Wma journal autumn 2016 digital by PIMFA

WMA JOURNAL Autumn/Winter 2016

Autumn/Winter 2016

WMA JOURNAL

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WMA Journal

Autumn / Winter 2016

Contents 04 06 10 14 17 20

SAFE WITHDRAWAL RATES FOR UK RETIREES: IS IT TIME TO RESET THE 4% RULE?

SCRATCHING THE INSTANT GRATIFICATION ITCH: USING TECH TO SATISFY INVESTORS DEMANDS

FACTOR INVESTING: ADDING INVESTMENT SKILL TO INDEX INVESTING

SENIOR MANAGERS REGIME: GETTING CULTURE AND CONDUCT RIGHT

THE UK WEALTH MANAGEMENT SECTOR SUMMARY REQUIREMENTS FOR BREXIT AND AFTER

CAREER INTELLIGENCE: WHAT YOU REALLY NEED TO SUCCEED IN THE WORLD OF WORK

24 26 29 32 35 38

CRYPTOCURRENCY & BLOCKCHAIN: PRACTICAL USE CASES

KEY ASPECTS AND TRENDS TO CONSIDER FOR A WINNING DIGITAL STRATEGY

HOW TO BE CLIENT CENTRIC: USING CLIENT EXPERIENCE TOOLS EFFICIENTLY AND EFFECTIVELY

MiFID II AND THE FINANCIAL RESEARCH LANDSCAPE

BARBADOS: ANCHORING INTERNATIONAL BUSINESS

HACKER GIRL - PART TWO

Autumn/Winter 2016

Safe Withdrawal Rates for UK Retirees: is it time to reset the 4% rule? Writing in the summer of 2016, investors’ concerns about low yields have never been more acute: in the aftermath of the Brexit vote, the changed direction of monetary policy has only exacerbated longstanding concerns. In this context, it has never been more important to understand the rules of thumb that we use as a starting point to evaluate how much someone must save for retirement, since the misapplication of these rules can have significant negative implications for retirees today.

period. A more relevant measure of life expectancy is called ‘Cohort’ and considers the expected life expectancy of a given cohort of individuals as they evolve through time and therefore incorporates gradual survival improvements. Already, cohort life expectancy exceeds period life expectancy at birth by about 10 years in the UK, and even by a couple of years at a standard retirement age of 65. Average life expectancy into the mid-90s should no longer be regarded as extraordinary. With a clear historical baseline established, one must In a recent study, Morningstar’s Investment then question whether capital markets history is a Management group has revisited what is known good-enough guide to the future. With the UK base as the ‘4% rule’, which dictates the portion that rate recently lowered to 25 bps, a level well below all can initially be safely drawn from a pension for recorded UK capital markets history (going back to a sustainable income. For those not familiar with the late 1600s), it is only prudent to consider whether the rule, it is the initial withdrawal rate that can be future asset returns might differ from the past. When taken from the portfolio in first year of retirement, forecasting future equity returns, Morningstar where that amount is subsequently increased by decomposes the returns into the underlying inflation. For example, a 4% initial withdrawal economic and corporate fundamentals. Using this rate (i.e., the “4% rule) would result in £4,000 from approach, we expect lower returns for equities in a £100,000 portfolio in the first year in retirement, the future and a comparable approach for fixed where that £4,000 initial withdrawal amount is income suggests lower returns for bonds as well. subsequently assumed to increase annually by inflation (and retirement is assumed to last 30 years). In an analysis based on our forward-looking return The 4% rule originated in the US in the 1990s estimates we found that a portfolio with a 40% based on long-run US historical data. Our research equity allocation, with a 2.5% initial withdrawal shows that a similar approach conducted across 20 rate, had a 90% likelihood of success over a 30-year developed markets including the UK would have retirement period today. In other words, we expect typically yielded initial withdrawal rates well below the odds a portfolio worth £100,000 portfolio will 4% at any reasonable likelihood of success. The be able to create an income of £2,500 per year, in generally superior historical return performance today’s pounds, are about 90%. An important part of US capital markets has translated into a safe of our analysis is the inclusion of fees (which we peg withdrawal rate that was often unattainable at 1% per year), something most other research has elsewhere. In the UK, the historical safe initial ignored. While our forward-looking portfolios retain withdrawal rate would have been closer to 2.5%. a domestic bias, they do benefit from a substantial international exposure and as such provide a more In the 20 years since that original research, life realistic depiction of what is achievable compared to expectancy has steadily improved and it is expected purely domestic approaches based on historical data. to continue doing so. As a result, the standard 30year retirement period underlying previous research Portfolios with higher allocation to equities tend no longer looks as safe as it used to. The more to have higher initial withdrawal rates but also commonly used measure of life expectancy, termed more volatility. This is a fundamental trade-off for ‘Period’, looks at death rates for a current point-in- investors and therefore it is critical for advisers to help time and takes no account of changes after that investors understand their risk tolerance to strike to

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right overall balance. Higher volatility can manifest itself as a greater chance of running out of funds in retirement given the importance of portfolio returns early in retirement. This effect is commonly referred to as “sequence risk” or “pound-cost ravaging.”

unsuitable today given expected returns, safe portfolio withdrawal rates are relatively similar with opportunities available in the annuity market. For example, our finding that a 2.5% initial withdrawal rate is likely a better starting place for retirees today echoes annuity rates, where 2.5% is the Implications for financial planners approximate cost of an RPI-linked annuity for a Armed with a better understanding of sustainable 64-year old. While this is far from a like-for-like withdrawal rates, advisers will need to tailor comparison, since the annuity leaves no capital their recommendations to clients by discussing in the event of an early demise, but does provide the likely duration of the need for retirement certainty of lifetime income, it is an important income. The 30-year baseline may be too reminder that these are trying times for retirees. short for many retirees, and for some too long. Retirement is the most expensive “purchase” Equally, the desire for income needs to be many households will ever make. Unfortunately, understood: other Morningstar research has for retirees today, it has never been more shown that spending in retirement follows certain expensive, and the importance of understanding patterns, with the need greater in the earlier and this cost, and helping clients through it, has later years, but lower in the middle years. While a never made financial advisers more valuable. flexible drawdown approach can espouse these trends well, they require continuous monitoring This article is based on “Safe Withdrawal Rates for to mitigate the risk of failure. While the State Retirees in the United Kingdom”. Blanchett et al, 1 May pension and other sources of income will provide 2016 an income floor, our range of estimates can be used as a roadmap to making adjustments along the way Marc Buffenoir, CFA and help clients vary their spending when required. Morningstar UK While a 4% initial withdrawal rate may be http://www.morningstar.co.uk/uk/

Autumn/Winter 2016

SCRATCHING THE INSTANT GRATIFICATION ITCH: USING TECH TO SATISFY INVESTORS DEMANDS

Instant gratification is seemingly almost hard-wired into our DNA. As a species, we’re conflicted by long-term ambitions and wanting things now. According to Freudian psychoanalysis, humans act upon something called the “pleasure principle.” It’s the driving force that compels us all to satisfy our needs. These needs can be as basic as the requirement to eat, drink or breathe. But they can be as complex as the desire for the next cool thing you never knew existed two weeks ago. It’s up for debate what constitutes a pure ‘need’ as opposed to a ‘desire’ but the drivers and

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effect on the human psyche remain the same. When we don’t satisfy our needs, our psychological response often manifests as anxiety and tension. An anxious customer is rarely good for business (unless you’re a psychiatrist). In the savings and investment industry, we sometimes stub our toe on this instant gratification driver. After all, how can we – the financial services industry – really satisfy investors’ immediate demands with a product or service that relies on them adopting a medium to long-term strategy? Investing is all about delayed gratification.

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Make investing habitual (yes, really) The answer almost certainly lies in the user experience and how we make investing more interesting, engaging, fun, or even habitual? Clever application of modern technology and software can go some way to delivering this. There was a time, not so long ago, that investing and saving was a buy-and-forget transaction. But times have changed and we have an opportunity to help investors be more informed, engaged and have access to the appropriate tools and services, whenever and however they need it. A similar dynamic applies to other providers of financial services, including insurers, lenders, banks and intermediaries. Communication by means of the good old annual statement is simply no longer good enough. Whilst there are certain things we have to provide, like the annual statement, investors increasingly want, and expect, a more interactive process, where they can have a degree of control and engagement. Some organisations understand this better than others - and they’re the ones embracing technology, listening to their customers, empowering them and delivering what they need – not just for some esoteric reasons or theoretically based ‘best practise’ but to deliver hard-nosed commercial outcomes around; retention, upselling, new client acquisition and operational cost savings. The companies using technology most effectively are those using it to better understand their customers. Website tracking technology, for instance, enables firms to see how investors are navigating their

websites, the information they look for and to identify the things they may be interested in in the future. There’s a lot to play for A typical wealth management business has invaluable data held within all areas of its business. Take two elements; risk profiling and suitability tools. These elements alone can be mined to improve the investor’s understanding of risk and goals. Similarly, goalbased tools that allow customers to create scenarios can both help investors gain a better understanding of the impact of their choices and improve the industry’s grasp of investor decision making. The pace of technological development continues to open up new possibilities. Gamification within the investment and wealth industry is still in its infancy, so there’s a lot to play for. Gamification isn’t actually about building a ‘game’. It’s about amplifying the effect of an existing, core experience by applying the motivational techniques that make games so addictive – like point building, competition, challenges and rewards. It’s argued that gamification, applied properly, drives more sales, engenders trust and creates deeper loyalty, leading to higher customer satisfaction. Start pushing their buttons Consider how a wealth management firm could benefit if, for instance, it segmented its customers into groups with similar characteristics, based on things like risk tolerance, similar investment time horizons, amount invested, similar goals etc. The firm then uses this segmented data to create ‘people like me’ interactive discussion boards, fantasy investment league challenges, goal trackers, expert Autumn/Winter 2016

analysis and updates, case studies and what if scenarios. Investors could interact, within the wealth manager’s brand – online or through an app – in real time. They would be rewarded with information, knowledge and peer views and their instant gratification button would be pushed each and every time they interacted. They would feel more confident. They would feel reassured. They would feel more engaged. They would feel part of something bigger. After all, we all want to ‘belong’. Getting ahead of the game Now think about the value gamification adds to the wealth manager. The firm knows what its customers are thinking and what they’re concerned about. It might even reveal that someone is not in the appropriate segment. Communications can be appropriately tailored for the different audiences. In short, a process like this would provide the wealth management firm with a far richer mine of data with which to market more effectively, via its chosen channels, creating more advice point opportunities. This is what gamification is all about; giving the customer a richer experience and providing business opportunities to engage clients in different ways. Segmentation, executed effectively, can be especially valuable in an investment world in which there is a growing focus on suitability and knowing your customer. Gamification strategies are often complemented or supported by interactive tools and calculators that can go a long way towards making the world of investment more accessible and easy to understand. But to do this properly, you need data, or more accurately connected data. Set the data free To harness the power of your data, you need to set it free. You need to prise it out of the dark corners of your internal systems and connect it all in a meaningful way that can educate and excite customers through whichever channel they wish to engage, whether that be online, mobile, face-to-face or a combination of all. And here lies the power of partnerships between invest-

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ment companies, with their rich data, and tech companies that have the experience of connecting that data and the vision to apply it in innovative ways that transform the relationship between wealth managers and their clients. But once the data is actually connected how do you ensure that all of your endeavour and investment has a lasting impact? After all, the idea behind using technology in this way is not merely to entertain and promote, but to build and support relationships, empower investors and drive more profitable relationships. Again, we’re back to tangible commercial reasons. Short term gains So the trick, surely, is to use the desire for instant gratification to make the actual process of investing more exciting. This may sound counter-intuitive, but the use of rewards, incentives and other short-term strategies can promote engagement and better long-term decisions. The industry has all the data it needs to exploit our natural preference for short-term gains by bringing the actual process into play. We know more now about behavioural biases, risk perceptions and investor decision-making processes than ever before. It’s time to put that to creative use. Many people – including the high net worth – perceive the actual investment process as dull and cumbersome. It’s seen as remote, where a lack of transparency around costs, complexity and processes, often acts as barriers to engagement and interaction. Technology is key to overcoming that. Pension investments are a case in point, given the industry’s battle to boost provision and encourage people to take a greater interest in their retirement funds. Employers and pension firms are using apps, interactive tools and personalised updates to promote engagement in workplace pensions. The more engaged an individual with their pension funds and investments, the more positive

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their experience is likely to be and the better their perception of the industry as a whole.

tates a multi-channel approach so that investors can engage when and in any way they choose.

Transformation through technology Technology has the power to transform perceptions of an industry seen by many as dry and opaque but which has the potential to lead the way in engagement, innovation and interactivity.

The future leaders in wealth management will be those companies that understand the instant gratification itch must be scratched. And it’s the process itself, not necessarily the outcome, that satisfies the all-important “pleasure principle”.

But remember, great fintech is usually complemented by unifying digital and face-to-face services. Research by IRESS and Compeer found that while millennials are transact digitally and want real-time information, they also value the human touch. Technology is most useful when it facili-

Simon New Group Executive – Strategy IRESS https://www.iress.com/uk/

Autumn/Winter 2016

FACTOR INVESTING: ADDING INVESTMENT SKILL TO INDEX INVESTING

Evermore, investors are including funds within their portfolios which are designed to match or track market indices (index funds) due to cost considerations and the diversification benefits they can offer alongside more traditional strategies. However, index funds will only ever perform in line with their index, and we believe that by adding investment skill to index investing, there is an opportunity to deliver a better return. At Invesco Perpetual, we are doing this through factor investing techniques. What is factor investing? In its most basic form, factor investing is investing in a group of stocks with similar characteristics such as low volatility or high dividend yields (the amount a company pays in dividends each year relative to its share price). These single criterions are often combined to build aggregate factors such as: • • • •

Value: grouping stocks with attractive valuations Momentum: reflecting price and/or earnings dynamics Quality: company profitability and/or its management quality and/or its balance sheet strength Growth: company sales, earnings and cash flow growth, amongst others

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Definitions of factors can differ quite substantially within the broad variety of strategies and products in this investment space. Factor investing has been spreading across equity markets in recent years, appearing under various labels. It has become widely accepted that factor returns go a long way to explaining the active returns in equity markets. This means that it is not just a fund manager’s stock-picking skill that could add to returns, there is also evidence that exposure to certain factors can result in outperformance of a benchmark index in the long run. Using multiple factors At Invesco Perpetual, our factor investing goes far beyond this single factor approach. We implement strategies with well-diversified exposures to multiple factors with different characteristics. More importantly, our factor investing approaches focus on bottom-up stock selection − we incorporate risk and return expectations to construct multi-factor portfolios within the scope of extensive risk management. Using a model developed in-house, every day over 3,000 stocks are ranked from the most to the least attractive. We use a range of factors to evaluate WMA Journal

the relative attractiveness of each stockâ&#x20AC;&#x2122;s price in the past. These factors are grouped into four broad concepts (Figure 1). Figure 1 Four broad concepts

Earnings expectations

Analyses how the earnings expectations of a company are changing

Market sentiment

Examines past performance of a company relative to its peers

Management and quality

Examines a companyâ&#x20AC;&#x2122;s operational and financial health

Value

Measures the attractiveness of a company relative to its peers

Balancing index-like performance and index outperformance To many, the beauty of being passive is the idea of generating index-like performance without bearing the risk of significant underperformance relative to that benchmark index. However, the caveat of being passive is that after costs, the index return is never fully captured, which can lead to meaningful compounded underperformance over time. At the same time, the search for yield is becoming ever more difficult, so any potential additional basis point of return generated from equity exposures is important. This is why multi-factor equity strategies are gaining interest from investors: they offer access to moderate extra return potential without straying too far from the benchmark index. These strategies maintain some characteristics very similar to passive strategies: approximate market volatility, low divergence between return of the portfolio and the benchmark and diversified equity exposure, but they also offer the potential for increased returns in comparison to the benchmark. Autumn/Winter 2016

Careful implementation of moderate active positions versus the benchmark index in a riskcontrolled framework, in order to potentially generate additional returns compared to that benchmark, is the added value that the Invesco Perpetual enhanced index funds managed by the Invesco Quantitative Strategies (IQS) team can offer. It is an obvious distinction from passive approaches, and positions multi factor enhanced index strategies in the camp of active strategies, albeit less active compared to strategies which behave entirely differently to the relevant index. Factor evolution However, with over 30 years’ experience in this field, we know that nothing is as constant as change. Factor development responds to opportunity and threat. It deals with weaknesses and strengths. When we look at the opportunities, we constantly see new ideas bubbling up and an incessant stream of new datasets becoming available. But life and markets are not only about opportunities. There are threats too. Other market participants pursuing similar ideas in a number of ways make markets more efficient, so our factors need to subtly evolve to stay ahead of the market. Some factors have weaknesses that seem a part of their nature. Part of the job of our analysts is to look for ways to mitigate weaknesses. One issue with factors that focus on momentum is sharp and prolonged declines. Expecting past winners 12 @WMA_UK

to continue to outperform works on average, but can be very painful when markets change direction and break trends. What can be done about this? Risk adjustment is a key solution. As − and even before − trends break, risk profiles give tell-tale signals that can help to shorten any required period of adjustment. At IQS we believe our strengths are not only in the broad global scope of the team, which now numbers over 40, but in our attention to detail. For example, when we evaluate the changing expectations of analysts, we make sure we cannot only identify the firm that is responsible for an estimate, but the individual analyst. Thus we can identify the changes that may be caused by a change of analyst rather than a change of mind. Similarly, a confident change in mind is much more important than one that lacks conviction – and the two can be told apart. Ongoing evolution of factors is, we believe, a necessary requirement for any ability to sustain an edge in investment markets today. There is no guarantee that the funds will achieve their target and investors may not get back the full amount invested. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

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The Invesco Perpetual UK Enhanced Index, European ex UK Enhanced Index, Global ex UK Enhanced Index and US Enhanced Index funds may use derivatives (complex instruments) in an attempt to reduce the overall risk of their investments, reduce the costs of investing and/or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of the funds. The Manager, however, will ensure that the use of derivatives within the funds does not materially alter the overall risk profile of the funds. Michael Fraikin Head of Global research Invesco Quantitative Strategies www.invescoperpetual.co.uk

1As the funds below launched on 28 July 2016, the first reports will be issued on or before the following dates: Invesco Perpetual European ex UK Enhanced Index Fund: Interim – 30 June 2017; Annual – 31 December 2017 Invesco Perpetual US Enhanced Index Fund: Interim – 30 April 2017; Annual – 31 October 2017 Invesco Perpetual is a business name of Invesco Fund Managers Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.

Important information Where Michael Fraikin has expressed opinions, they are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco/Invesco Perpetual investment professionals. For the most up to date information on our funds, please refer to the relevant fund and share classspecific Key Investor Information Documents, the Supplementary Information Document, the Annual or Interim Short Reports1 and the Prospectus, which are available using the contact details shown.

Autumn/Winter 2016

SENIOR MANAGERS REGIME: GETTING CULTURE AND CONDUCT RIGHT SENIOR MANAGERS AND CERTIFICATION REGIME AND CULTURE – HOW CAN WEALTH LEADERS PREPARE FOR THEIR INVOLVEMENT? Andrew Bailey asserted that “it is not the job of regulators to enforce and to change culture” at May’s City Week conference, prior to him assuming the role of FCA Chief Executive. However, with the FCA’s press release in September detailing the regulator’s ‘new measures to maintain firms’ focus on culture’, some may feel there is a dichotomy here, especially given that the announcement almost exclusively addresses upcoming changes to the Senior Managers and Certification Regime (SM&CR). Following this latest announcement, is the regulator saying something different about its role in supervising firms’ culture? With senior leaders of many wealth firms soon to be affected by SM&CR, firms in this sector will need to reconcile this and previous FCA announcements on senior management responsibility, and ensure they’re confident about how they embed an effective culture, and who is responsible for overseeing this and ensuring it is performing.

THE NATURE OF CULTURE The internal culture of firms has often seemed nebulous and difficult to assess, as it’s the sum of many composite parts. It has long been clear that the influence of senior leaders’ ‘tone from the top’ is an important factor in fostering good culture in a firm, and that it is incumbent on a firm’s culture to protect customers from detriment. It’s perhaps not surprising then, that much of the culture discussion exists in the SM&CR space. Despite the fact the regulator states it does not directly govern culture, it acts when the implications of poor culture manifest themselves in customer detriment. SM&CR provides far greater impetus for decision makers to act to protect customers. In a regulatory landscape where customer outcomes are the primary metric for assessing performance, wealth firms seeking simply to discharge regulatory obligations can find themselves disadvantaged. Approaching regulation in this way fails to turn spend on compliance into tangible benefits, such as increased customer advocacy and being able to produce effective evidence in case of regulatory scrutiny to avoid censure. The regulator has noted that firms across financial services, particularly banking, have made great strides to improve their culture in recent years, and initiatives such as SM&CR have made a contribution to this culture shift. So how can senior leaders in wealth firms ensure cultural success following their inclusion in SM&CR? 14 @WMA_UK

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SIX AREAS FOR CULTURAL SUCCESS It’s a challenge for firms to measure their own internal culture against a rigid set of metrics. However, it is possible to gain a clearer view of whether the culture in your firm enables commerciality, compliance and good customer outcomes by thinking about culture in terms of six key areas.

• • •

Business model and strategy

You can examine whether business model and strategy contributes to good culture by looking at it through three ‘lenses’:

Commercial – does your business model and strategy contribute to achieving your commercial aims? Customer – does your business model and strategy support (or detract from) the delivery of the right customer experience and outcomes? Conduct – can you provide the regulator with assurance that your strategy is appropriate and effective (especially in regards to the outcomes you are providing)?

Ensuring your business model works for these three stakeholders (shareholders, customers and the regulator) will be seen by the regulator an exponent of good internal culture.

• •

People and employee lifecycle

Doing a great job is a key motivating factor for employees of any firm. However, the financial and performance management-based incentives available in a firm will always have some effect on its peoples’ behaviours. Of course, incentives are no bad thing; however firms have a responsibility to ensure the incentives they offer enable good outcomes for their customers. Incentives that cause staff to prioritise profit ahead of suitability, for example, can result in undue detriment and future remediation costs for the business. Do you have a clear view of the effects of incentives and targets in your firm?

Leadership

A key task for business leaders is creating and maintaining a culture which reflects their vision, ethics and values while allowing a degree of individual empowerment within an organisation. If you’re a senior decision maker, consider whether you are able to: •

The values business leaders endorse can have far-reaching effects within a firm, for example, in ensuring a customer-centric culture proliferates downwards, and that commercial success is built on high-quality customer experience. Is this the case in your firm? Can you evidence it?

Articulate the ‘strategic purpose’ of your organisation; that is, “why do we do what we do?” Obtain a clear and ongoing view of customer outcomes within your firm, as well as the commercials Project a ‘tone from the top’ that promotes customer-centricity and demonstrates the values you hold for your organisation

Behavioural norms

Where decisions are being made within a firm, it’s fairly common to see ‘behavioural norms’ influencing the process. “That’s just the way we do things here” type-thinking can sometimes coincide with decision makers’ overconfidence, resulting in decisions being based on presumption – not a reliable basis for providing good customer outcomes. Firms should ensure that they have formal processes in place to help them embrace internal challenge in a way that takes concerns seriously but is not disproportionate and a burden on commerciality. Senior leaders should challenge their own assumptions about decisions, and leave themselves open to be challenged by their peers, also.

Autumn/Winter 2016

Customer focus

Ensuring firms place the customer at the centre of everything they do is the ultimate aim of the regulator. However, as well as some of the great work taking place within firms post-financial crisis, there still exists, in some areas, a public mistrust of financial services. Connecting with consumers though their channels of choice, letting customers know they are protected from the threat of financial crime, raising awareness of the benefits of financial advice and successfully dealing with vulnerable customers will help you garner advocacy, and will likely be the key to success in this area.

Monitoring and controlling

The shift towards a customer-centric culture in financial services means that firms periodically ‘taking the temperature’ of products, processes and the outcomes they provide now features heavily in the regulatory discussion. When it comes to continually improving the customer experience, outcomes testing can help you gain an accurate view of how products and processes are performing. Not only this, but if your firm experiences regulatory scrutiny, being able to evidence that you have regularly assessed the outcomes you’re providing will assist you in satisfying the regulator. satisfying the regulator.

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DEALING WITH SM&CR IN WEALTH

By satisfying themselves that they operate in line with the principles above, firms can take full control of their internal culture. Although the regulator is more concerned with the effects of poor culture on customers than the setup of internal culture itself, presiding over a firm that understands its responsibility to its customers and constantly tries to assess and improve their experience is certainly the best option for senior leaders in wealth, given the imminence of the SM&CR. Consequently, the FCA does think getting culture right is firms’ responsibility. Huntswood has developed the Culture Conduct Model to measure Culture across financial services and will be helping facilitate the WMA’s Insight 360 on Culture on 24th November 2016. Matthew Drage Huntswood ww.huntswood.com

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THE UK WEALTH MANAGEMENT SECTOR SUMMARY REQUIREMENTS FOR BREXIT AND AFTER

STOP PRESS: Bill (Act); marked by temporary equivalence and legislative review; is the transition period to final settlement of UK’s global position; duration approximately 2 years;

At the time of going to press we have just received news of a High Court ruling that states for the Government to trigger Article 50 without a debate and vote in Parliament is unconstitutional. This obviously has major implications. Although the government will now appeal, and a win on appeal will overturn the initial ruling, the fact that possible unconstitutionality has been raised at this level will be seen by many to call into question the validity of the referendum result on its own as an initiator of major constitutional change. If the Government fails on appeal there will have to be due Parliamentary process and that may not lead to where the government might wish.

Phase 3: UK policy on long-term approach to EU and other relationships settled; firms know broad policy framework for future planning purposes. •

In either case the Brexit context is now different and the • hand of those wanting either to stay in the EU or to at the very least have a ‘soft’ Brexit has been strengthened. •

The WMA advocates a 3-phase approach to the Government’s Brexit negotiations: Phase 1: Article 50 negotiating period while UK is still inside the EU; Phase 2: commences on departure from the EU and the coming into force of the Great Repeal

•

In this process, sudden changes, shocks or disruption to business and regulation during the changeover to Brexit must be avoided; a smooth and predictable transition is required. During Article 50 negotiations (phase 1) the UK will remain in the EU so current passporting, market access arrangements and EU law and regulation will apply. Negotiations on the future UK/EU relationship cannot formally begin until the UK is out of the EU; so there must be a transition period (phase 2) between the date of leaving the EU and when the UK has a longer term, more settled legal, regulatory and commercial relationship with both the EU and its member states, and with other countries and organisations (phase 3).

Autumn/Winter 2016

Key Issues •

•

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At the point of departure from the EU the UK will operate the same EU legislative and regulatory system for the financial services sector as other EU member states; so we will de facto be almost fully equivalent; this will facilitate the running of a reciprocal equivalence régime for a limited time (say, two years) during the phase 2 transition period; This will provide stability and continuity for firms while the Government initiates immediately on leaving the EU (to run during the transition period or, informally, well before if the resources are available) a major review of the UK’s legislative and regulatory arrangements in financial services (looking specifically at the wealth management sector in this process) to assess the degree of overhaul needed to suit the UK’s new global position.

•

The Great Repeal Bill (Act) will at the time of leaving the EU come into force (date to be determined but at present we assume by 31 March 2019) and transform European legislation into UK legislation which can then be dealt with by the UK as we choose; hence the ability to leave the equivalence arrangements in place while decisions on the longer term framework are made.

•

In the review during the transitional period the Government should consider three main options and their likely impact on business (passporting/non-passporting etc), and consult widely on what should happen; by the end of this period decisions should be made about whether UK should go for (a) UK only régime for wealth management, or (b) continued equivalence with the EU (and therefore mainly EU law in place) for reciprocal market access

purposes, or (c) potentially a twin track approach (running both EU and non-EU regulation side-by-side depending on whether a firm has or wishes to have a client base in EU member states managed out of the UK). •

We envisage the whole period from the start of Article 50 negotiations to the point at which the UK has embarked on its post-transition definitive course (phase 3) to be about 5 years’duratio

Summary Recommendations to Government for Brexit Negotiations and After

The following summarises the WMA’s recommendations for Government Brexit negotiation: 1. Aim to frame a bespoke UK cooperation agreement with the EU allowing for continued financial market access; 2. Retain reciprocal passporting arrangements for wealth management firms regarding access to retail clients in EU member states (mainly MiFID) during the Brexit negotiation phase (UK in the EU) and immediately (max 2 years) afterwards (UK out of the EU but on an overall equivalence basis); 3. Prepare for change immediately following exit by introducing identified quick regulatory wins (see pages 21-23), summarised as follows: Capital requirements for UK-based investment firms (current EBA work); The use of legal entity identifiers for retail transaction reporting (MiFIR); The 10% fall additional reporting requirement for WMA Journal

9. discretionary clients (Article 62, MIFID II) Revise the MiFID II requirements to eliminate investment trusts and other non-complex listed funds from complex product definitions;

Take all possible measures to retain the integrity of the United Kingdom and disincentivise Scotland from seeking independence.

Align the verification of identity tests in MiFID II/ 10. Implement in phase 3 the results of phase MiFIR for transaction reporting with those in Anti2 legislative and regulatory review and Money Laundering legislation; consultation (d above), including any agreement to reconsider or terminate Align the costs and charges requirements in MiFID equivalence arrangements. II and the PRIIPs Regulation so that only one set of data requirements is needed and retail clients are PHASE ONE not faced with different cost statements for the • EU membership continues same product; • EU legislation and practices in place Eliminate the €100,000 Prospectus Directive • Article 50 negotiations under way on threshold for exempting corporate bond issuers terms of UK exit from EU from full prospectus requirements and aim to • Assume 31.03.19 the end-point: rejuvenate the retail market in corporate bonds; equivalence of legislation/regulations to be achieved at this point Revise the Short Selling Regulation to reflect both the true range of liquidity in equity markets and PHASE TWO to cease to penalise UK retail market makers for accidentally going short. • 1.04.19 Great Repeal Bill takes effect: EU UK legislation During and immediately after Article 50 negotiations • Quick wins (phases 1 & 2) conduct a root and branch review • UK equivalent at outset; government of UK legislative and regulatory régime to reach should have negotiated minimum 2 year decision on new UK framework at end of transitional period during phase 1 for equivalence to period; should include an assessment of best options prevail in phase 2, creating stability and regarding continuation or not of passporting planning horizon for firms arrangements; • Government reviews and consults in Ensure continued access to investment by and for order to build final settlement private clients in the UK, EU and other regions in funds domiciled in the EU, UK and elsewhere by UK, EU and PHASE THREE other firms; • New settlement begins, perhaps 01.04.21 Retain cross-border EU equity dealing arrangements • • Government to have selected between for and on behalf of UK retail investors under MiFID options: UK regulation only; EU regulation II/MiFIR, and avoid disruption of UK settlement for long-term equivalence; or twin track arrangements for retail equity transactions; • • Firms to be given maximum planning time to accommodate long-term Retain the ability to recruit and retain high quality UK position in their future business staff from across the EU for the wealth management approaches. sector and avoid restricting or erecting barriers to such recruitment; Retain existing access arrangements for UK-based clients to funds and investment services domiciled in the Channel Islands and the Isle of Man;

John Barrass Wealth Management Association (WMA) www.thewma.co.uk

Autumn/Winter 2016

CAREER INTELLIGENCE: WHAT YOU REALLY NEED TO SUCCEED IN THE WORLD OF WORK

The world of work is on the brink of a complete transformation - and with it comes a whole range of far-reaching and ultimately game-changing implications. One of the challenges facing workers in the financial and professional services industries and other “knowledge workers” - i.e. people who think for a living – is that IQ (academic intelligence) and EQ (emotional intelligence) alone are no longer sufficient to help them navigate the changing world of work or manage their careers as effectively as they would like. So, what’s changing and how can Career Intelligence or CQ help?

Broadly speaking, the “Old World of Work” operated a bit like a giant escalator with workers joining an organisation at the bottom, and being promoted through the ranks towards a pension pot at the end of their career (and top of the escalator). Sound familiar?

The Old World of Work

Managing your career in the Old World of Work was relatively straightforward – as long as you turned up and fulfilled your role, the ability to pass exams (IQ) and emotional intelligence (EQ) would ensure that you progressed up the escalator. This model has become outdated as progression 20 @WMA_UK

WMA Journal

of workers is being thwarted at every level of the escalator. At the top, people are living and working longer as pension pots no longer provide the lifestyle required. In the middle, ambitious managers are caught in a promotion limboavailable. And at the bottom, Millennials are finding it harder to get on the escalator. With job security at an all-time low, employees are faced with continuous change - restructurings, mergers, and downsizings have become the new norm. Employers are turning to contingent labour to meet more of their needs, and the â&#x20AC;&#x153;Gig Economyâ&#x20AC;? (where a large pool of skilled freelance workers offer their services) is growing from strength to strength. Data shows that the average baby boomer now changes jobs 11.7 times in their career, and for Millennials the rate is as high as every two years. With such a pace of change, and increasing levels of uncertainty, something more than IQ and EQ is needed to navigate the changing work environment. The New World of Work With the career escalator analogy becoming increasingly redundant, it can help to perceive your work-life journey in a less linear way. In the New World of Work, the single route to

the top of the building is now replaced with a whole metropolis in front of you with multiple destinations. Now you can choose where you want to go and how. And crucially the only way is not up - itâ&#x20AC;&#x2122;s as much about the journey as it is the destination. Choice, freedom, opportunity and possibility are words that belong to the New World of Work as many workers re-invent their careers multiple times, often doing completely unrelated things from where they first started. I started out as a City lawyer in London, moved Autumn/Winter 2016

in-house to a US investment bank in Asia, then did a 2- year full time MBA in the US before working as a Marketing Manager in American Express and a Wealth Manager at UBS. Latterly I retrained as an Executive Coach and now run my own business helping professionals adapt to the new world of work. And I am not alone – many others have similar stories of reinvention and new possibilities to tell. Developing Career Intelligence (CQ) CQ is the ability to shape your working life to satisfy your professional aspirations in accordance with your personal values. And crucially the ability to keep doing this throughout your working life as you change and the world continues to change around you. It is both a new mindset and skillset.

It doesn’t necessarily mean reinventing your career entirely – although it may well do – the crucial point is it puts you back in the driving seat, enabling you to take ownership of your career and make conscious choices in accordance with your own values and not someone else’s outdated definition of success. • CQ is a new Mindset…. The mindset shift involves thinking about your career not as something you are “in”, but as something you “run”. It is about thinking and acting more like your own CEO, with your career as the microbusiness – even if you are still employed. • And a new Skillset The skills involved are an ability to know how you add value and then create opportunities in the external environment to do that – either within your current organisation or elsewhere. Equally important is a knowledge of what matters to you in addition to economic survival – what do you stand for, what is your definition of success – and being able to find your place as the world of work changes around you. Having a professional brand, getting known, actively networking, continuously learning, improving and developing yourself are also important facets of CQ. A New Way of Managing your Career Ultimately, as I tell my clients there is no longer

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any standard definition of what career progression is – you need to know what it is for you, and then be able to notice and create opportunities to get there. The good news is that like EQ, CQ is an ability that can be learned. Organisations that invest in developing the CQ of their employees find they become more engaged and proactive and take

more ownership of their own careers. Meanwhile, individuals who increase their CQ feel a new sense of power and motivation as they start to focus on the things they can control and forge a more authentic and fulfilling career path for themselves. The New World of Work is already here, what are you waiting for?

How High is your CQ? Rate each statement on a scale of 0-5 (0 = not true at all; 5 = completely true). • • • •

I know how to manage my career so that it is satisfying and successful (to me) I know how to develop myself so that I stay relevant I devote sufficient time to career management activities I feel confident that I have the tools to take control of my career

Scoring: 16-20: Your current level of CQ is high and you just need to ensure you stay adaptable as the environment changes around you. 11-15: You are displaying moderate levels of CQ at the moment – you could benefit from learning more about CQ and how it applies in your personal situation. Below 10: Your current CQ levels are below average – this could be for a number of reasons and may be worth exploring with a coach or mentor. You may not be in the right job, or you may be so busy you don’t have adequate time for your own development.

Anita Rolls Executive Coach and Founder of So What Do You Do Ltd. www.swdyd.com

Autumn/Winter 2016

CRYPTOCURRENCY & BLOCKCHAIN: PRACTICAL USE CASES The technology behind Bitcoin – the decentralized, stateless Internet currency released by anonymous programmer in 2008 – has in the space of several years gone from the play thing of nerds and anarchists, to a serious financial instrument that Wall Street and the largest investment banks are investing billions in. The rapid rise of popularity of the “blockchain” – the technology that makes Bitcoin possible – has confused many people. Such confusion has often given rise to the feeling of a fear of missing out – sometimes causing investors to blindly invest in the technology so that they are not left behind. Especially with names like Goldman Sachs and J.P. Morgan publicly endorsing the technology. With the confusion that has equally surrounded its popularity, there is an important role to play in educating the public and investors about when the technology should be applied and when it should not be. Recently there has been a rapid rise in organisations proposing to use blockchain technology for all sorts of projects simply because of its hype, without properly considering whether it be appropriate for their use cases. So what is the blockchain exactly? Simply put, it is a technology that allows a number of participants to maintain a database of records together, without trusting each other. In order to understand what practical use cases this has, it is important to consider why this property is useful. Bitcoin for example, can be thought of as a bank with a database of everyone’s balance. Everyone who uses Bitcoin has a copy of that database and helps to maintain it. Because everyone has a copy of the database, any user can make sure that no one is cheating by artificially changing their “balance”. So the users keep each other in line. This system has three key advantages over traditional centralised banking systems: • Cost: because there are no trusted middlemen required to process transactions, transactions fees are much more competitive than what industry monopolies such as Visa or Mastercard can charge. 24 @WMA_UK

•

Auditability: because the database is maintained by everyone, it is very easy to audit the log of every transaction in the system. This makes largescale money laundering more difficult as every transaction is accounted for. Innovation: Because the system is decentralised like the Internet, everyone is free to innovate on top of it without asking for permission from any company.

When considering using the blockchain for a project, it is important to consider which of the above advantages can be exploited to add value to the project. A common pitfall for organizations is to use the blockchain for internal systems. Because the value of using a blockchain inherently depends on third party actors, there is little value in using a blockchain internally as opposed to a standard database. There are however, some exciting use cases for this technology that are being actively explored by the industry. One of these is “smart contracts”, which are financial contracts (such as loans) that are enforced by computers. If traditional contracts are written by lawyers, executed by administrators and enforced by courts, then smart contracts are written by computer programmers, executed by computers and enforced by the blockchain. Compared to traditional contracts, smart contracts could have lower administration costs and be faster to execute. Does this mean that if you are a lawyer your days are numbered? Obviously not, but it means that you might be working side-by-side with computer programmers in the future. Because these technologies do not easily build on top of existing financial infrastructure, but instead introduce radical changes, it will be a while before we see full mainstream adoption of the technology. Today’s investors are still therefore very early investors that are taking a great deal of risk. Mustafa Al-Bassam information security and blockchain strategist

WMA Journal

Autumn/Winter 2016

KEY ASPECTS AND TRENDS TO CONSIDER FOR A WINNING DIGITAL STRATEGY

A variety of factors contributes to the pressure wealth firms are feeling to implement a digital wealth management strategy. The major drivers to be considered for technology investments in digital transformation are: • • •

the need to meet “digital” clients’ expectations; the need to comply with new regulations such MiFID II; the desire to quickly react to increasing market volatility.

The results of our joint survey conducted with Efma “Digital engagement and collaboration in wealth management: the hype, the reality and the future” offer an insight on how digitally minded investors will influence the approach to wealth management in the coming years. When engaging with a financial institution, the customer experience defines the first impression of the wealth firm with a (potential) client. Nevertheless, the survey results show that only 31,4% of respondents claim to have a real-time and consistent customer experience across all channels. This result underlines the need for investments to implement it. For the surveyed panel, security could be an issue, but is not a limiting factor for digital engagement and collaboration when using relevant and appropriate technology. Consequently, the digital engagement and collaboration capabilities that will grow more in two years will all be aimed at enhancing interaction between client and advisor (See figure 1). 26 @WMA_UK

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Figure 1 – Digital Strategy – What are your main “digital engagement & collaboration” capabilities? +10% in 2 years

INTO 2 YEARS 50% 45% 40% 35% 30% 25% 20% 15% 10% 5%

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Coherently with this pivotal role of interaction, the adoption of hybrid and robo advisory tools will register the higher growth in two years, compared to other online investment management tools (See figure 2). Figure 2 – Online Investment Management – What kind of online investment and wealth management tools are you offering to your clients? Now: 8%

INTO 2 YEARS

The use of these on-line investment tools will change wealth managers’ business model: the hybrid advisory model could represent a winning approach to investment servicing. To support this emerging business model, Objectway provides Hybrid Advisory solution combining human interaction with digital capabilities: investors can use a robo-advisor, and then request the consultancy of an advisor for more complex investment decisions in the digital manner they prefer, asynchronously or in real time via safe chat, video, co-browsing tools, etc. Goal-based financial planning adds effective investment strategy through constant portfolio monitoring and rebalancing.

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The use of these digital tools to engage and collaborate with clients is transforming the onboarding process into a revenue function. A workflow-driven platform integrating the different onboarding-involved systems and applications, in fact, can originate organisational efficiency and keep customer loyalty high. Regulatory requirements and volatility represent other major drivers for IT spending. On the one hand, the "continuous suitability" is currently the focus of financial institutions. This term concerns the application of the rules Autumn/Winter 2016

based on the upcoming MiFID II regulation, which implies the control of the investment appropriateness and the investor protection. To that extent, Objectway has developed "SURE", the Suitability Rules Based Engine based on a multivariate rule system that can be easily customized according to the market and financial institution’s needs. The multivariate approach compares the profiles of customers according to different parameters: experience, knowledge of financial products, liquidity, time horizon, risk profile, financial position; allowing tracking and storage of information involved in the suitability process. Thanks to the centralized management of compliance issues, the engine can comply with the country-specific regulation where it operates. Moreover, the market high volatility postBrexit increases the need to invest in portfolio management systems capable of rapidly and flexibly execute portfolio rebalancing and asset allocation. In response to market fluctuations, Objectway’s Optimo works on the portfolio optimization, based on parameters specified by the single advisor or defined at corporate level. An efficient and dynamic model portfolio construction provides agile and swift reaction to market oscillations, leveraging on strategic insight and tactical choices. Objectway’s proprietary algorithms allow you to set the investment targets, maximize efficiency and minimize risks by defining multiple constraints (asset class, strategic and tactical asset allocation, duration, maximum portfolio volatility, etc.) These algorithms can be used to support wealth managers in their activity, but also as standalone robo-advisory engines or within our Hybrid Advisory solution, to support the digital investment experience. We believe that in this context of uncertainty and new approaches to wealth management, technology has a significant role both in dealing with market fluctuations, and in limiting the costs associated with the redefinition of the business models impacted by investors’ demands and regulatory developments.

28 @WMA_UK

Written by Objectway Financial Software www.objectway.it/EN/financial-software/ default.asp WMA Journal

HOW TO BE CLIENT CENTRIC: USING CLIENT EXPERIENCE TOOLS EFFICIENTLY AND EFFECTIVELY 90% of businesses agree that Client Experience is vital â&#x20AC;&#x201C; but less than 51% use Client Experience as part of their strategy (Source: 2015 Global Customer Experience Peer Research Panel Survey)

Introduction The wealth management industry is a sector where it is essential to focus on clientsâ&#x20AC;&#x2122; needs and expectations and how best to serve them. A cornerstone of ensuring a wealth manger is client centric is Client Experience (CE) research. An effective research program will provide measurable, timely and actionable insight into the health of the business and areas of focus. This paper, written by the Wealth Management Association (WMA) and Wealth-X, seeks to highlight why CE is important, what to measure and how this intelligence can be used to ensure clients are central to all business activities. Why Client Experience is important for Wealth Management: Challenges and Opportunities Client experience is the subjective response clients have to any direct or indirect contact with a company. Direct contact can consist of client calls, reporting, transactions and so on. Indirect contact can be what your client reads about your firm or interactions with the firmâ&#x20AC;&#x2122;s brand or advertising, etc. The goal is to

provide a positive experience for the client at all times. How a client interprets and internalises their experiences with your business strongly shape their behaviours and hence the health of your business.

tend to be more involved, of a higher value (financially and emotionally), and based on saving and investment goals. Monitored and used correctly CE can be a strong retention tool for the industry.

Not all financial services are the same and therefore client expectations will differ from service to service. It also varies from company to company within the wealth management industry given the differing propositions, delivery channels and touchpoints different clients may experience.

What to measure So, what information do you need to gather from clients to assess this effectively? Commonly, the first step is to identify any issues, so an approach which gathers quantitative measurements is often used first. Each of these measures tells us something different about the health of client relationships and their impact on the business.Very broadly, there are two measures client satisfaction and client loyalty. Although equal in significance, these measures are often mistaken for each other and assumed to be essentially the same thing. They are, in fact, different but intrinsically linked and it is important to understand these differences.

Trust in the banking industry and associated financial services has been damaged since the financial crisis, especially for millennial clients, causing changes in client behaviour. To adapt to these changes a well planned and executed research program can identify gaps in the service offering, key touchpoints and what your clients value the most. The wealth management industry has traditionally had stronger referral rates than other financial services due to the very personal interaction many clients have. Wealth management transactions

Client satisfaction: Tells you how happy a client is with the service(s) you provide. It relates to the results of a process whether it is the process of sales, service, product performance

Autumn/Winter 2016

or a combination of all of these. It is a natural and well received question, or set of questions, that can identify areas of concern in the business. However, it doesn’t relate to financial metrics of growth and retention well. Loyalty: Measures how likely clients are to stay in the relationship and to provide further assets. Often a blunt measure but it clearly identifies relationships or types of relationships that require action. As 95%+ of clients don’t change wealth managers in a typical year, and it is far more expensive to gain clients than keep them, even small changes on this metric make a huge difference when a single client can represent a huge portion of wealth and assets under management. Multiple adviser relationships are common (the average number of relationships is two), so knowing if you are first or second choice, and what for, can make a big difference in strategy. A third measure that is often quoted in CE campaigns is the Net Promoter Score (NPS). This provides a metric related to growth by asking how likely clients are to recommend your firm/service/ product. This is followed by a simple but intuitive calculation to get a score. With referrals being a key source of new business, this metric should be very important. Positive scores indicate likely growth, negative scores a contraction; with

30 @WMA_UK

the size of the score indicating the possible scale. Clients can be broadly satisfied with your service and loyal but if, across your client base, more speak of issues than enthuse about you to their peers, business growth will be hampered. Choosing the metrics, and the importance with which they are regarded, therefore needs to match the business aims (e.g. growth or retention). Every business goes through periods of growth and consolidation, peaks and troughs, so recognising that the information provided by clients can predict the likely future size of the business and any changes required are very important. Once chosen, all these metrics give you an indication of business health, but much like a doctor, you can easily find out how healthy you are with straightforward checks, but it takes expertise and investigation to diagnose what the symptoms mean. How to investigate specific issues and topics Once you know the health of your business, your client relationships and the areas that may require improvements or developments, a different type of research is often then required. Follow up research will help to understand the issues, potential improvements and the effects of developments in detail. Here, the benefit to the company is getting the change right and avoiding investment in something that has minimal positive effect or even negative consequences. For example, you may find that clients believe your online system to be out of date. Further in-depth research can then understand the particular aspects

requiring attention and/or test new propositions. A key element at this stage is to have a hypothesis or proposition, i.e. something to test. This gives the greatest benefit and direction to this type of research whether qualitative or quantitative. Again, different approaches can be taken to get these specific insights. They are often more qualitative and targeted primarily at the area in question, but also often targeted at the specific clients that the changes may affect most. This typically involves fewer interviews of greater depth and non-metric information. It gives a deep understanding of the pros and cons, elements to enhance, avoid or give clarity on, and often gives inspiration for potential actions. Factors to consider As with any business activity, understanding what you want to achieve and developing a plan around it is vital. Before going any further, discussing these with experienced researchers is key. They will be able to advise what information and insight is possible to achieve and how this can be best collected. There are many factors to consider when thinking about what to investigate and how. Some of the key ones are:

•

Method of contact: How are you approaching them? If your organisation employs a primarily face-to-face strategy, it may be incongruous to email your clients with a survey. Equally, if this is a common means of personal contact, this won’t be a problem. Essentially, WMA Journal

the research should ideally match your organisation’s contact strategy and brand. •

•

Regularity of interaction: How often do you interact? If only an annual meeting takes place, approaching them twice a year for feedback may be out of keeping with their expectations. Client importance: How vital is the client to your business? Treating them with respect and attention during the research is important but some clients will require a very personal touch. Segments: It’s also important to bear in mind that even within a single wealth management firm, clients may not be treated the same, or have the same type of relationship. Thinking about how the research should approach different sub-groups by understanding which factors and elements differ, will help determine which metrics are most important and how can the approach can be made. Total number of clients: If the business has less than 300 clients, aiming to get 100 to take part is ambitious. A more qualitative approach might be better to capture the key health metrics you want. If the business has thousands of clients, you don’t need to survey all clients to have a good representation – as long as you don’t select a biased group. Source: Who is asking for the feedback? Is it the relationship manager, head office, the client service director, or an independent third party? Who the request comes from will affect response rates, the

accuracy and the detail of responses. •

Introduction: What are you asking for? Honesty is the best policy and providing insight on what you intend to do with the information will encourage clients to respond.

A census that approaches all clients may not be necessary for good quality data, but may be an excellent communication exercise. Equally, wealth management typically has very stable and long-term relationships with clients so getting data every month or quarter may not be required unless there is a vital need to understand the effects of short-term changes: The last thing we want is for clients not to want to provide their feedback again because they’ve already told you the same thing multiple times before and nothing has happened. If relevant, employing the lessons learned from other business units, e.g. premier banking or corporate banking arms, can be beneficial. Many clients could have joined the wealth management or private banking service through these channels. However, there isn’t a ‘one size fits all’ approach for measuring client satisfaction and loyalty in firms that have corporate, retail & wealth management business units. Each has a different relationship with the client and arguably different aims for the relationship. Some alignment is positive but the services and relationships do tend to be different. After any research, the company should speak to those invited to take part to tell them what is being done on the back of their comments and responses. If this, and everything else, is done well you can expect a positive effect on the relationship with the company and relationship

manager. This is often referred to as ‘closing the loop’. An important tool in the toolbox Research with clients is certainly not the only way to understand the health of your business but it should be a feature of any well-rounded assessment. It can often be the most instructive around how to improve your offer to better meet client needs. Health-check and in-depth research can take time but they often deliver important actionable insights to the business. They also tend to prevent less effective decisions being made, generating better return on investment in the long-run. Such research should be a regular part of any business looking to better serve, retain, attract and ultimately generate long-term income from clients. For further enquiries please contact the whitepaper authors: Noelle Buckley Wealth Management Association (WMA) www.thewma.co.uk David Barks Wealth-X www.wealthx.com/home

Autumn/Winter 2016

MiFID II and the Financial Research Landscape Infront is a new member of the WMA, with many years of experience in providing market data information and trading solution to the financial markets. At Infront we specialise in providing data aggregation and visualization of financial market data. Recently we have we have forged a unique partnership with RSRCHXchange allowing access to the RSRCHX platform on the Infront terminal. RSRCHXchange is the online aggregator and marketplace for institutional research and this partnership addresses the challenges in the upcoming Markets in Financial Instruments Directive II (MiFID II) of compliant research procurement. In this article we give an insight to how the Markets in Financial Instruments Directive II (MiFID II) will change the whole financial research landscape. Little has happened to financial research since email replaced the fax machine, but that is all about to change and quite significantly. In what is expected to have the biggest effect on the industry since the Big Bang, EU-wide regulation is unbundling research from execution. With the introduction of the Markets in Financial Instruments Directive II (MiFID II) banks now have to put a price on their research. If buy side firms want to continue to receive research, which is no longer free, they will need to pay explicitly and begin to consume research in a fully compliant way. While there is a lot of detail, what is most apparent is that the FCA expects significant changes to policies, systems and even business models as a result of MiFID II. Why has this happened? The regulator has decided that the bundling together of research with execution is an inducement to trade. The more banks sent, the more they expected back from their clients. Paying an all-in commission rate to receive that research meant that buy side firms werenâ&#x20AC;&#x2122;t seeking out best execution for their end investors. Instead, they were likely to trade with banks who produced the most and possibly the best? research. 32 @WMA_UK

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What does it mean for you? There is a lot of detail available now on what the new rules of engagement are. The FCA release their consultation paper at the end of September producing some much need clarity. By sheer size, the FCA report is nearly 600 pages long. However, the relevant section relating to research unbundling is just 10 pages. The principles are simple: • • • • • • •

Separately & explicitly pay for research Set a research budget Block any research you haven’t paid for Monitor what you consume Rate the quality of the research you use Have management oversight Report to investors on how you’ve used their budget

Is this just for equities? No, the new research rules apply to all asset classes covered under MiFID II. As a result, unbundling is not just an “equity issue.” Economics, commodities, even real estate research will need to be paid for. How much is it all going to cost? Well, we’re still waiting for the banks and& brokers to put a price on their research but there are 1000s of non-broker research firms who have been pricing their research for years, if not decades. Their pricing will help in price discovery but it’s not just the level that will emerge. How research is packaged is also something to look out for - is there one price for everything from a bank or will research be available by asset class or sector? What about all the emails in my inbox? One of the biggest challenges of continuing to read research from your inbox is the need to monitor consumption of research. It’s quite hard to do from a PDF attachment. The bigger challenge is actually blocking research that you haven’t paid for. Freeing up your inbox and moving to a cloud-based aggregation platform gives you the tracking and blocking required while making research reports easier to find and search. Will small and midcap research disappear? There will definitely be some structural changes Autumn/Winter 2016

in the market but itâ&#x20AC;&#x2122;s more likely that some of the 50+ research providers covering Vodafone will find a new focus in life. Some of them may choose to cover less liquid, smaller stocks where they are able to sell their research for a similar price. There will be a place for waterfront coverage but there will also be interest in niche providers. Ultimately, demand should balance out supply. What do investors need to know? Keeping in line with increased post-trade communications which appear elsewhere in MiFID II, asset managers will be required not only to set and communicate budgets in advance, but also to inform clients of the total amount actually spent on research. Beyond accounting, firms will also need to keep track of the goods and services received. This requirement will mean material changes on how research is received, consumed and monitored by the buy side and the creation of audit trails for research providersâ&#x20AC;&#x2122; payments. I have a CSA, is that enough? A new way of paying for research has been introduced, the Research Payment Account (RPA). Investment firms will set budgets at the strategy level and then make payments from one RPA per budget. The budget can be funded by a direct fee to the investor, most likely charged alongside the existing management fee. CSAs can still be used to fund an RPA but there are now stricter rules in place. Richard J N Burtsal Sales Director Infront http://goinfront.com

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BARBADOS: ANCHORING INTERNATIONAL BUSINESS In S.B. Flexner's Listening to America, Jerry Rubin cynically asserts not to trust anyone over thirty. Barbados' international business and financial services sector acknowledges a legislative start of 1965 with the passage of the International Business Companies Act; and secondly, acknowledges a wide usage and recognition from the decades following 1980 with the passage of banking, captive insurance and other financial incentive legislation. These two periods albeit one continuous period - have, to the benefit of Barbados, significantly facilitated the movement of internationally mobile capital. While this success may be measurable in terms of the standard economic and financial indicators, emphasis must also be placed, notwithstanding Rubin's comment, on ongoing cumulative benefits which enure from jurisdictional trust and transparency and which are engendered by a judicious mix of public private partnerships.

From the start, Barbados' homogeneity and relative social cohesion has allowed for intra jurisdictional trust as regards policies and activities which have been geared towards improving its international business and financial service sector. Very early in the decade of the 1980s successful efforts were made by a group of professionals in the sector along with cooperation from the Canadian High Commission to Barbados in the formation of the Canada-Barbados Business Association (CBBA). It functioned along the lines of a flexible yet firm organisation structure, and its major raison d ĂŞtre was an annual promotion to a major Canadian city. The advantages of the CBBA were many but a few stand out. In the first place, it cemented

Barbados' relations with Canada at the important level of Ottawa policy making through the presence and involvement of the Canadian High Commission. Secondly, it gave Barbados an additional advantage over Bermuda which at that time was engaged in intensified lobbying efforts geared towards attracting more Canadian investment and investors to whom the relatively short airline connection from Toronto remained poised as a constant reminder. CBBA served its time and purpose, and it was the institutional and spiritual base on which the Barbados International Business Association (BIBA) was formed. Allied to the CBBA and later to BIBA has been the early marketing role of the Central Bank of Barbados particularly as regards the captive insurance sector. The essential feature of this partnership was that a Central Bank regulatory agency had taken on active marketing of the allied international insurance industry through its rigorous and robust annual participation and leadership at the annual United States Risk and Insurance Managers Meetings (RIMMS) and the equivalent Canadian Risk and Insurance Managers Meetings (CRIMMS). It was master stroke, because once again the jurisdiction's private sector was able to engender global trust through its visible and clearly viable cooperation with a regulatory agency allied to but not regulating the promoted project. It was a useful countervailing marketing tool towards the older and more advanced captive insurance domiciles of Bermuda and Cayman Islands. Today, the promotional role of the Central Bank of Barbados has changed. It is now broader and encompasses a wide mandate of hosting regular and relevant conferences, coordinating informal think tanks as well as directing focussed research and analysis of the sector. Institutionally, today, the Joint Policy Working Group (JPWG) is comprised of a variety of sector professionals. Autumn/Winter 2016

government and its private sector professionals, and it gives a high level of comfort to those within and outside of the jurisdiction who remain satisfied that there is a conduit for their voices to heard. The JPWG together with the other private-public actors are today all combined in message and meaning in the presence of INVEST BARBADOS, the jurisdiction's official marketing arm.

They are appointed by the Minister of International Business whom they advise on all aspect of the sector including new and updated legislation, as well as appropriate policy on critical matters of relevance. The evolved JPWG has a long history going back, albeit in a different form, for at least fifteen years. It represents the trust which exists within the jurisdiction between

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EPILOGUE William Pitt's memorable words in 1766 may therefore better encapsulate the trust which has been engendered by the Barbados International Business and Financial Services Sector rather than the earlier cynicism of Jerry Rubin. Pitt poetically exhorts us: "I cannot give them my confidence, pardon me, gentlemen, confidence is a plant of slow growth in an aged bosom: youth is the season of credulity". In a word, the sector is fully grown and has seen all seasons. Sir Trevor Carmichael, KA, LVO, QC Chancery Chambers www.chancerychambers.com

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Events Calendar 2016/7 @WMA_UK www.thewma.co.uk

events@thewma.co.uk

November 2016 M T W T F 1 2 3 4 7 8 9 10 11 14 15 16 17 18 21 22 23 24 25 28 29 30

S 5 12 19 26

8 CEO Dinner, London 9 Annual Summit, London 24 Insight 360, London

February M T W T 1 2 6 7 8 9 13 14 15 16 20 21 22 23 27 28

F 3 10 17 24

S 4 11 18 25

S 5 12 19 26

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25 Insight 360, London

September M T W T 4 11 18 25 6

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Fintech Conference, London

S 3 10 17 24 31

March M T W 1 6 7 8 13 14 15 20 21 22 27 28 29

T 2 9 16 23 30

June M T 5 12 19 26

S 2 9 16 23 30

S 3 10 17 24

6 13 20 27

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April M T

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27 Investment Conference, London

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19 WMA Mindful of Brexit, London 26 Financial Crime Conference, London

October M T W

January 2017 M T W T F

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8 Women in Wealth, London 9 Insight 360, London 13 Associate Members Update

22 Insight 360, London 28 MiFID Conference, London

May M T 1 2 8 9 15 16 22 23 29 30

December M T W T 1 5 6 7 8 12 13 14 15 19 20 21 22 26 27 28 29

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4 Women in Wealth Forum, London 10 Insight 360, London

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S 5 12 19 26

Insight 360, London

November M T W 1 6 7 8 13 14 15 20 21 22 27 28 29

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1 Insight 360: London 7 CEO Dinner Autumn/Winter 2016 37 8 Annual Summit, London 14 Wealth Management Network, London

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Would you like to contribute an article? Alongside updates from the WMA, 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 WMA associate members. If you are an associate member who is interested in contributing to future editions of the Journal then please contact: Jason Baxter (jasonb@thewma.co.uk) or Sheena Gillett (sheenag@thewma.co.uk)

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