EMPLOYEE BENEFITS
31 October 2020
CRAIG ABBOTT Co-Head, Institutional Discretionary Fund Management, RisCura
Looking for an umbrella fund? Watch out for leaks!
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ncreasingly, trustees are choosing to pass on the burden of managing their own standalone pension funds by enrolling their members in umbrella funds. With the many advantages of looking towards an umbrella solution, there remains the question of how tailored an investment portfolio can be, relative to the cost. Independent financial advisers who focus on employee benefits should be aware of the following: Excessive investment choice With such a wide array of investment portfolios available to employees and IFAs on umbrella platforms, how do they make the choice best suited to their members? How, and on what basis, are they able to differentiate between investment houses, other than relying on past performance, which is not always an indicator of future performance? Often, less is more. Do members really need access to more than two or three funds, possibly with life staging built in? In the famous ‘jam experiment’, researchers Sheena Iyengar and Mark Lepper offered shoppers different selections of jam. On day one, six kinds of jam were on offer. The next day, there were 24 kinds to choose from. While the second test brought more customers into the shop, the first test resulted in more sales. The smaller selection resulted in 12% of customers buying jam, while the larger selection resulted in only 2% of customers buying jam. This is known as the paradox of choice. Even though we think offering choice will be appealing to buyers, the reality is that buyers find too much choice debilitating. The same is true for too much investment choice. Best of breed managers Often, using a balanced fund offered by an investment manager who is strong in one asset class, say equities, but less adept at investing in fixed income, results in diluted returns. Having a quality equity manager paired with a specialist manager on the fixed income side can be to members’ advantage. However, manual intervention to rebalance the asset allocation and the cost implications as you add on specialist managers, can become overwhelming for IFAs when attempting to blend managers.
Blending and style IFAs may try to blend what they believe is the best of the available portfolios for a client. All too often, it happens to be brand names that either have the same or a similar investment style, which results in duplication of certain stocks or styles, ultimately detracting from performance. Understanding the style of a manager, and how they contribute to the overall portfolio, is key to understanding how they will perform in a phase of the market cycle and complement the overall makeup of the portfolio. Asset allocation is key to performance and blending, in terms of trying to get the correct asset class mix, is complex. Finding alpha in unusual places As the world continues to change, so too should your investments. A good investment house should always try to provide growth through diversification, whether through new or additional asset classes, or broader geographic exposure, or finding untapped or new markets for clients. China, for example, has seen exponential growth and will possibly see more in the next few years, yet we are limited in terms of selection under many umbrella structures. In a well-designed asset allocation portfolio, exposure to a market such as this can have an enormous impact over a period. Active vs passive Even as the either/or debate rages on, the reality is that sometimes neither is the most appropriate solution on its own. Often passive managers are used to reduce costs, but you may have to give up on alpha. Active, on the other hand, can be expensive and, in uncertain markets, underperformance of the benchmark does not sit well with clients. Having a strategy that incorporates both active and passive in the portfolio make-up will help reduce costs, while allowing you to build on specialist managers that can go beyond just the index to attain alpha. If you are thinking of moving to an umbrella solution, consider an alternative investment portfolio that allows for a complementary mix of specialist managers with different styles, active and passive options, as well as access to different geographical markets.
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Exploring new business frontiers with employee benefits
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s you evaluate new opportunities for your business, employee benefits can be a game changer, and your existing client base may be ripe with opportunities. Tapping into relationships with individual clients who are business owners or decision makers could allow you to make a real difference in their business. Bolstering those relationships and increasing client retention can help you future-proof your own business and, ultimately, improve insurance and retirement outcomes for a positive socioeconomic impact. Getting started and finding an employee benefits provider Nashalin Portrag, Head of FundsAtWork at Momentum Corporate, says the right provider can help you gain a solid understanding of employee benefits to make it easier for you to expand your business into this space. When choosing a provider, look for the following: • An employee benefits provider who is in touch with the needs of changing workplaces, and has research and data-interpreting capabilities to provide insights that help you offer your clients solutions that add value beyond cost-efficiencies • Innovation – combining insights, expertise and technology to optimise experiences at every touchpoint • High levels of flexibility and choice that enable tailored solutions. Portrag adds that some leading umbrella funds partner with financial advisers through programmes that support and reward them for helping their clients get greater value from their employee benefits through combinedsolution value propositions. Licensing requirements and legislation Although the employee benefits industry is highly regulated, it is easy to enter the market. Currently, these are the applicable licences required to sell employee benefits solutions: The Financial Product Licence required Sector Conduct Insurance-only employee Long-term Insurance Authority has made benefits subcategory B1 (No 1.3) extensive changes to the Policyholder Group retirement benefits Pension Fund Benefits Protection Rules (No 1.7) (PPRs) prescribed Bundled group benefits – Both licences above by the Long-term retirement and insurance Insurance Act. The benefits combined amended PPRs Other group benefits, Health Services Benefits incorporate the such as health solutions (No 1.16) principles of Treating Gap cover products Short-term Insurance: Customers Fairly to Personal Lines (No 1.2) ensure that insurers offer products that meet clients’ and their employees’ needs, keep them informed of their benefits, and provide sufficient and correct advice. Analysing potential employer clients’ needs Various factors around clients’ businesses are relevant to the types of employee benefits they may want to provide. As a financial adviser, you will have an active role in helping employers balance the cost of benefits, while offering the choices that employees want and need in a changing world. There are certain factors to consider that provide a thorough picture of employers’ varying and specific needs when advising them on group benefits for their employees. In short, these include: • The sector in which the employer operates • What benefits to offer - appropriate insurance cover, retirement savings, healthcare cover, and employee and employer rewards programmes. Portrag concludes, “While 2020 hasn’t been easy for you or your clients, employee benefits can help you secure group business and unlock further opportunities with your clients’ employees as individuals. This full circle of recurring business means a group scheme client is a potential client for life.”
Nashalin Portrag, Head: FundsAtWork, Momentum Corporate
