they have different needs and goals to those of their parents. And, as those younger clients inheriting this money live in the digital economy, they are most likely to be driven away by an outdated onboarding process.

REVENUE AND COST IMPLICATIONS The traditional onboarding process can take up to 4-12 weeks and 5% of onboarding steps account for 50% of time and cost.

This is known as a lost opportunity cost, as there is no revenue for that period.

In 2019, global penalties totalled $36 billion for non-compliance with Anti-Money laundering (AML), Know your Customer (KYC) and sanctions regulations, according to laundering (AML), Know your Customer (KYC) and sanctions regulations, according to recent research.

Another survey from Forrester Consulting predicts that, on average, clients are contacted TEN times during the onboarding process and asked to submit between five and up to a hundred documents. Also, it costs up to $25,000 per client, with the average cost calculated at $6,000 per new client.

Adopting digital “Know Your Customer (KYC) can reduce turnaround time by up to 90%, reducing onboarding costs by up to 70%.

For many banks, these figures amount to millions of dollars every year that could be rightly invested back into their innovation budgets. @PIMFA_UK

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PIMFA JOURNAL

SPRING/SUMMER EDITION

Now more than ever, your customers need uninterrupted digital financial services. It’s time to become simpler, faster and to expand your digital

100% Degree of Automation on Key Onboarding Activities

channel offerings. It can lead to happy clients who invest more money.

15

15

17

14

Completely Automated More Automated than Manual

For modern wealth managers, effective onboarding is essential. If you do

Even Mix of Manual and Automated

not serve a clients’ needs fully from the beginning, the clients may leave

More Manual Than Automated

and take their money with them.

33

33

32

30

Completely Manual, Paper-based

50%

AUTOMATED PROCESSES TO TAKE THE COMPLEXITY OUT OF ONBOARDING

WHAT DOES THE ONBOARDING TECHNOLOGY NEED TO DO?

Younger clients have lived all their lives in a digital economy that often provides near instantaneous customer service.

They are used to placing orders instantly on platforms like Amazon or Alibaba, therefore an onboarding process that takes several weeks or months will definitely frustrate them.

•

What they want is an app that asks all the relevant questions once. The app only needs to ask questions so it can verify the client’s identity through biometrics.

Obviously, the easiest and most seamless method of verification will be fingerprint or facial recognition using the customer’s phone.

WHAT ARE THE ATTRIBUTES OF A POSITIVE ONBOARDING PROCESS? •

•

• •

•

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The process is simple and seamless; the client only needs to enter information once.

It is fast, the client receives a response to all enquiries within a few seconds or minutes.

The wealth manager receives an update on every step of the process The process complies with all laws and regulations- Know Your Customer (KYC), Anti-Money Laundering (AML), tax reporting, privacy regulations, etc.

All managers and executives need to complete the onboarding process themselves to see if it works.

www.pimfa.co.uk

•

•

•

•

Offer fast access to an app.

Remember, today’s client normally gets all the information he or she wants through his or her phone 24 hours a day, seven days a week. Helps to stay competitive.

Use technologies like artificial intelligence (AI), and robotic process automation to process applications as quickly as possible.

Provide smooth access to a client’s information as many wealth managers and advisors are working from home One team will oversee onboarding for the entire organisation. That teams’ job is to get new clients into the system quickly and seamlessly.

The more automation the better for speed, reduction of errors and limiting security risks. Remember, algorithms have no incentive to lie or steal.

Kean Williams, CEO, Contemi Solutions Europe www.contemi.com

On average, clients are contacted TEN times during the onboarding process and asked to submit between five and up to a hundred documents. Also, it costs up to $25,000 per client, with the average cost calculated at $6,000 per new client.

35 Manual Onboarding activity with scope of automation

36

36

33

10

11

15

17

4

6

5

4

Funding Accounts

Opening Accounts

Capturing Prospect Information & Consent

Completing Necessary Forms and Disclosures

0

Source of Graph: Group Futurista The Futurista graph shows wealth managers have automated 40% of their onboarding process, but it also shows that the market has a long way to go in servicing and attracting new clients.

— SURVEY, FORRESTER CONSULTING

@PIMFA_UK

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PIMFA JOURNAL

SPRING/SUMMER EDITION

STICK TO THE POSITIVES

INDUSTRY VIEW ON REMOTE WORKING HINTS, TIPS & PRACTICAL SOLUTIONS

While many of us are working remotely as a matter of necessity, it’s quite likely our current experience will impact the way we work going forward. Lessons learned now could prove invaluable to all of us and help you build a more robust and sustainable model both for now and in the future.

I thought it would be useful to share some best practice, hints and tips from people in our industry who have spent many years honing their skills and expertise when working remotely.

WHERE TO START

A good place to start is segmenting your client bank. You can target different groups or individuals with different messages by different mediums. There are many ways to do this. If you predominately have protection clients, you might split the client bank into those who have a mortgage, are self-employed or are Limited Company Directors. You might

As we celebrated the start of a new decade less than 6 months ago, I’m sure none of us could have predicted by spring we would be facing months of lockdown. And for most of us, a completely new discipline of working solely from home.

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CLIENT SEGMENTATION

want to split by lifestyle. Clients who are married, have children or are divorced.

Another segment might be clients who have been declined due to a medical condition. This could prove invaluable as illness specific covers, such as Royal London’s Diabetes Life Cover, enter the protection market.

For many people this is a very worrying time. They’re out of their comfort zone. Their world has been turned upside down. They have more time to dwell on things. Which often isn’t ideal when there’s an abundance of bad news about. I know it sounds obvious, but when contacting clients, do your best to keep it positive and practical. Don’t be a reporter or amplifier of bad news. Unless there is something practical you want the client to do in light of that news.

You can use relevant external content, provided you’ve checked the accuracy and have permission to use it. This could be helpful with general market updates where broad generic commentary from an industry expert is suitable. Keep this to a minimum though, as primarily your clients want to hear from you.

HAVE A BIT OF STRUCTURE It’s a good idea to create structure in your day. Consider getting up and starting work at the same time you would be going into the office. If you’re doing video calls make sure you dress appropriately. As well as looking better, it’s likely to put you in the right mind-set to work. Which can be one of the biggest hurdles to overcome in our current working climate.

Set a start time, lunch break and a time you’re going to finish. Getting up and travelling into the office, while a bit of a bind at times, creates a clear distinction between what’s work time and what isn’t. As soon as home becomes your place of work, that clear distinction is removed and the urge to ‘just do that one last thing’ can sometimes see you still sitting there an hour later.

RESEARCH TECHNOLOGY How IT savvy are your clients and how effectively could you upskill those who aren’t? There’s a lot of video conferencing tools out there, and many of them are quite simple for a client to use.

We’ve all heard a lot of comments in the trade press that the legacy of Coronavirus could mean a substantial shift in working practices, even after the threat has passed. Time invested now in developing your web communication functionality may reap benefits not just during this crisis, but permanently.

PRACTICE, PRACTICE, PRACTICE! For the meeting itself my top tip is to practice, practice, practice! If you’re not familiar with online meetings, it’s likely to feel a bit foreign initially, so practicing will help. When deciding what software to use, spend some time on the provider’s site. They’ll have lots of helpful hints and tips.

If your clients are unfamiliar with video conferencing software, consider building five minutes into the beginning of the call to ensure they’re comfortable with most of the functionality. Run through things like web chat, how to mute or unmute yourself, how to identify you are on mute, how to change the volume, how to turn the webcam on and off and how to maximise the screen. This is particularly relevant if you’re going to share your screen. You don’t want the client peering at a minimised box only a quarter the size of their screen.

AND REMEMBER… Make sure the dog is fed & walked, outside or in another room. Otherwise you know it’s going to start barking as soon as your call begins.

Before the call, ensure you have any documents you want to share with the client loaded and sitting at the bottom of your screen. The meeting will run much more smoothly if you’re not keeping clients waiting while you search online.

Stop regularly to ask the client a question. Even if this is just to check that the sound and video quality is OK, that they’re not missing parts of what you say, and that the experience is working from them.

While sharing your screen can be a great way to illustrate things to clients, you also need to keep them focused on what you’re saying. Share your screen when necessary but don’t have an endless string of documents popping up because they’ll read those rather than listening to you.

There’s lots of support from providers to help you through this new and often unfamiliar working regime. At Royal London, we have a dedicated support page with tools, tips and guidance to help you with working remotely. For more information on how we can help, get in touch with your usual Royal London contact.

Shelley Read, Senior Protection Development and Technical Manager, Royal London www.royallondon.com

Have a contingency plan. People are likely to understand that these are strange times and much of what we’re doing is new to everyone. Explain at the outset what will happen if the technology fails, how you’ll try to fix it and how long you’ll try to fix it for.

No client wants to sit and wait for 20 minutes with occasional texts saying, ‘nearly there’.

Having a telephone option as a back-up is very important. You might not want to continue the meeting by telephone, but it allows you to discuss alternative arrangements. Make sure you have their number to hand and that they also have their mobile phone with them.

It’s still okay to use telephone and letter if that’s what the client would prefer. But if you can offer easy online alternatives for your client it could add real value to your interaction.

@PIMFA_UK

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PIMFA JOURNAL

SPRING/SUMMER EDITION

NEW MSCI PIMFA EQUITY RISK INDEX SERIES LAUNCH Interview with...

Indices Committee Chair Mark Bulsing Over the last two years PIMFA has been consulting with our members on the structure of our Indices offering.

Resulting from this dialogue PIMFA, in collaboration with MSCI, has created the MSCI PIMFA Equity Risk Index Series, which was launched on December 1st, 2019.

To give our members and their clients more understanding of the processes involved in the creation and operation of this Index Series, we arranged an interview with Indices Committee Chair Mark Bulsing so that he could answer some of your more frequently asked questions: WHY WAS THIS NEW INDEX SERIES CREATED? Mark Bulsing (MB): “For some time, the Indices Committee had been receiving feedback from PIMFA member firms that the traditional “objective based” indices were becoming less reflective of the more “risk-aware” approach that many were taking when constructing portfolios. In addition, concerns have been expressed that there are no universally-accepted definitions for what constitutes, for example, a “Balanced” or a “Conservative” portfolio, which could be confusing

30

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to investors when trying to compare offerings between different firms.

Following this guidance, the Indices Committee worked with MSCI for almost two years to develop this series of new indices. When the objective indices were set up,’ income’ implied a heavier weighting in Gilts and thus lower risk, and ‘growth’ a low weighting in Fixed Income and, by implication, “low income”. Over the last 15 years we have seen a steady reduction of Gilt yields and a rise, certainly in relative terms, of equity yields. So, in many cases, a high income requirement can now only be met with high equity and/or alternative weights.

We have seen the traditional relationship between objective and risk turned on its head. Given this dynamic, simply focussing on risk is much simpler!

HOW DO THEY DIFFER FROM THE LONG-STANDING “OBJECTIVEBASED” MSCI PIMFA PRIVATE INVESTOR INDEX SERIES? MB: “The Committee still receives the same surveys submitted by member firms each quarter, showing their current Strategic Asset Allocation weightings for each of the objective-based indices. The difference is that, instead of grouping the submissions

by objective (e.g. Conservative, Balanced, etc…), the Committee simply looks at the percentage of equities held in the portfolios and re-groups them into one of five piles based on their equity weight.

WHAT ARE THE EQUITYWEIGHTING GROUPS AND WHY WAS THIS SELECTED AS THE PREFERRED METHOD TO SEGREGATE PORTFOLIOS BY RISK? MB: “The Committee studied the portfolio volatility of submissions from our members using a multiasset risk model. We disregarded portfolios with less than 10% equity as these were deemed to be closer to cash portfolios and thus did not really register on the volatility spectrum. For the remainder, we found that, for diversified wealth portfolios, equity-weight provided a reliable indicator of portfolio risk and volatility whilst still remaining relatively simple to explain and implement. Hence the series being named ‘Equity Risk Indices’”.

Find out more about the Indices at: https://www.pimfa.co.uk/ indices/

MSCI PIMFA Equity Risk 1 Index (Equity 10-25%)

MSCI PIMFA Equity Risk 2 Index (Equity 26-46%)

THE METHODOLOGIES FOR CALCULATING THE PROXY INDICES REPRESENTING BOTH “CASH” AND “ALTERNATIVES” HAVE CHANGED. WHY? MB: “For the “Cash” proxy index, the change to using a Bank of England Bank Rate reference was simply in anticipation of the impending market move away from Libor. As for “Alternatives”, the Committee felt that it needed an index that more closely reflected the risk and return characteristics of a notional basket of alternative assets as reflected in wealth portfolios (which in itself is extremely challenging to define given the diversity of “alternative” investments used by members!).

MSCI PIMFA Equity Risk 3 Index (Equity 47 - 66%)

MSCI PIMFA Equity Risk 4 Index (Equity 67-85%)

The previous methodology wasn’t quite delivering to expectation and so we worked with MSCI to come up with the new methodology. The final constraint is that a properlyconstituted benchmark index should be investible, meaning that anyone should theoretically be able to obtain the return of an index by investing in all of the same assets that are represented in the index.

I also should point out that the changes apply to both the new and old index series’”.

THE NEW INDICES COME WITH SEVERAL YEARS OF HISTORY. HOW WAS THIS DONE? MB: “We were able to provide MSCI with allocation-weight history back to 2007 using the same quarterly

MSCI PIMFA Equity Risk 4 Index (Equity 86-100%)

portfolio submissions from member firms that have been used for the Private Investor Indices. We simply re-grouped these according to their equity weights.

MSCI is offering PIMFA member firms a 50% discount on the annual subscription fee for either MSCI PIMFA index series, plus additional discounts for firms subscribing to both series. Additional information about the indices can be found at: https://www.msci.com/pimfaequity-risk-indexes

@PIMFA_UK

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The Personal Investment Management & Financial Advice Association

@PIMFA_UK www.pimfa.co.uk

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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