PIMFA Autumn Journal 2021 by PIMFA

The Personal Investment Management & Financial Advice Association

JOURNAL AUTUMN 2021 HOW MODERN-DAY WEALTH MANAGERS CAN THRIVE DURING UNPREDICTABLE TIMES

DO YOUR CLIENTS NEED HELP WITH THEIR TAX RETURNS?

INVESTMENT LEGENDS – FACTS NOT FICTION

PIMFA D&I AWARDS

BUILDING PERSONAL FINANICAL FUTURES

CONTENTS PAGE 4

HOW MODERN-DAY WEALTH MANAGERS CAN THRIVE DURING UNPREDICTABLE TIMES

HOW TO PERFECT STRATEGIC TECHNOLOGY PARTNERSHIPS IN THE DIGITAL-FIRST WORLD

HOW CONSUMER COMMUNICATION EXPECTATIONS IN THE ‘NEW NORMAL’ HAVE BEGUN SHIFTING FINANCIAL SERVICE MENTALITY

FROM MASS AFFLUENT TO HNWIS, HOW TO CREATE EXPERIENCES THAT COST-EFFECTIVELY SUPPORT THE NEXT GENERATION OF WEALTH.

ETF STREAM DATA CHALLENGES LOOM OVER BOOMING ESG/ ETF INDUSTRY

DO YOUR CLIENTS NEED INVESTMENT LEGENDS HELP WITH – FACTS NOT FICTION THEIR TAX RETURNS?

WHY CYBER RISK MANAGEMENT IS NOT THE SAME AS IT SUPPORT

22 PIMFA D&I AWARDS

PIMFA JOURNAL

AUTUMN 2021

HOW MODERN-DAY WEALTH MANAGERS CAN THRIVE DURING UNPREDICTABLE TIMES

obody would ever question the importance of data when it comes to tackling the global health crisis (when to open up vs when to lockdown), and the world of wealth management is no different. There is no doubt that wealth managers have made significant strides in terms of their sophisticated use of data in recent times. However, as high-net-worth clients continue to put a greater emphasis on high quality service levels, it has never been more important for wealth managers to continue to make the most out of their data. According to the Accenture 2021 wealth management report, firms are looking to expand out from the traditional transaction-led trading offerings by developing datadriven innovative services that deliver more personalised experiences. Providing an in-depth and personalised client service can only be achieved by ensuring the available data is put to the best use. Take the movement of data as a prime case in point. The reality is that whenever important information is moved across an institution, there is a chance something could go wrong unless there is detailed checking from the start, right the way through to the end of the workflow. Knowing what data has moved where and when is really the only way that wealth managers can get a true grasp of the results they are delivering to clients. Due to the fast-paced nature of markets, data changes as fast as it moves. This puts a huge significance on understanding the specific processes at work as well as interpreting the data accurately.

With so much information to manage across an organisation, it is becoming harder to understand exactly what the data is saying. Often a wealth manager may find themselves creating data for a trading situation, only for it to be used to solve a back-office issue. This is why it is imperative that there is a strong connection between the physical data and the business assets – otherwise things could become complicated very quickly. Once there is a thorough understanding of the data, selecting the right subsets becomes crucial in order to make the most informed decisions on behalf of investors. This can be challenging, particularly when there are breaks in the data. This is a problem that can escalate depending on the size of the dataset in question. To manage these movement, transformation and interpretation challenges, it is paramount that wealth managers have the best possible tools in place that provide them with accuracy, consistency, conformity, completeness and timeliness throughout the lifecycle of the data. Data will of course continue to be expensive, which is why with just a few firms dominating the market, wealth managers need to constantly adapt to the changes driven by digital transformation and increased automation. From greater provenance and data lineage – the industry as a whole needs to continue to innovate to drive standards forward. The sheer scale of information may not be something markets can control right now, but the source and traceability of data, including where it comes from and where it ends up, very much can be. After all, if a healthcare industry can learn from the importance of making decisions based on in-depth data insights, so too can wealth managers.

Tamsin Hobley Country Head UK & Ireland SIX

www.pimfa.co.uk

@PIMFA_UK

PIMFA JOURNAL

AUTUMN 2021

HOW TO PERFECT STRATEGIC TECHNOLOGY PARTNERSHIPS IN THE DIGITAL-FIRST WORLD

he pandemic has changed many things fundamentally, but none more so than the importance of leadership and partnership. As organisations and nations have come together to collaborate on how to manage change, so too have many leaders benefited from building stronger ties with their own community and peers. But what does this mean for strengthening partnerships within the UK’s leading wealth management and private banking organisations?

of relationships, being able to understand and navigate the changes, as well as challenges, together.

As our industry navigates this transitional period, it’s key that partnerships do not suffer as a result, and leaders must be able to recognise the critical features that underpin a relationship with long-term impact and successful outcomes. Change is not always comfortable in any area of business, but it is how you come together to tackle change that makes the difference, getting comfortable with adversity while recognising that progress comes in many shapes and sizes.

• ENSURE IT IS MUTUALLY BENEFICIAL - Identify and

It has, however, become clear that approaches to change and business transformation, are softening. Leaders know they need to evolve, but they cannot do this alone. The 2021 Deloitte Global Human Capital Trends survey showed that 54% of European senior executives intend to focus on reimagining work in their organisation in the next one to three years, compared to just 28% before COVID-19 struck.

• TAKE A LONG-TERM HORIZON - There is a big

DO YOU WORK WITH STRATEGIC PARTNERS OR VENDORS? Organisations like ourselves sit at a unique vantage point to the industry. We work with organisations large and small to support their transformation to deliver more effective wealth management in an environment of multiple pressures. We have the privilege of not just walking in our clients’ shoes but walking with them through many years

www.pimfa.co.uk

• CULTURES THAT WORK TOGETHER - Partnership

works best when you find matches around key values. For example, finding a shared approach to empowering teams in order to create scalable solutions. Trust between strategic partners means developing an honesty that allows for frank conversations, which use expertise to constructively challenge the status quo and bring a new perspective that can help meet your business goals.

• USE CHALLENGES TO DRIVE INNOVATION - Your

partners should have a shared love of, and commitment to problem solving. This isn’t always firefighting, this is about spotting things that haven’t yet been ‘solved’ in the industry and working collectively to find, build, test and launch those solutions. Having a shared commitment to this approach and to driving evolution leads to a positive relationship based on always improving.

In challenging and changing times, having the right partner by your side is transformational. It gives you confidence to change; it enables you to focus on what you excel in while relying on them to do the same; it helps you achieve your strategic goals together. Private banks and wealth management firms are human businesses, and done well, technology transformation is human too. Standing still is no longer an option. Only those that are moving ahead and tackling these challenges head on will thrive and continue to grow. It is time to get braver together.

Brett Williams CEO, SEI Investments (Europe) Ltd seic.com/en-gb/solutions/technology-and-outsourcingsolutions-wealth-managers

Selecting a strategic technology partner can be a significant decision. Our experience working with our clients has led us to understand the differences between vendor and strategic partner, enabling us to map out the key pillars for meaningful strategic partnerships in the industry:

build connections with organisations that share your ambitions, are similarly on a growth trajectory and are always looking for continuous improvement. From the outset, be clear about your long-term business objectives. Success stories happen when you work with someone who understands your business and will work alongside you to help you achieve these.

difference between long-term value creation and short term advantage. A true partnership requires time and effort and isn’t always easy, so implement a long horizon in your strategy to build a rapport and working relationship that is optimised for the business to be able to thrive. A strategic partner will become a key part of your business, so ensure that you have invested time into developing the relationship at every level of the organisation, from the CEO to the people who are dealing with the day-to-day challenges.

• GET COMFORTABLE WITH CHANGE - The majority of the relationship with a strategic partner will be focused on managing the variables. Leaders must actively acknowledge that change isn’t always comfortable and find a way to embrace conflict together and make it constructive by finding a shared mission, communicating visions for the future, and putting trust and transparency at the heart of the partnership.

@PIMFA_UK

PIMFA JOURNAL

AUTUMN 2021

HOW CONSUMER COMMUNICATION EXPECTATIONS IN THE ‘NEW NORMAL’ HAVE BEGUN SHIFTING FINANCIAL SERVICE MENTALITY

t’s fair to say that Covid-19 has changed the world as we know it. Businesses have experienced rapid transformation, needing to adapt to the economic, social, and technological outcomes of the pandemic. Many have done a fantastic job, and as a result, customer expectations of company services have risen. Consumer demand has become the driving force behind service digitisation, causing accelerations across all industries, but especially within the financial sector.

EXPANDING DIGITAL SERVICES Digital financial services, such as online banking, have been growing in popularity for years, with customers revealing that they enjoy the ‘experience and functionality’ that it brings, alongside improved rates and impressive service quality. This has led to 34% of UK branches closing down between 2015 and 2019, showing a measurable decline in the use of brick-and-mortar banking. However, it wasn’t until the pandemic caused a nationwide shutdown of in-person financial facilities that the true demand for digital services was revealed. Investment apps underwent an 88% growth in 2020 alone, with Santander completing 80% of their sales digitally and payment app sessions increasing by nearly 50%. Since restrictions have lifted, this trajectory seems like it will continue, with 62% of people revealing that they will continue to use online banking whether social distancing remains or not. However, businesses still need to consider their longterm digital agility, with a significant amount of work to be done to support customer expectations.

UPGRADING LEGACY SYSTEMS When it comes to customer communication, it is imperative that FS raises the bar on digitisation to provide for more tech-savvy clients. One survey reveals that two-thirds (63%) of people would consider switching banking providers if communications don’t meet their expectations.

www.pimfa.co.uk

Having spent decades investing in legacy systems, 36% of FS businesses rank their systems as the biggest obstacles, with 81% of banking CEOs being concerned about the speed of their technological change. According to a study by PWC, in order for financial services businesses to succeed in the future, they need to ‘simplify legacy systems, update their IT systems, and take advantage of technology beyond the cloud such as artificial intelligence and robotic process automation’. An example of a ‘quick, but visible win’ for businesses to improve their communication offering is implementing interactive chat solutions, following the rise of conversational banking currently taking place. Chatbots in particular can capture data across multiple touchpoints in order to personalise a customer’s experience, with 75% of FS customers preferring to use them when asking simple questions. However, FS companies must also develop and secure their pre-existing lines of communication, ensuring a variety of interaction choices to provide a customercentric experience across the entirety of the user journey.

Human error can be defined as anything from an email sent to the wrong person, to a lack of awareness around the opening of phishing emails, with 9/10 data breach incidents being attributed to employee mistakes. Currently, email providers have little to no built-in capabilities to prevent this from occurring, such as endto-end encryption or email revocation. Even Outlook’s innate ‘recall message’ feature frequently fails to work due to a long list of requirements on both the senders and receivers end. This results in Outlook simply sending a message requesting for the email to be deleted rather than forcibly revoking it themselves, showcasing that industry-standard software is still not up to speed.

CONSIDERING THE FUTURE When bearing the above in mind, it is clear that there is still a significant amount of digital development for financial services to undertake, particularly within the security of their customer interactions. It is paramount that FS companies continue to take necessary steps to adopt secure solutions for their business communications, ensuring they protect both their's and their client’s confidential data.

Paul Holland Beyond Encryption https://www.beyondencryption.com/

SECURING EMAIL COMMUNICATIONS Secure methods of communication are fundamental in a post-Covid world to support positive customer relationships. With a reported 4/10 businesses experiencing a security breach or attack in the past 12 months, it has become clear that the downside to digitalisation is a more effective cybercriminal. Email is one of the most common methods of interaction with clients. 76.8% of customers consider it to be the main channel where they can be reached, with emails from banks achieving an impressive 97% deliverability and a 13.5% open rate. However, it is also one of the platforms most susceptible to a data breach, with human error and cyberthreat both playing their part.

@PIMFA_UK

PIMFA JOURNAL

AUTUMN 2021

From Mass Affluent to HNWIs, how to create experiences that cost-effectively support the next generation of wealth. REAL OPPORTUNITY

CHOOSING A PATH

side from the obvious challenges of living through a pandemic, the last 18 months have offered a period of reflection for many businesses as they adapt to new needs and technologies and embark on transformations that ensure service models are fit for purpose far into the future, not just for a few more years.

The private banking and wealth management industry is undergoing a fundamental shift, with an increasing need for long-term savings driving new asset flows and the rise of the middle class leading to a 10-12% annual increase in global AUM.

For private banks and wealth managers in particular, the growing interest in investment markets brings real opportunity, as illustrated by the recent results announced by many in the industry, whether through targeting of the ‘mass affluent’ client segment to drive new revenue streams and offer services to what has traditionally been an underserved market, or through the intergenerational transition of wealth as a whole. It’s clear that the pandemic has radically impacted client behaviours, accelerating the use of digital technologies and driving new engagement strategies. As client expectations continue to rise, businesses that adopt a more flexible service model can be more accurate in their vision and plans. A service model that offers real-time insights to its clients at the right time in the right place in an easily consumable way is destined to become the ‘new normal’. Clients want to see businesses moving forward, so giving them greater transparency and visibility to accelerate decision-making is key. Saying that, not every financial institution is the same, and there are a number of different strategies when it comes to supporting specific market segments and choosing what services to offer them. As financial services markets converge around the lifetime needs of the mass affluent clients to offer a more holistic and personalised service, there are roles to play for generalists and specialists alike in the banking and wealth markets, and this will drive greater collaboration across a wider ecosystem.

www.pimfa.co.uk

Millennials, the emerging wealthy and HNW individuals are already demonstrating their preference for hybrid models over traditional advice models. Digital tools offering a transparent and real-time understanding of client investments have become table stakes. For many, the new ‘target model’ is defined by a flexible service model that supports clients throughout their financial journey, spanning from mass market to UHNW individuals. Flexible service models enable wealth advisers to engage clients and offer cost-effective services at all stages.

people in investment activity and creating opportunity for the industry as a whole. For many of the long-established institutions, the cost to serve these lower-value client segments is simply prohibitive as it stands, with operational processes built around disjointed legacy technology making it near on impossible to compete with the new entrants and their simplified, highly automated digital propositions. So for many, the focus will continue to be on existing wealth services and segments, only targeting new clients once their wealth has grown and they have a need for additional (more complex) wealth services. The challenge for these institutions is in how they attract the next generation of wealthy clients, and how much transformation is required to ensure this can be achieved in a cost-effective manner. How the next generation of wealthy clients choose to transition from the simpler wealth propositions to more complex wealth services is not entirely clear yet, but many expectations will have already been set by this initial experience so traditional service providers will be challenged.

ENABLING FUTURE GROWTH With market competition getting tougher and increasing demand for new products and services, financial institutions need to be able to focus more on their clients and business growth strategy. Whether private banks and wealth managers adopt an organic business transformation strategy or not, technology will remain at the core of this transformation. A core platform that embraces open finance and APIs to connect with fintechs, allowing seamless and agile integration, is the need of the hour.

businesses while enabling them to monitor and control their operating costs and expenses, using a reliable, open and proven platform in a world of ever-increasing digital innovation and regulatory pressure. Our OLYMPIC Banking System is available for clients to access in multiple modes, including as a SaaS solution. The latter enables institutions to access it without having to install and run applications on their own IT infrastructures. Organisations opting for this cost-effective, reliable and secure delivery model will gain agility for their business. Those looking to optimise productivity and efficiency can leverage enterprise connectivity (via APIs) to streamline their business models, enabling them to offer better services at more competitive prices.

EMBEDDING TECHNOLOGY Clients are increasingly aware of the impact of digital technology in the investment space. It is imperative for private banks and wealth managers to have a business strategy that embeds technology innovation into their value proposition to stay relevant. Wealth management and the private banking sector need to understand that they are not alone in their digital journey. Technology experts, ecosystem partners, and even their peers can be useful partners to drive innovation.

Paul Driver, ERI Sales Manager UK&I www.olympicbankingsystem.com

At ERI, our goal is to support the growth of our clients’

The accelerated adoption of digital technologies to support remote working and virtual meetings, combined with the increased uptake of wealthy clients, has put real pressure on middle and back-office operations and systems. These operational strains may not have been highlighted so quickly were it not for the pandemic, but now that they have been, institutions have had to revisit end-to-end service models and technology strategies to ensure that they are fit for purpose. Those choosing to build their future propositions on a flexible, open and easily configurable platform will benefit from streamlined front-to-back processes, with the ability to offer all-digital services to those client segments seeking a more “do it yourself” way of managing their money, whilst removing the administrative bottlenecks experienced today. As a case in point, new entrants to the market are offering clients a simplified wealth proposition built on modern technology and processes, which is engaging

@PIMFA_UK

PIMFA JOURNAL

AUTUMN 2021

ETF STREAM DATA CHALLENGES LOOM OVER BOOMING ESG ETF INDUSTRY DATA IS THE BIGGEST CHALLENGE FACING THE ESG SPACE. IMPROVING COMPANY DISCLOSURES AND STANDARDISING INTERPRETATIONS WILL BE CRUCIAL OVER THE NEXT FIVE YEARS TO ENSURE THE INDUSTRY’S CONTINUED GROWTH.

he environmental, social and governance (ESG) boom is well and truly underway, with ETFs set to play a major role in the shift to sustainable investments. However, challenges remain for an industry still in early stages of rapid growth. Last year proved to be a watershed year for ESG ETFs. According to data from BlackRock, EMEA ETF industry cumulative flows in 2020 were $127bn with ESG ETFs closing at $52bn. ESG ETFs made up 41% of the total compared to only 14% in 2019. Somewhat interestingly, ESG ETFs have proven much stickier assets than their non-ESG ETF counterparts. Highlighting this, the segment saw €730m inflows during the extreme volatility in March, according to Morningstar. While European ETFs overall suffered their worst monthly outflows on record with €22bn pulled from the market. As was discussed at ETF Stream’s Big Call: ESG Investors Forum on 17 November, the significant surge in demand this side of the pond was driven by an increasingly conscious investor set, regulatory tailwinds, performance opportunities and the recognition ETFs provide the perfect tool for investors to express their sustainable views.

www.pimfa.co.uk

Highlighting this, a survey of 400 professional European investors conducted by Censuswide studied the reasons why respondents used ESG ETFs. Some 27% of respondents said they liked the benefits of traditional ETFs – the most cited answer – while 26% said they like the transparency and simplicity ETFs offer, and 24% said they like the ability to select specific ESG outcomes. As Andrew Limberis, Investment Manager at Omba Advisory & Investment, told ETF Stream: “Where the relationship between ESG and indexing works well is in the transparency provided by ETFs. It is clear to investors exactly what they own and having a rules-based methodology provides clear reasons for holding a security and in determining its weight." “Having this clarity is important to ESG investors, who want to know what companies they are invested in and may have an opinion on that company. As obvious as it sounds, ETFs are also dynamic in the sense that as the underlying data changes, the composition of the ETF will change.” Despite the rapid development of the ESG ETF space, one area that continues to be a challenge is around ESG data. As highlighted in the section above, the world’s largest asset manager has said the “lack of confidence in ESG data and ESG scores” is the single biggest challenge facing investors at this moment.

One problem is the number of ESG data providers. According to Gianfranco Gianfrate, Professor of Finance at EDHEC Business School, there are around 200 providers of ESG scores, which can lead to greenwashing issues. “Because there are so many data providers, investors are able to find one that rates the sustainability of a company even if the others do not,” Gianfrate continued. “It is like having no ESG ratings at all.” One way investors are solving this challenge in portfolios is by selecting trusted ESG ratings providers with thorough and industry-recognised processes. Using a consistent ESG ratings provider can also help investors take a consistent approach to sustainability across a portfolio’s exposures. While the 200 or more providers certainly opens the door to potential issues, where investors and the European Union are most focused is around the disclosure standards for individual companies. Firms are not required to submit ESG data to providers which can lead to big holes when being assessed from a

sustainability perspective. For example, MSCI – one of the largest players in the space – takes an industry average score when there are holes in its data, meaning companies can, in effect, play the system by not submitting data for metrics they know they will score poorly. “The obvious issue here relates to quality of data which has spurred the number of acquisitions of ESG data providers,” Limberis added. “ESG data is without a doubt improving but it is still lagging in some areas like Scope 3 emissions and emerging markets. Consistency of ratings between data providers is still an issue which does impact the fungibility of switching between ESG ETFs that use different index providers.” Regulation to improve company reporting standards would be a huge step as it would enable ESG ETFs to be created with more accuracy and provide investors with even more transparency when selecting which strategy to include in their portfolios. Tom Eckett, Editor ETF Stream

@PIMFA_UK

PIMFA JOURNAL

AUTUMN 2021

PROPERTY INVESTMENT: SUPREME DO YOUR CLIENTS COURT DELIVERS BLOW TO BUSINESS NEED HELP WITH RATES MITIGATION SCHEMES

THEIR TAX RETURNS?

nvesting in Self Assessment support is becoming more popular amongst wealth managers. By offering to simplify or help with the tax return process for their high net worth clients, they’re able to further support with tax planning and boost the value of their service. But this is just one benefit of adding our platform to your arsenal. Here, I explain how GoSimpleTax makes wealth management easier.

SAVE TIME GoSimpleTax lets users record income and expenditure as and when it happens, and presents a real-time forecast of their final tax bill. Not only does this help your clients file, it also means they’re able to sidestep the notoriously difficult HMRC portal. Navigating this portal causes stress to many Self Assessment customers, regardless of their level of experience. All that can be avoided with GoSimpleTax. Our software submits tax returns directly to HMRC and will be compliant with the new Making Tax Digital (MTD) regime being introduced from April 2023. This means that you won’t have to change your clients’ approach later, and you also won’t be required to dig deep into the GOV.UK site to find the relevant tax forms. With our platform, information is automatically entered into the right supplementary pages. An added advantage of this, of course, is that you’re less likely to make an error, protecting your clients from any unnecessary penalties and greatly improving the overall accuracy of your service. What’s more, should your client need any assistance when you aren’t available, our platform comes with a whole host of resources to support them through the Self Assessment process.

BE ALERTED TO POSSIBLE SAVINGS Not only are you going to increase your accuracy, but with our hints and tips, there may be some tax savings for your client. Our platform prompts users when potential expenditure has been missed and could perhaps be classed as an allowable expense, helping to reduce your clients’ tax liability.

invoices, upload them to their GoSimpleTax account, and store them securely in the cloud. This way, should your client be investigated by HMRC, they have all the documentation they need to help avoid a penalty. The three kinds of investigation – full enquiry, aspect enquiry and random check – vary in scale, but by having receipts in a digital form, you’re more than equipped to explain a client’s expense or source of income. Most taxpayers will never face a full enquiry, but for those that do, HMRC is entitled to study up to six years’ worth of tax history – so it really does pay to be organised. Once your clients are regularly sending you receipts and invoices, they’re much more likely to rely on your services as you’ll have immediate access to their documentation.

LET’S WORK TOGETHER GoSimpleTax is an award-winning, cloud-based solution that’s officially recognised by HMRC. We can help your clients file the SA100 personal tax return and the SA800 partnership tax return. Not only does our software carry out all the calculations for you, we also prepare your clients for the government’s new MTD initiative to digitalise tax. But don’t just take our word for it. See what Lance Baron of Tucana Financial Planning has to say: “From my point of view, it adds clear value to the relationship between clients and advisers. It offers increased transparency and visibility and, ultimately, it allows for effective collaboration on their tax affairs.” If you’re interested in enhancing and streamlining your service, as well as offering effortless Self Assessments to your clients, please get in touch with me: Mike Parkes, Technical Director, GoSimpleTax www.gosimpletax.com

This service alone positions you as an expert on your clients’ tax affairs. Depending on how much they claim, you may even be able to help them steer clear of falling into a higher tax bracket – especially as you’re able to see what they owe in real time. The difference this will make year-on-year is more than enough to justify your management fees.

STORE DOCUMENTATION You know as well as us that paper is too easily lost. So, our app allows users to take pictures of their receipts and

www.pimfa.co.uk

@PIMFA_UK

PIMFA JOURNAL

AUTUMN 2021

2012

INVESTMENT LEGENDS – FACTS NOT FICTION INVESTMENT LEGENDS HAVE BEEN AROUND FOR DECADES. IN FACT, YOU CAN PROBABLY TRACE THESE ‘LEGENDS’ RIGHT BACK TO THE 18TH CENTURY AND THE CREATION OF THE LONDON STOCK EXCHANGE.

hether it's accepted practices like diversification and comparing like for like or going against the plan and hitting the panic button and trying to time the market collectively, these all form a template of considerations that investors are aware of and are adopted within various processes. The problem is that during a crisis, we can all be guilty of forgetting these accepted practices. We’ve been through many different crisis’ before but one thing we have never collectively experienced is a global pandemic on this scale. Perhaps if the last 18 months had just been another investment crisis and not a pandemic, we would have seen calmer behaviour right across the market. So why do these legends exist and what learnings can we take from them to add value to client conversations and investment processes?

Roger Ibbotson and Paul Kaplan were responsible for an integral piece of work in 2000 'Does asset allocation policy explain 40, 90 or 100 percent of performance?'. The study detailed how asset allocation accounts for 90% of performance. Clearly, diversifying means you have a wider exposure to different investment strategies and that can help generate returns in a wider variety of market conditions and help minimise the impact of large market drawdowns. You’re probably familiar with the investment patchwork quilt. It’s ranking the best performing asset classes over the last three calendar years and year to date. Each coloured box ranks the performance of a particular class of asset. If you look at the pattern of where any one of the colours fits on the chart it clearly shows how difficult it is to pick an overall winner. 2020 wasn’t a great year for UK equities. The winners were clearly global stocks and fixed income driven by a highly valued US market and bond yields hitting unprecedented lows. The tables, however, have turned in 2021 (up to the end of July) and along with commodities, the UK’s sector exposure and ‘value’ orientation has provided a greater resilience to this inflationary backdrop relative to overseas markets.

2014

2015

2016

2017

2018

2019

2020

YTD

Global HY

Global Stocks

IL Gilts

Property

Commodities

Global Stocks

Property

Global Stocks

Commodities

18.7

21.2

19.0

8.6

33.3

14.0

4.5

22.6

14.3

21.3

Corp Bonds

UK Stocks

Property

Global Stocks

UK Stocks

Cash

UK Stocks

IL Gilts

UK Stocks

13.1

20.8

14.1

4.4

30.3

13.1

0.6

19.2

11.0

11.7

UK Stocks

Mixed Asset

Gilts

Mixed Asset

IL Gilts

Property

Gilts

Mixed Asset

Gilts

Global Stocks

12.3

14.3

13.9

3.2

24.3

8.5

0.6

13.8

8.3

11.4

Global Stocks

Property

Global Stocks

UK Stocks

Mixed Asset

IL Gilts

Global HY

Corp Bonds

Mixed Asset

12.1

7.9

12.2

1.0

16.8

8.3

-0.3

12.3

7.8

8.2

Mixed Asset

Global HY

Corp Bonds

Gilts

Global HY

Corp Bonds

Global HY

Property

9.2

7.3

12.2

0.6

15.7

6.7

-1.5

9.3

5.0

4.7

Gilts

Corp Bonds

Mixed Asset

Corp Bonds

Mixed Asset

Corp Bonds

Global Stocks

Gilts

Cash

Global HY

2.7

0.9

8.4

0.5

13.9

4.3

-3.1

6.9

0.2

3.0

IL Gilts

Global HY

Cash

Corp Bonds

IL Gilts

Global HY

IL Gilts

Mixed Asset

Cash

0.6

0.5

2.7

0.5

10.6

2.3

-3.6

6.4

0.2

0.0

Property

Cash

UK Stocks

IL Gilts

Gilts

Mixed Asset

Commodities

Property

Corp Bonds

1.1

0.5

1.2

-1.0

10.1

1.8

-4.3

3.5

-4.4

-1.1

Cash

Gilts

Cash

Global HY

Cash

Commodities

Cash

Commodities

IL Gilts

0.6

-3.9

0.5

-2.1

0.4

0.3

-5.7

0.7

-6.1

3.2

Commodities

Property

Commodities

UK Stocks

Property

UK Stocks

Gilts

-5.4

-11.2

-11.8

-20.3

-0.9

-7.1

-9.5

-0.9

-9.8

-3.1

DIVERSIFICATION RULES! On the face of it, we all know the benefits of diversification and why you should refrain from putting all of your eggs in one basket. It’s engraved in investing 101 and for very good reason too.

2013

Source: Lipper, Royal London, as at 31/07/21

Instead of picking a winner, the smart answer could be to diversify. If you blend different investments together, you’ll never come top but you’ll also never come bottom as you can see with the black box. Effective diversification also means you are always going to be holding at least one asset that is underperforming but I’d argue that this is very much a success of the design and not a failure. As the turbulence over 2020/21 has shown us, that design can not only be an effective path to maximising risk-adjusted returns but also serve as a defence against rising inflation through exposure to different investments, particularly commodities.

course that fixed income went on to become one of the best performing assets over the course of the year. Over the second half of 2020, money flooded out of UK equities before flooding back in at the turn of the year, off the back of improved performance. But how many investors who previously panicked subsequently missed out on this recovery? It’s a similar pattern to the fixed income trend at the start of global lockdowns; significant redemptions followed by strong performance.

DON’T PANIC! I do appreciate that this is much easier said than done, especially when you’re in the midst of a global killer virus! Everyone knows not to panic when markets fall but that is exactly what tends to happen and rational behaviour tends to go out the window when faced with a crisis. It’s happened plenty of times before and it’ll happen plenty of times again. This is despite knowing that downturns tend to be followed by strong upturns. If you’ve glanced over the Investment Association’s fund flow data for 2020, you’ll be aware that it identifies a strong trend of panicking with both advised and non-advised investors moving significant volumes of assets around. In March 2020, fixed income suffered outflows of £7.5bn. The problem is of

www.pimfa.co.uk

@PIMFA_UK

PIMFA JOURNAL

AUTUMN 2021

£100,000 initial investment in Governed Portfolio 4 since launch net of 1% charge Missing just the top 20 days since launch reduced the value of investment by over £106,000

8.12% ANNUALISED RETURN

6.72% ANNUALISED RETURN

5.63%

3.93%

ANNUALISED RETURN

£100K

Fully Invested

Top 5 days missed

Top 10 days missed

Top 20 days missed

UK Equities

Overseas Equities

Property

Alternative

UK Fixed Interest

Overseas Bonds

Cash Average

Source: Lipper, 31/03/21

Source: Royal London, 31/03/21

Many pensions clients will have an investment horizon of years, if not decades. It's a simple statement, but one that can be forgotten during market shocks. We would all deny that we are susceptible in allowing heightened emotions to dictate our investment decisions. But we see this type of behaviour time and time again. We saw it in 2020 when feelings of panic, agony and depression resulted in a rush out of quality diversified assets. We’re seeing it at the moment with general feelings of optimism that will surely turn to euphoria at some point. A rational and disciplined investor will not be distracted by the noise and will stay focused on the long term instead of panicking and allowing emotion to dictate decisions. It needs to be pointed out that the figures are for illustration purposes only, and are to demonstrate the possible effects of mis-timing the market. It's not intended to highlight the relative performance of any one fund or sector. The first column shows an annualised return of 8.12% over this period generating a pot of £269,387. The second column shows what the impact would be on the annualised return and what the amount in the pot would be if you missed the top five days over this period. The pot size has now reduced to just over £228,000. The third column takes the top 10 performing days out of the equation but it’s the final column which really underscores the significance of time in the market. This column shows the impact if you remove the top 20 days and if you compare this directly to the first column where you are fully invested – the annualised return has shrunk from 8.12% to 3.93% and the pot size has reduced by over £106,000.

www.pimfa.co.uk

Markets don’t usually require investors to sit tight for too long and yesterday’s losers can often turn around dramatically during the early stages of a recovery. You only have to look at the difference in the performance of UK equities over 2020 and then YTD in 2021 for proof of that. The actual experience, however, highlights that we can be far too quick to dismiss poorly performing sectors or asset classes that are going through a phase of poor performance and into those that have performed well and potentially past their peak. The flip side of this could also be true. It may be possible to time the market so that you miss the bottom 20 days, which would limit your downside but is it worth taking the risk?

COMPARE LIKE FOR LIKE! This ‘legend’ is perhaps less of a rule because current processes may dictate that you have to compare a specific investment against a specific sector average for example but it’s one that should at least be taken into consideration, particularly when comparing against mixed investment sector averages.

The fact that you could have one fund with a 19% exposure to UK equities being compared to another fund with almost 60% exposure doesn’t really feel right. If you were to put those two funds side by side, it would be be unlikely that you’d want to compare them on an individual basis so why would you compare against a sector average?

IN SUMMARY These ‘legends’ aren’t new; they’ve been around for decades and for very good reason too. We don’t consciously decide to ignore them but emotions can dictate decisions particularly in the midst of a crisis.

Well, as I said earlier, it may be something which is a constrained part of your process but it’s important to consider what’s in the box when you’re comparing against a sector as well as what comes out of the box in terms of the range of returns. Multi-asset solutions aren’t designed to beat other multi-asset solutions over every time-period. That is practically impossible because there is such a variation in how they are structured and what they are exposed to.

So stay rational and disciplined, don’t be distracted by the noise and continue to focus on the long term for your clients who will be invested long term. Always keep these legends front and centre.

Failing to take this into consideration can paint a very distorted and misleading picture when talking to your clients about their relative performance.

For further support, please speak to your usual Royal London contact or visit adviser.royallondon.com

Ryan Medlock, Senior Intermediary Development and Technical Manager, Royal London adviser.royallondon.com

If we take the ABI mixed investment 40-85% shares sector as an example - we know funds in this sector can hold up to 85% in equities. That’s quite high for your typical ‘balanced’ investor but that’s an argument for another day. What I really want to focus on is the composition of this sector and the huge amount of variance which exists amongst the constituent parts. The following chart shows the range of minimum and maximum allocations within the sector as well as the average.

@PIMFA_UK

PIMFA JOURNAL

AUTUMN 2021

WHY CYBER RISK MANAGEMENT IS NOT THE SAME AS IT SUPPORT

Firms are increasingly being asked to satisfy the FCA, clients and others about their security arrangements. Your security professional should be able to help with this. They should also be advising you on the type of checks you should be doing on those with whom you share systems and data.

8. Who is providing you and your Board with ongoing assurance that your security controls remain both appropriate and effective?

Cybercrime is increasingly sophisticated, and methods of attack constantly evolve. Wealth managers and other financial services firms are a prime target. Attacks pose a serious risk to operational resilience, data and system security, client relationships and confidentiality, and business reputation. Security should be right at the top of any firm’s risk register. Which is why firms must adopt proper cyber risk management systems and not assume that their IT function has it covered.

is a crucial aspect of a firms’ defences. It is also now a legal obligation. And you should test that the training is working, by simulating attacks. We have frequently found that before training, over 25% of staff will click on phishing emails, but that figure reduces to under 5% after training.

ASK YOURSELF THESE QUESTIONS ABOUT YOUR CYBERSECURITY.

5. Have you got the right policies and procedures in place?

1. Who is currently undertaking and documenting your cybersecurity vulnerability risk assessment? This is now a legal requirement under the Data Protection Act 2018 and it is the essential first step towards security. It should be undertaken periodically by someone with cyber risk management experience. They should know the current methods of entry and forms of attack against firms like yours, such as email account takeover and ransomware. It will provide you with an assessment of your vulnerabilities. It must of course include scanning and probing for vulnerabilities in your technology and its current configuration. But that alone is not enough. It must also include assessing the risks associated with people and the way they use the technology; your systems of work; your interaction with clients and suppliers; the platforms you rely upon; and so much more.

2. Who is configuring your security? Your vulnerability assessment will provide visibility of risk. A cybersecurity professional can now determine how to configure your technology appropriately. This is a specialist job - configuration must provide protection against attacks without interfering with daily functionality. Firewalls, anti virus, email set up, logins to cloud platforms, personal devices, remote

7. Are you getting the right help in replying to FCA and client questionnaires and in assessing your own supply chain?

www.pimfa.co.uk

connections, back ups, access rights, user privileges, logs, detection alerts, are just some of a long list of areas requiring attention. Equally important, is advice on the other organisational controls and governance necessary to protect you against the risks identified.

3. Are you meeting legal, professional and regulatory requirements? Does your security adviser really know how to comply with your legal obligation to take appropriate technical and organisational measures for the security of personal data, and to review their effectiveness on an ongoing basis? And do they know your regulatory obligations, such as protecting your clients, to run the firm in accordance with proper governance and risk management principles and as regards operational resilience? Are they providing the necessary information for your Board reports and are they satisfying your other record keeping obligations?

4. Who is providing cybersecurity awareness training to staff?

Your systems are most secure when people know how to use them safely. Defining and communicating policies and procedures will help prevent or mitigate security incidents. As well as being another legal obligation, policies protect your business, your staff and your clients. And have your staff agree and sign for a cybersecurity staff handbook as part of their training, so that everyone knows the rules and what is expected of them.

6. Are you buying security software which you do not need and which is not actually solving your security problems? Does your security adviser really know how to comply with your legal obligation to take appropriate technical and organisational measures for the security of personal data, and to review their effectiveness on an ongoing basis? And do they know your regulatory obligations, such as protecting your clients, to run the firm in accordance with proper governance and risk management principles and as regards operational resilience? Are they providing the necessary information for your Board reports and are they satisfying your other record keeping obligations?

It is a basic principle of risk management that assurance be provided by someone independent. It is neither sensible nor fair to expect your IT people to be cybersecurity experts or to mark their own homework. Nor will their professional indemnity insurers when a breach occurs. Just like a vulnerability assessment, assurance is not a one-off spot check. Over time, your technology will change, as will the threats, forms of attack and methods of extortion. So testing and auditing your security configuration and controls should be undertaken on a regular basis to ensure your defences are kept up to standard and you continue to be protected. Again, checking the effectiveness of your security measures on an ongoing basis and recording this in writing, is now a legal obligation. If you still think your IT support are the right people to be looking after your cyber risk management, you are now lagging behind the field and are likely to suffer a breach. The FCA have been clear that they require someone at Board level to be responsible for cybersecurity and operational resilience, and for leading a “security culture” from the top down. It is time to stop hoping you are secure and start proving you are secure. PIMFA has partnered with Mitigo to offer member firms a trusted cybersecurity solution to help them protect against cyber-attacks 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

This is about making all staff aware of the type of dangers which exist, including the tricks being used to gain access to credentials, your systems, data and finances. Some estimates reckon that over 60% of breaches are caused by staff error. So regular training

@PIMFA_UK

PIMFA JOURNAL

AUTUMN 2021

PIMFA D&I AWARDS On 20 October, PIMFA were delighted to announce the winners of our inaugural industry Diversity & Inclusion Awards. Launched in early May this year, our industry awards received close to 100 entries at a time when the Financial Conduct Authority (FCA) has made it clear that diversity and inclusion within financial services is a key area of focus which could become a regulatory matter in the future.

International, Worksmart, Morningstar, Raymond James Investment Services, Interactive Investor, Mapped Marketing, Sesame Bankhall Group, Howden Insurance Brokers, IFA Magazine and Citywire and was held at Fidelity International’s central London headquarters. The event was streamed live online and showcased the best Diversity and Inclusion initiatives from around the UK’s financial services industry.

INCLUSIVE TALENT MANAGEMENT AWARD – SMALL FIRM

INCLUSIVE TALENT MANAGEMENT AWARD – MEDIUM FIRM

INCLUSIVE TALENT MANAGEMENT AWARD – LARGE FIRM

(SPONSORED BY MORNINGSTAR) WINNER: AMMONITE

(SPONSORED BY: MAPPED MARKETING) WINNER: FINANCIAL

(SPONSORED BY: SESAME BANKHALL GROUP) WINNER: HSBC UK

SERVICES COMPENSATION SCHEME

The Awards were sponsored by Royal London, Fidelity

BEST D&I INITIATIVE AWARD (SPONSORED BY: WORKSMART)

BEST APPROACH TO WELLBEING AWARD (SPONSORED BY: ROYAL

RISING TALENT AWARD (SPONSORED BY: RAYMOND JAMES

WINNER: LGT VESTRA

LONDON) WINNER: THE OPENWORK PARTNERSHIP

INVESTMENT SERVICES) WINNER: AMY KIRBY – RATHBONES

OVERALL D&I CHAMPION AWARD (SPONSORED BY: INTERACTIVE INVESTOR) WINNER: FABIO PEYER – MORNINGSTAR

www.pimfa.co.uk

@PIMFA_UK

The Personal Investment Management & Financial Advice Association

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 Nigel Ross-Scott, Content Manager (nigelrs@pimfa.co.uk)

Journal design by Cicero/AMO cicero-group.com For more information about Digital and design services please contact: Megan Harley, Digital Creative Director, Cicero/AMO (megan.harley@cicero-group.com)

@PIMFA_UK www.pimfa.co.uk