IFA Magazine September 2011

S E P T 2 0 11 ■ I S S U E 4

For today’s discerning financial and investment professional

BRAZIL IS IT GETTING TOO HOT TO HANDLE?

KEEP I T LEGA L

DO YOU KNOW THE UCIS RULES?

CLIMB I N G A WALL OF WOR R Y HOW DO WE GET OUT OF THIS ONE?

BRITAIN AFTER THE RIOTS WHAT HAVE WE LEARNED?

M U LT I -A S S ET F UNDS

AND WHY YOU CAN’T IGNORE THEM

N E W S R E V I E W C O M M E N T A N A LY S I S

1001748.003_SP28_IFA mag_Sep11_297x210_DPS_v2_A brand apart 24/08/2011 13:03 Page 1

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Neil Crossley writes for The Guardian,The Independent, The Financial Times and The Daily Telegraph, mainly on technology, business, media affairs and TV. Emma-Lou Montgomery, the former editor of Moneywise, has an impressive record of print and broadcast journalism including editor-in-chief at Interactive Investor.

She is a qualified investment adviser.

Nick Sudbury is an experienced financial journalist and investor who has worked both as a fund manager and as a consultant. He is also a chartered accountant.

Paul Clutton, Director of Professional Recruitment Ltd, specialises in financial services recruitment and is a regular contributor to many publications on emerging HR legislation.

Monica Woodley, senior editor at the Economist Intelligence Unit. She has previously worked on Money Management, Investment Adviser and Investment Week.

Lee Werrell is the Managing Director of CEI Compliance Ltd, a leading UK consultancy.

Editorial Advisory board: Mark Pullinger and Ian McIver.

09.11

Editor: Michael Wilson

editor@ifamagazine.com

Art Director: Tony Merlini

tony.merlini@ifamagazine.com

Publishing Director: Alex Sullivan

alex.sullivan@ifamagazine.com

20

8

News

All the big stories that affect what we say, do and think.

Editor’s Soapbox

Think it’s hard selling pensions to the young?

Ask the fiftysomethings for their experiences.

44

Looking the Beast in the Eye

47

We’re under-estimating the numbers of post-RDR leavers, says Paul Clutton.

An Elephant in the Room If we didn’t have NEST it would be necessary to invent it, says Steve Bee.

Pick of the Funds

53

Nick Sudbury’s monthly review of what’s hot and what’s not.

FSA Publications

Our monthly listing of FSA publications, consultations, deadlines and updates.

59

56

The Compliance Doctor

Lee Werrell of CEI Compliance discusses some of today’s most pressing issues.

Thinkers

George Soros - hero or villian? Either way, he’s been hugely successful.

66

48

65

The IFA Calendar

Conferences, economic summits, race meetings... All the dates you daren’t miss.

And Finally...

Klondike Smythe-Allinson reaches for his trusty pick and shovel.

features

This month’s contributors

regulars

C O N T R I B U TO R S

magazine... for today ’s discerning financial and investment professional

IFA Magazine is for professional advisers only.

Full subscription details and eligibility criteria are available at: www.ifamagazine.com

N E W S R E V I E W C O M M E N T A N A LY S I S

CONTENTS

features 16

Where Do We Go from Here?

Was August’s panic just a sillyseason diversion? Michael Wilson isn’t so sure.

COVER STORY

22

Brazil - A Real Dilemma

President Dilma Rousseff is trapped between a buck and a hard place, says Nick Sudbury.

32

Britain After the Riots Red sky at night, Croydon alight.

Monica Woodley asks what we can learn from the August disturbances?

36

Multi-Asset Funds

This year’s success story - and rightly so. Emma-Lou Montgomery looks at a fast-growing funds sector.

40

Profiling tools from your platform.

Neil Crossley investigates.

IFA Magazine is published by The Wow Factory Publications Ltd., 45 High Street, Charing, Kent TN27 0HU. Tel: +44 (0) 1233 713852. ©2011. All rights reserved.

‘IFA Magazine’ is a trademark of The Wow Factory Publications Ltd. No part of this publication may be reproduced or stored in any printed or electronic retrieval system without prior permission. All material has been carefully checked for accuracy, but no responsibility can be accepted for inaccuracies. Wherever appropriate, independent research and where necessary legal advice should be sought before acting on any information contained in this publication.

➹

Getting the Risk Balance Right

Is Brazil Dancing to the Wrong Beat?

I SN E W S R E V I E W C O M M E N T A N A LY S I S

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1285-03-EIS-0811 IFA Magazine 210x297.indd 1

19/08/2011 12:32

WORDS OF WILSON

1 12:32

OH TO BE IN ENGLAND... ...NOW THAT AUTUMN’S HERE.

It seems like only yesterday that we were reflecting on this page about how August is no longer a safe month to turn off the phone and disappear into the wide blue yonder. Didn’t the great global panic of 1987 start rumbling in July and August before it finally went critical in October? Wasn’t it in August 2008 that Lehman Bros finally lost all hope of rescue? And wasn’t it also August 1929 when the Dow first headed for the precipice?

Indeed it was. And this summer, as Yogi Berra would have said, it’s been déjà vu all over again, with what’s probably been the second biggest setback of the last decade. The Footsie lost more than 16% in the four weeks, and the FTSE Eurofirst 300 skidded by a horrific 19%. Ouch.

At one point the Footsie price/earnings ratio dropped to just 8, which is about as low as you’re likely to get in anything less than a full-blown war situation.

Even energy stocks have been on p/es of five or thereabouts, which would seem to make them a no-brainer for the long term. And even though some of those p/e ratios probably aren’t worth the paper they’re printed on, for reasons we’ll consider on Page 16, there’s surely still a powerful logic for laying down some new investments while they’re cheap.

So take courage. At some point - and it might be soon - this market is going to turn, and turn rapidly. At the time of writing, the bid yield on a four year gilt is barely a third of the dividend yield on the FTSE 100, and that’s simply crazy. In the States they’re getting just 0.9% on five year government paper, which is horribly negative in real terms. And even in Germany the yield is only 1.25%.

These are not the sorts of conditions under which you can interest a safetyconscious client in buying bonds, so the logical expectation would surely be that high-quality equities will start taking up the running instead.

Granted, selling funds is not going to be easy under current conditions.

But, for IFAs with the diligence and the perseverance to seek out the right opportunities for their clients, there are reputations to be won. Go get ‘em.

M ik e

Michael Wilson, Editor, IFA magazine

www.IFAmagazine.com

Write to Michael at editor@ifamagazine.com

September 2011

7

shorts

magazine

ETFs that use derivatives

ought to be tagged with a special sign so that investors can identify them, says HSBC’s head of exchange traded funds, Farley Thomas. Derivative-based ETFs in Hong Kong have carried an X since last November for easy identification. And no new swap-based funds have been approved in the United States for some 16 months.

Just when you thought it was safe The newspapers finally got some relief from the endless tedium of the News International Story.

A sudden and horribly unexpected dive in global investment sentiment sent the business reporters scurrying back from the beaches to report on an August story that had surfaced with all the subtlety of a great white shark inside the bathing zone.

The shark, of course, had been lurking beneath the waves for many months. Growing concern about the sovereign debt levels in America and the Euro zone turned into sudden panic as the EU failed to show the necessary public solidarity in presenting its rescue package for Greece, and as worries grew about Spain and Italy too.

Meanwhile President Barack Obama struggled to get Congress’s approval for raising the government’s debt threshold raised – and by the time the deal eventually squeaked through, Standard & Poor’s had dropped America’s AAA credit rating to AA+.

By a hideous coincidence, revised new figures on the growth rate revealed that US GDP had

grown by a mere 0.4% in the first quarter, and by only 1.3% in the second. That was barely more than the crisis-stricken EU. Loose talk of a doubledip recession soon followed, and before we knew it there were people claiming that the whole western world was headed the same way as 1990s Japan.

It was all too much pressure for the markets to endure. The S&P 500 and the FTSE-100 dropped by around 15% in a matter of three weeks, and the EuroFirst 300 lost 19%. Bond yields, already stretched, plunged into negative real territory as gold touched $1900 per ounce. And by the time IFA Magazine went to press it was still uncertain who, or what, might be able to turn sentiment around. Certainly, the Fed chairman’s subtle hints at market intervention – probably another round of quantitative easing – hadn’t done the trick.

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Britain’s economy

grew by just 0.2% in Q2 of 2011, according to revised figures from the Treasury. Services and construction both increased their output by 0.5%, but production output was down by 1.4% year on year. The government drew a scornful response in many quarters to its claims that the lapse had been due to the bank holiday awarded to celebrate Prince William and Kate Middleton’s wedding.

NEWS

Business Secretary

Vince Cable attracted yet more glares from Downing Street after he appealed to the Bank of England to force the pace of sluggish bank lending to businesses. The government has stuck by the principle that the BoE’s independence from policymaking should be respected.

Sayonara Mr Kouldn’t Japan’s Naoto Kan finally acknowledged the inevitable...

www.IFAmagazine.com

Finance Minister Yoshihiko Noda bows as he is congratulated by outgoing Prime Minister Naoto Kan upon his election as the new leader of the Democratic Party of Japan after a vote by the party lawmakers in Tokyo on 29 August.

analysts fear that the impact on next year’s GDP may turn out to be worse than expected.

Meanwhile the crisis in the dollar and euro has not been bad enough to reduce Japan’s already serious trade surplus, which reached 72.5 billion yen ($950 million) during July even though export volumes had actually shrunk by 3.3%. The strength of the yen is emerging as one of the country’s biggest problems. As if it needed any more.

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...and gave up on his attempt to hold onto the premiership, as complaints grew about his handling of the March tsunami and the ensuing crisis at the Fukushima nuclear energy plant. Mr Kan, a member of the Democratic Party of Japan (which has ruled for only four of the last 60 years) had only been in the post for 14 months.

Doubts about his leadership had arisen not just because of the massive scale of the postearthquake reconstruction, which seems likely to knock the country back into recession this year, though it ought to recover next year. Rather, his low-key ‘inclusive’ style had raised disagreements among his colleagues who felt he was ineffective.

Mr Kan’s successor, the finance minister Yoshihiko Noda, is a fiscal conservative who favours drastic action to address the country’s burgeoning government debt while also meeting a spiralling social care bill for an ageing population with high unemployment. One of his key priorities is to double the level of sales taxes from 5% to 10%. But that probably can’t be achieved without seriously affecting consumer demand, and

I SN E W S R E V I E W C O M M E N T A N A LY S I S

AIFA’s strategic review

Bank of America gave the

bore its first fruit when it was announced that advisers who offered only a restricted product range will be allowed to join the organisation within the next 18 months. The organisation is to restructure itself into three subsidiaries one for IFAs, one for restricted advisers and one for mortgage brokers. Singleclient tied IFAs are still not to be accepted.

markets a bad week in late August, as the cost of insurance against a possible default on its bonds continued to soar. In stepped billionaire Warren Buffett (right) with a welcome $5 billion investment that quickly calmed the markets. Analysts noted that the philanthropist stands to gain substantial tax breaks from his investment – plus a cool $300 million a year in dividends.

Grandfathering Still Looks Unlikely Older IFAs are thinking hard about taking early retirement, according to figures in the treasury select committee’s report on RDR. Or, at least, about pulling back from advising on retail investment matters, which is almost the same thing. Of the 32% of IFAs who are currently aged 55 or over, only 59% said that they were likely to continue advising retail clients, compared with 82% among the wider IFA community who said the same thing.

8% of the over-55s said that they were considering taking an earlier retirement than planned, compared with just 3% of IFAs of all ages.

There’s been no backdown from the FSA on the subject of grandfathering (i.e. allowing

“Competition and choice is key.”

Conservative MP, Mark Garnier, has led the parliamentary campaign for grandfathering older and more experienced IFAs to sidestep the Level 4 requirement). The reason being, rather unexpectedly, that the idea would amount to an infringement of the 2010 Equality Act because it discriminated between people of different age groups. And no ground has been given on the idea that older IFAs might be allowed to work on under

the supervision of qualified persons while they swotted for their exams.

Will it work in practice?

Given that more than 50% of IFAs, and well over 60% of older professionals, had still to get their Level 4s in mid2011, the chances of getting enough people formally qualified by the December 2012 deadline seem fairly slim. However, Mark Garnier, the Conservative MP who has led the parliamentary campaign for grandfathering, is still reasonably relaxed about the situation.

“The report is balanced and seeks to take the views of both the advisors and the more disparate groups of consumers,” the MP says on his website. “Competition and choice is key.”

Mr Garnier will not have been so pleased with the FSA’s rejection of a call by the Treasury select Committee to postpone the implementation of RDR until January 2014. “The RDR is already a long-running initiative with the first consultation paper published in June 2007,” it said. And “there is clear evidence that the industry is well advanced in its preparations, with 49% of IFAs already qualified and at least 82 per cent expecting to remain as retail investment advisers.”

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St James’s Place

raised its firsthalf profits by 52%, from £36.3 million to £55.3 million, the organisation reports. But changes in the commissions paid by its investment arm to its advisers meant that the distribution arm of the business failed to make a profit at all. The comparable result in first-half 2010 was £5.9 million. But funds under management grew by 8% in the first half of 2011, to £29.1 billion.

NEWS

Japan’s earthquake

is expected to send the economy back into recession for the year as a whole, according to a new report from the International Monetary Fund. Japan’s output will shrink by 0.7% this year, it says, compared with the IMF’s previous forecast of 1.4% growth. It does. however, assure us that growth will resume in 2012.

Good News, Bad News No fewer than eight EU banks failed the European Banking Authority’s ‘stress testing’ procedures.

These procedures are designed to identify banks whose capital reserves and other resilience levels were insufficient to guarantee their stability under duress.

Specifically, five of the 80 banks tested were found to have Tier One capital ratios of less than the 5% target over a two-year time horizon, along with one from Greece and (perhaps surprisingly) two from Austria.

Equally surprising was the fact that none of the Portuguese or Italian banks examined failed the capitalisation test – and, reassuringly, none of the UK banks. Not that it helped the share prices at Lloyds and RBS, both of which fell heavily in the following days.

In fact the figures are already out of date. Since the conclusion of the tests in December 2010 – which found that around €26 billion of additional capital would be needed – another €50 billion of new money had been raised.

The EBA has called on member governments to step up their enforcement of the 5% threshold, especially where banks have exposure to sovereign debt.

It is due to present a formal report on the implementation process next February.

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I SN E W S R E V I E W C O M M E N T A N A LY S I S

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In 2010, the Schroder Global Alpha Plus Fund, managed by Virginie Maisonneuve, earned a place alongside three well established funds. Richard Buxton’s Schroder UK Alpha Plus Fund, Matthew Dobbs’ Schroder Asian Alpha Plus Fund and Nathan Gibbs’ Schroder Japan Alpha Plus Fund. These have all proved more than worthy of the Alpha Plus name, delivering 1st quartile performance over three years.

So unchain your investment thinking from the benchmark, and give your clients the best opportunity to break away from the pack.

Schroder Alpha Plus Range

* 0800 718 777 schroders.co.uk/alpharange For professional advisers only. This material is not suitable for retail clients. Past performance is not a guide to future performance and may not be repeated.

The data contained in this document has been sourced by Schroders and should be independently verified before further publication or use. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. The funds hold investments denominated in currencies other than sterling investors should note that exchange rates may cause the value of these investments, and the income from them, to rise or fall. Funds which invest in a smaller number of stocks can carry more risk than funds spread across a larger number of companies. Source for performance, Lipper Hindsight, bid to bid net income reinvested, data to 31/05/2011. Source for ratings, Citywire as at 31/05/11. *For security purposes, telephone calls may be recorded. Issued in July 2011 by Schroder Investments Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 2015527 England. Authorised and regulated by the Financial Services Authority. UK01287

Investec reported a slowing rate of new lending in the Q1 of financial 2012, due, it said, to a backdrop of poor economic fundamentals and weak debt and equity markets.”, However, it added, operating profits before tax had been slightly ahead of year-earlier levels. Core loans and advances grew by 3% to £19.4 billion over the three month period, it said, while customer deposits increased by 2% to £24.9 billion.

NEWS

The Consumer Focus

campaigning group is demanding the FSA review the level of consumer detriment, because it says trail rates are actually going up rather than down as IFAs seek to make hay while the sun still shines. And it adds: “It is all too easy for savings that should be going into a pension pot to be siphoned off in costs and charges.”

Lend Me a Fiver, Son? The Treasury has confirmed that the Children’s ISA scheme will go ahead as scheduled on 1 November... ...and that the contribution limit is to be £3,600 a year, higher than the £3,000 threshold that had originally been planned. From 6th April 2013, it adds, the threshold will be further adjusted in line with the Consumer Price Index.

All UK resident children under the age of 18 who do not already have a Child Trust Fund will be eligible for the new Junior ISAs. That includes children who were born before September 2002, when the CTF was first introduced.

Like a CTF, accounts are to be owned by the child itself, and funds will be locked in until the child turns 18. But after the age of 16 children will have the right to manage their own accounts. Any income or gains will of course be tax-free.

Upon maturity, the Junior ISA accounts will by default become adult ISAs. That’s an important detail because it effectively confirms that the child will be able to roll the funds forward without attracting capital gains tax, and without breaching the thresholds (currently £10,680) on an adult ISA.

“After the age of 16 children will have the right to manage their own accounts.”

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NEWS

Germany finally backed

the Greek bail-out that will commit Û 135 billion of EU money to Greece over the next 30 years. Chancellor Angela Merkel had initially insisted that private-sector lenders to Greece should ‘take a haircut’ alongside the official lenders, but she eventually backed down. It didn’t pacify the global markets, which duly tanked.

Worries about rising global food prices

received another unwelcome boost in late August after estimates for America’s 2011 harvest were scaled back. Preliminary surveys show a 3% decline in output per hectare, to the lowest levels since 2005. America is responsible for half of the world’s corn exports. Analysts fear that rising corn prices, currently close to $8 per bushel, will increase the pressure on developing country governments if the trend continues.

Life, Death and Automatic Enrolement Automatic pensions enrolment comes another step closer.

The Pensions Regulator released a set of online interactive tools intended to help smaller businesses begin preparing for the new automatic enrolment regime.

The new tools, available at www.thepensions regulator.gov.uk/employers/tools.aspx, resemble a ready reckoner and are designed to allow an employer to calculate his responsibility by filling in basic information, such as their PAYE reference, the number of people they employ and salary information. In particular, employers can find out more detail about when the changes to pensions law will affect them; which staff need to be automatically enrolled into a pension scheme; how to automatically enrol new staff; and how much they will need to contribute to their staff’s pensions.

Bill Galvin, chief executive of the regulator, said that, in practice, “automatic enrolment will not affect the bulk of small businesses until 2015 or 2016.” That compares with next year’s October

deadline for the country’s largest employers.

But he stressed that small company owners would have no excuses for not planning ahead.

Altogether it’s estimated that 1.3 million employers will be affected by the new rules.

Letters giving 18 months’ notice have already been sent out to the chief executives of those companies which will be affected first.

The Institute of Directors was less impressed. “With over 45 different “staging” dates, for example, employers will struggle in many cases to comply with their new duties,” said Malcolm Small, Senior Adviser on Pensions Policy. “And that’s even before they get to the bits about how to auto-enrol, and re-enrol, employees into pension saving. Never mind how to deal with those who want to opt out.

We suspect that many employees will want to do just this – opt out – and recent research suggests employers expect this to happen.”

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T m m In to th m

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This explains why the Fund is currently the only S&P AAA-rated fund in the absolute return sector: it’s bucked the market trend and delivered an impressive annualised return of 9.08% over the last 5 years. Quite significant during a credit crisis. Run by a highly experienced team with a clear strategy that doesn’t rely on complex computer modelling, the Newton Real Return Fund will be of real interest to your clients.

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Fund (%)

IMA Absolute Return Sector (%)

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28.19

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54.44

28.53

1st

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Source & Copyright: CITYWIRE as at 31/05/11

This is a financial promotion and is not intended as investment advice. The information provided within is for use by professional investors and/or distributors and should not be relied upon by retail investors. *1-month LIBOR +4% before charges in all market conditions over the medium to long-term. †Source: Lipper, as at 31/05/11. Fund performance is calculated as total return including reinvested income net of UK tax and annual charges but excluding initial charge. The impact of the initial charge, which may be up to 4% can be material on the performance of your client’s investment. Performance figures including the initial charge are available on request. Past performance is not a guide to future performance. Issued by BNY Mellon Asset Management International Limited (BNYMAMI). BNY Mellon Asset Management International Limited, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Services Authority. All information relating to Newton Investment Management Limited (Newton) and the Newton Real Return Fund has been prepared by Newton for presentation by BNYMAMI. BNYMAMI and its affiliates are not responsible for any subsequent investment advice given based on the information supplied. The Prospectus and/or Simplified Prospectus should be read before an investment is made. This document can be obtained from www.bnymellonam.co.uk. To help us continually improve our service and in the interest of security, we may monitor and/or record your telephone calls with us. BNYMAMI and Newton are ultimately owned by The Bank of New York Mellon Corporation. Newton is a member of the IMA. PC6961-29-06-2011(3m)

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05/07/2011 16:01

magazine... for today ’s discerning financial and investment professional

SO WHERE GO FROM MICHAEL WILSON SUMMONS UP THE CRYSTAL BALL, WHICH SEEMS TO HAVE GONE STRANGELY CLOUDY It is a truth universally acknowledged, as Jane Austen didn’t say, that a man in possession of a fortune must be watching the bullion price pretty closely. Like many others, I subscribe to the view that gold is a decorative but largely useless metal that doesn’t make the world a better place. It doesn’t produce dividends, it doesn’t create employment, and it isn’t a proper investment anyway – more of a speculation that somebody else will feel panicky enough to pay more than I did.

Which is why it’s significant that my gold holdings have risen in value by 40% in the last 18 months and my physical platinum ETFs have made 30% since January.

Thus showing a clean pair of heels to every stock market in the world. There’s something badly wrong when a defensive investment does that. And, as we got into September, even the most upbeat pronouncements from the world’s most eminent financial authorities were still failing to lift the mood for more than a day or two at most.

After that it was relentlessly downhill again.

It is of course entirely possible that the mood will have flipped over into sunny positivism by the time you read this. In which case we may have a golden opportunity to get out there and sell funds at rock-bottom prices. But by the start of September there were few signs indeed that anybody was in a serious buying mood to buy. Gold had spiked

16

September 2011

back up to $1,850 and the price/earnings ratio on the Footsie was still flirting with 8. It looks like a grim portent that the normal rules of engagement might be hors de combat for a while yet.

The Footsie Trips First, though, let’s recap on the very short timescale of this horror. The Footsie lost more than 15% in the six weeks to 26th August, before reviving a little bit as the month ended, and the FTSE Eurofirst 300 skidded by a horrific 19%. (Not counting the effects of a weakening euro, which would have made things even worse for a sterling investor.)

That’s the second nastiest short-term fall in the last decade – beaten only by the 2008 slump which took 35% off the average portfolio in four months.

More ominous, perhaps, was the fact that there were good, wise people constantly trying to kick-start a revival during those weeks.

Warren Buffett bought a $5 billion stake in Bank of America and demanded to be allowed to pay more taxes. EU leaders achieved a deal (of sorts) that would get Greece and Portugal out of the mire, and President Barack Obama escaped fiscal disaster by getting Congress to agree on raising the federal debt threshold.

Ben Bernanke, the Federal Reserve Chairman, let it be known that US interest rates would stay low for at least a couple of years, and on 26th August he hinted at a third bout of quantitative easing. (Meaning, essentially, that the government would buy back quantities of its own bonds, using newly-minted money. The point being that “QE3” would release large quantities spending power back into Main Street while also depressing interest rates – all of which would make company shareholders happy, even though it would depress the dollar.)

But none of this has worked - yet. The US markets remain focused on Standard & Poor’s downgrade of the government’s triple A rating, and growing doubts are now surfacing about whether some Euro Club members will be able to hang onto their investment grade ratings at all, never mind a triple A. There’s a lack www.IFAmagazine.com

M U LT I -A S S E T F U N D S

DO WE HERE? of confidence in global political and economic competence that goes right to the heart of things.

About Those Underpinnings...

But surely the business underpinnings aren’t really as perilous as they’re made out to be? Well, that’s a good question. By the end of August the p/e ratio on the Footsie was down to just 8.2 - a good 35% lower than its recent annual averages.

Oil, gas and electricity companies were to be had for barely 5 times earnings, which ought to have made them a screaming buy. It was the same pattern in the United States, where the S&P was trading on a p/e of 13 – a third down on the 1819 threshold at which many US investors would normally say their market was fairly valued.

Yet the markets still insist on buying gold bars and avoiding stocks. And treasury bonds, too -which is doubly bizarre since they’re all on negative yields. So maybe we ought to be asking ourselves whether those very low p/e ratios we’re being quoted are actually as attractive as they seem?

They are, of course, nothing of the kind. Most p/e ratios are quoted on a trailing basis, which effectively means that we’re measuring today’s share prices against the last year’s profits. But if we build in the fairly widespread perception that the global GDP slowdown is likely to hit corporate profits growth badly in the next twelve months, then all the assumptions are bound to be undermined.

Try dividing tomorrow’s lower profits into today’s share price and you get a much more sobering and realistic - picture.

There is, of course, a problem with forward p/es, and that’s that they’re subjective. Every analyst’s individual view of future trends will produce a different figure. So, faced with this dilemma, some investors are turning to the American economist Robert Shiller, and more specifically www.IFAmagazine.com

to his cyclically adjusted price/earnings ratio (CAPE), which effectively reworks p/e ratios so as to take account of inflationary influences over the last ten years. And his calculations make sobering reading.

According to Shiller, the talk of a p/e of 13 on the S&P500 is a long way from the truth – indeed, he says, it’s been rising relentlessly since early 2009 and is now closer to 21. Although that’s still a lot healthier than the absurd 44 that we saw in 2000, it’s still half as big again as the 14 low that it hit only eighteen months ago. Applied to the FTSE, the Shiller calculation shows a more modest appreciation from 10 to about 14 over the same period. Both of these CAPE figures are significantly higher than the long-term average.

Who Shall We Blame First?

Are those CAPE ratios just mumbo-jumbo? It’s entirely possible, but it doesn’t exactly reassure at a time when the world is pondering whether we’re heading for a double-dip recession. Skyrocketing public debt levels, compounded by evasiveness in Europe, political stalemate in the USA and slowing growth in China are all raising the spectre of a world that can’t grow fast enough to honour our expectations.

Some people are even pondering the resemblances between ourselves and pre-1990 Japan. (Over-indebted, addicted to cheap credit, and burdened with zombie banks that we’d have to declare bust if we were really honest enough with ourselves.) And all

“The problem with forward p/es is that they’re necessarily subjective.”

Faced with this dilemma, some investors are turning to American economist Robert Shiller’s cyclically adjusted price/earnings ratio (CAPE).

September 2011

17

M U LT I -A S S E T F U N D S

magazine... for today ’s discerning financial and investment professional this against the background of our dying industrial competitiveness against emerging Asia.

“Europe will have to do much better.”

That fear is largely a Olli Rehn, the EU’s economics and monetary nonsense. Japan’s 1980s bubble affairs commissioner, said recently that happened because its political a failure by EU leaders to adequately system had been stitched up explain how a second bailout for Greece by a rotten one-party network and other reforms would work was partly that offered sweetheart deals to blame for the recent market turmoil. to its large employers and happily borrowed cripplingly vast sums. America’s political smaller debts if its central bank had been allowed system might be colourfully discordant and to moderate the boom period of the last decade loaded with pork-barrels, but - unlike with sharply higher lending rates. But we forget 1980s Japan – administrations that fail too easily that Dublin could also have cooled can generally expect to get thrown out. its economy by raising its corporation taxes above their aggressively low 12.5% level.

Then there’s the fact that Japan has a ‘goldfish bowl’ investment environment We can probably agree, too, that in which foreigners hardly feature Greece’s hideous debt binge had less to do in the shareholders’ registers – with interest rates, and more to do with and in which domestic Japanese the fact that its rulers had concealed savers can be persuaded to accept their overspending habits for a couple lousy bond and dividend returns of decades before they were found that no other nation would ever out. That and the fact that a better have accepted. Two solid reasons campaign against widespread tax for rejecting the Japan comparison. evasion would have helped matters...

Solution One: Blame Europe

Solution Two: Blame Obama

For many, Europe’s single currency is a safe and obvious target. Dear old Aunt Sally in Brussels decided to organise a group marriage involving no less than seventeen spouses, and surprise, surprise, some of them didn’t play by the rules. Some of the spouses complained that the housekeeping money didn’t cover their needs, or simply ran up hidden overdrafts that eventually brought the inevitable crisis meeting with the European Central Bank manager. A few of them fell into seductive liaisons with Iceland, Russia, Iran or other bits of rough and were duly caught in flagrante.

Smaller spouses complained that it wasn’t fair to expect them to obey the same fiscal rules as the bigger stronger ones.

Whereupon Germany beat its fist on the table and said it was tired of supporting southern whingers with no self-discipline.

Meanwhile Britain’s Chancellor George Osborne allowed himself a fairly public smirk at the folly of it all.

But we run an important risk of getting it wrong when we try to blame the ECB’s restrictive interest rate policy for the troubles that have been happening in Ireland, Greece and elsewhere. Yes, it’s absolutely true that Ireland would have had lower inflation and

18

September 2011

Who shall we blame first?

America’s president is currently heading for that dreaded finalyear-of- term stagnation that has crippled so many of his predecessors. Having lost his congressional majority to the Republicans, he’s having trouble stamping his authority on anything of consequence. What makes this so politically difficult is that this is only Obama’s first term. You have to go back to George Bush Sr to find a president who didn’t manage a second stint in the Oval Office, and before that it was Jimmy Carter - a war-entangled Democrat whose sorry fate still haunts the present incumbent.

This is, of course, an unfair perception. Few other Democrat

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M U LT I -A S S E T F U N D S

presidents have had to face an adversary quite like the Tea Party, the Republican Party subgroup whose largely ignorant resistance to tax rises completely scuppered the deficit reduction programme that Obama would have liked to introduce as the backdrop to August’s extension of the federal debt threshold, if only he’d thought he had any chance of getting away with it.

As it was, the deficit reduction programme that Obama finally managed to propose was a pitiful thing. A mere $1.5 trillion reduction over a ten year period (roughly equivalent to 1% of GDP per annum) is a mere down-payment on the $4 trillion reduction which he has spoken of so far. September should bring some rather more assertive statements from the President. But will they reassure the market?

On the positive side, Obama says he wants to extend for a further year a reduction in employees’ payroll tax, while also extending unemployment compensation for people who are out of work for more than six months. He wants to see an ‘infrastructure bank’ that he says will raise private money toward building roads, bridges, schools and so forth. And the President wants a faster writeoff process for capital investments made by US businesses, a general overhaul of patent law, and a new deal to promote jobs in export industries.

Solution Three: Blame the Consumers All of which should play well to the US electorate - which is exactly what it’s intended to do ahead of next year’s elections. But will it put any serious dynamism into the US economy?

And, more to the point, will it be enough to restart the mood of stock market optimism?

That seems unlikely, unless other feelgood factors such as the end of the Libyan conflict can improve the momentum. The Administration recently conceded that this year’s budget deficit will hit 8.5% of GDP this year – the kind of overspend

“Taxi for Obama?”

The deficit reduction programme that Obama finally managed to propose was a pitiful thing which seems to have convinced nobody.

that we used to castigate India for. Second-quarter economic growth has been downgraded to 1.6% per annum, slightly less than the Euro area.

With unemployment nudging 9.5% and winter on the way, it’s going to be a chilly Christmas for the consumer economy. And with inflation running at 3.6% - three times the level of a year ago – another bout of quantitative easing (“printing money”) is not going to be an unmixed blessing for the business community But the great unknown – and, indeed, unknowable – factor is whether households will continue to deleverage. All over the developed world, frightened consumers are repaying their debts rather than buying new goods, taking advantage of the beneficial tailwind from low interest rates. Two decades ago, that would have been regarded simply as good financial management. Now, alas, it may spell the death knell for an early resumption of growth.

What America needs, and Britain and the Euro zone too, is a little healthy relaxation of the reins so that normal service can be resumed and the financial markets can quickly recover. Will that happen? Not easily - and not while the political environment is so widely seen as having no answers to the various messes that we’ve got into since 2007.

This year’s steep falls are not disastrously bad by historical standards. What makes them worrying is that, unlike the full-blooded crises of 1973, 1987 or even 2008, they have no obvious economic cause, unless you count a lingering worry that the political establishment has lost its way – and, in Europe at least, that we may not have been told the worst yet.

Perhaps that’s a misguided sentiment?

Perhaps we have nothing to fear but fear itself? In which case, this market is surely cheaper than it’s been for many years.

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www.IFAmagazine.com

20

September 2011

www.IFAmagazine.com

magazine... for today ’s discerning financial and investment professional

TANGO THE STRONG CURRENCY IS PROVING A TOUGH NUT FOR BRAZIL TO CRACK, SAYS NICK SUDBURY Tell your average client that there’s an emerging stock market out there that managed to put on nearly 15% in August, during those same weeks when the Footsie and the S&P 500 were both losing about the same amount, and you can probably count on getting his undivided attention.

Then remind him that that same stock market had lost a third of its value in the four months before that, and you’ll have taught him a valuable lesson about how misleading a bounce can be. With a bit of luck, you’ll also have given him an insight into how international exchange rate mechanisms can distort a picture - sometimes damagingly.

It was nearly a century ago that somebody first cracked the old joke about how Brazil was “the country of the future – and always will be”. And by the turn of this present century, eighty terrible years of mismanagement, economic incompetence and two decades of military rule had done nothing to alter the common perception that this abundant, vigorous, fruitful, good-natured nation of 170 million people would always fail to deliver for investors.

It seemed as though poverty, corruption and a squandering of resources would always keep Brazil from the front rank of the world’s economy.

Mrs Rousseff’s Challenge But that was before President Luiz Inácio Lula da Silva took over in the big chair in 2003. Eight years later, this leftist former trade union leader had turned the country round so significantly that it was making big

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September 2011

BRAZIL

AND CASH waves in the international arena. More to the point, his economic stability programme came at the same time as a massive expansion of spending on social programmes intended to improve the living standards of the poor.

These days, having lifted nearly 49 million Brazilians into the middle or upper classes and having created a burgeoning domestic consumer market with rising wage rates and high employment, Lula is regarded by his people as a kind of god.

All of which makes it rather hard for his successor, the similarly leftist Mrs Dilma Rousseff, to live up to his example. It’s not entirely her fault that things have been so difficult since she took over in January - the slowdown in China and the US dollar crisis have dealt her an almost unplayable hand. As we shall see.

It was, of course, the new century’s boom in international commodity prices that made Brazil’s huge ascent to affluence possible in the first place - with exports of natural resources such as iron ore, meat and soya to places like China producing a flood of ready cash. But at the same time the government also borrowed heavily to finance much needed investment in new infrastructure projects, including power stations, railways and basic sanitation.

This public spending spree played a major role in getting the country through the global recession of 2008 but it is now proving difficult for Congress to turn off the credit taps. All in all, that’s not quite the legacy that Mrs Rousseff was hoping to inherit.

Tough Challenges Brazil is the eighth largest economy in the world and the biggest in Latin America, and it’s still growing. Last year it expanded by an impressive 7.5%, and this year it’s expected to grow by a further 4% unless the recent developed-market rout should turn into a full-

www.IFAmagazine.com

blown international slowdown. (Surely not?).

It isn’t too surprising that the strong performance of the economy should have attracted so much investor interest from abroad.

Sao Paulo’s Bovespa stock market index more than doubled during late 2008 and 2009, as the recovery from the world economic slump left most of its rivals behind. But alas, the returns this year have been extremely disappointing.

Aside from the forementioned international picture, the key issue for the economy is inflation, which is now running above target at a six-year high of 6.75%. Policymakers have tried a whole raft of measures to bring it back under control, including aggressively raising interest rates. The latest increase took the Selic lending rate to 12.5% - one of the highest in the world. And although the cooling mechanism has certainly had an impact, it’s proving to be something of double edged sword.

The main concern is that the high interest rates are attracting large amounts of overseas capital. In fact the central bank estimates that the economy will bring in a record $55bn in foreign direct investment in 2011. This has helped push the exchange rate up to a multi-year high.

Not quite the legacy Mrs Rousseff was hoping to inherit.

It’s not entirely Brazillian President Dilma Rousseff’s fault that since her election at the beginning of this year things have been so difficult - the slowdown in China and the US dollar crisis have dealt her an almost unplayable hand.

September 2011

23

BRAZIL

magazine... for today ’s discerning financial and investment professional

Too strong for its own good And that’s the problem. Brazil’s Real has been one of the strongest performing currencies in the world over the last few years, with the exchange rate recently trading at a twelve-year high to the US dollar. On a trade-weighted basis it is already 40% higher than it was 5 years ago. Quite a turnaround from the dark days of the late 1990s, when panics about Sao Paulo’s government solvency regularly pushed the currency into switchback mode and brought it to the brink of default.

Today’s strong currency is increasing the competitiveness of foreign imports, which is making life difficult for local Brazilian businesses.

The statistics show that cheap imports from countries like China have almost doubled, whereas export volumes have struggled and are up only 5% over the same period because of the strong currency. On the one hand, the cheap imports are helping to contain consumer prices and acting as a natural brake on inflation. On the other, it is making it almost impossible for employers to expand their domestic production.

The Devil Dollar The Rousseff administration has been quick to point the blame for the strong Real at the historically low interest rates being levied in the West. In particular, they single out the ultra-loose monetary policy in the US and the refusal of the Chinese to let the Yuan float freely on the foreign exchanges.

these factors will act as a further drag on the dollar - as will the downgrade in the US credit rating.

Currency wars And that’s where it gets nasty for Brazil. The unpromising macro environment in America has encouraged investors to turn their attentions toward the higher returns available from faster-growing economies like Brazil. For a US taxpayer, a 10% rate on a Real deposit account, or a 4% dollar yield on a ten-year government dollar bond, is a good deal when ten-year treasuries are offering barely 1.5%.

The speculative influx of foreign cash has been massive. Rousseff and her administration have responded to the pressure by introducing a series of capital and currency controls, with the specific aim of weakening the exchange rate – and thereby improving the competitiveness of local businesses.

In the first six months of the year Brazil’s central bank spent a total of $36bn on direct intervention in the foreign exchanges, selling the Real and buying overseas currencies like the US dollar.

They have also introduced a number of soft currency controls, with the taxes on foreign portfolio investment in local bonds being tripled in recent months. The rate now stands at 6% and it has been extended to include longer dated paper with the initial 360 day maturity limit being increased to 720 days.

In July a new 1% tax was imposed on all short dollar positions – a move intended to make it less attractive to speculate on the appreciation of the Real. If necessary, the government says it will increase the rate to as much

Now, that’s not entirely America’s fault, because its own options were limited. Policy makers in Washington, and in Britain too, have been trying to boost their respective economies with a combination of low interest rates and quantitative easing (of which a third round from Washington seems highly likely). The skyrocketing levels of public- and private-sector debt in America have made the Administration fearful of the threat of Japanesestyle deflation – and the general Brazil’s Finance Minister perception is that the least Guido Mantega, speaking painful solution will be to inflate in Sao Paulo recently. its way out of the problem and allow the dollar to take the strain.

“Creating conditions so that Brazil’s interest rates can come down is a priority.”

Recent data suggests that the US recovery is faltering and that Washington’s economy may experience a double dip recession.

The outlook has also deteriorated as a result of the spending cuts agreed as part of August’s deal to raise the debt ceiling above its $13.2 trillion threshold. Both

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September 2011

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www.bandbw.co.uk info@bandbw.co.uk 9/2/2011 4:11:16 PM

BRAZIL

magazine... for today ’s discerning financial and investment professional as 25%, although few observers expect things to go that far.

The latest package of measures unveiled in August is designed to strengthen the country’s industrial sector. It includes $16bn in tax breaks for some of the worst hit industries such as clothing, footwear and furniture. There is also a refund of the half percent tax paid by the exporters of industrialised goods.

Earlier in the year the IMF took the unusual step of officially sanctioning the capital controls as a way of offsetting the pressures of the strong exchange rate.

An inconvenient truth

TANGO AND CASH ROUSSEFF’S ADMINISTRATION IS KEEN TO BLAME THE FLOOD OF SPECULATIVE FOREIGN CAPITAL ON THE WEAK DOLLAR. BUT IT’S THE HIGH LOCAL INTEREST RATES THAT ARE ATTRACTING ALL THE MONEY. 26

September 2011

It is of course politically expedient for the administration to blame foreign policymakers.

But at least part of the problem is down to the management of the domestic economy - not least, the flood of easy credit that has fuelled a sharp rise in borrowing.

Consider this. In the 12 months to the end of May, total outstanding credit rose 20% - mainly due to a staggering 50% increase in mortgages.

This prompted the central bank to raise its forecast for credit growth in 2011 to 15%. (Ouch.)

Efforts to slow it down have included increasing the reserve requirements of the banks and doubling the IOF tax on consumer credit to 3%. Further measures are expected to be announced in the coming months.

Obviously, the expansion of easy credit mirrors the experience of the West, but unfortunately there are systemic signs that Brazilian consumers may now be getting overstretched. As a result of the high interest rates households are now spending about a quarter of their disposable income on servicing their debts, which is more than the pre-credit crunch levels in the US. This might signal the start of a natural slowdown that will put the dampers on market optimism.

As we’ve seen, the Rousseff administration is keen to blame the flood of speculative foreign capital on the weak dollar. But it’s the high local interest rates that are attracting all this money. If Sao Paulo really wanted to weaken the exchange rate, the quickest way to do it would to cut government spending so as to reduce the budget deficit. This would dampen economic activity and allow the central bank to start reducing interest rates. But it would be politically unpopular, for obvious reasons.

In May the fiscal budget deficit, which takes into account the interest payments on government debt, widened to 14.7bn Reais. This was despite

BRAZIL

higher-than-expected tax revenues from strong domestic demand, high commodity prices and increased revenue from import tariffs. Ouch again.

What to do? The administration plans to cut 50 billion Reais from this year’s budget, but that might be hard to achieve. Getting spending cuts through Congress has proved very difficult: in April the government announced that it could cancel investments of up to 10bn Reais that were approved under the previous administration - but a U-turn in June saw these plans put back by 3 months.

The outlook How it all turns out will depend very much on the trends in the global economy - the key issues being the sovereign debt crisis in Europe, the strength of the US recovery and whether China experiences a hard or soft landing. That’s a measure of how far Brazil has come in the last decade, but it’s also an indicator of how vulnerable its newly respectable international role has made it.

The increased risk of even one of these events triggering an international slowdown was enough to prompt the Brazilian central bank to soften its language recently - signalling a possible interruption in the run of interest rate rises. If the global economy does deteriorate, economists

believe that it might be enough to ease the price pressure without the need for further intervention.

Some analysts remain unconvinced, however, saying they expect a further quarter-point rate increase this year. They are forecasting consumer prices to rise by around 5.6% in 2012 - which is above the 4.5% target rate of inflation but within the acceptable tolerance of plus or minus 2%.

And the stock market? Well, as we mentioned in our opening paragraphs, the recent international market sell-off saw the Bovespa index dipping below the 50000 level - but it came surging straight back by around 15% in the next two weeks as the outlook for China and the worsening US environment added to the weight of the argument for emerging risk.

On balance, a significantly higher breakout would currently seem to be unlikely until the main global risks are truly resolved. But as long as there are so many investors, both in Brazil and abroad, who are desperate for both yields and (relative) stability, the danger of Sao Paulo getting swamped again can’t really be ruled out.

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15/08/2011 16:10

ED ’S SOAPBOX

THE GREAT PENSIONS SWINDLE MICHAEL WILSON GOES ALL GRUMPY OLD MAN ON US. No, honestly, relax, that title’s not intended too seriously. If there’s one thing that’s going to compensate the nation’s IFAs and paraplanners for all the regulatory travails and hardships of the next fifteen months, it’ll be the pensions industry. Or rather, the coming boom in advisory services related to both NEST and personal pensions. At a time when the government is hell bent on getting everybody to appreciate the need for personal planning after retirement, it could hardly be any other way. And that’s great.

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In some ways, of course, we have a head start in this country, because our financial markets are generally well regulated and the public is fairly well clued up on the benefits of investing.

Try persuading the Germans or the Italians or the Japanese to forsake their beloved bonds and bank deposits for a profitable but more unpredictable life on the open seas of the equity markets, and you won’t get far. Britons, however, take

“We near-wrinklies are caught right in the fiscal crossfire, and our concerns aren’t being heard clearly enough” www.IFAmagazine.com

16:10

little persuading that trackers, unit trusts and (increasingly) medium-risk funds are worthy recipients of the hard-earned cash they put into their retirement nest-eggs. That’s a good place to start a campaign for pensions awareness.

The Accursed March of Time But all is not calm and peaceful in the average pension saver’s breast at the moment. For younger consumers, obviously, the difficult state of the economy makes it hard enough to even think about saving for the future – which is why NEST is going to be a force for good, by forcing their reluctant hands. But the really painful problems are coming in for those clients who are now approaching retirement.

Or rather, who would have hoped to be able to retire if things had worked out differently. A small gaggle of unrelated issues are causing quite a bit of distress for the first wave of baby boomers. And, speaking as a member of the 1951 cohort who’s just got his bus pass, I count myself as one of them. We near-wrinklies are caught right in the fiscal crossfire, and our concerns aren’t being heard clearly enough.

The first of these issues, and by no means the most important, is of course that we’re all going to have to wait longer for our state pensions, which are being equalised at age 66 for both sexes by 2020. Now, I’ll admit that I escaped that one by the skin

September 2011

29

ED ’S SOAPBOX

magazine... for today ’s discerning financial and investment professional

The MVA holds a gun to my fund’s head and snarls: “One false move and the fund gets it.” of my teeth. If I’d kept my mother waiting for just a few more months I’d have had to wait an extra year for my state pension at 66, not 65. Whereas my younger sister, who will be turning 60 in a year’s time, is already having to reckon on waiting an extra two years for the payment. Although, since her starting line for the state pension was already five years ahead of mine, she doesn’t feel able to complain too loudly.

Nor, indeed, should any of us really complain anyway. People’s lifespans are extending by about two years with every passing decade, and I am fitter, healthier and better fed than my parents’ generation, so it won’t hurt me to work longer than my parents were able to. I am fortunate, too, in that I have a job with no natural age limits as long as my brain holds out. But if I’d been a manual labourer or a bus driver it would have been different. The question of how these people are going to find jobs in their 66th year has not been widely enough discussed. There’s real anxiety here.

Without-Profits Policies At the same time, many of us nearly-wrinklies are also having to deal with the legacy of an episode that’s still being conveniently swept under the carpet. I count myself among the lucky ones who decided, some fifteen years ago, that my self-select ISA funds were likely to prove a better financial way forward than the hideous clutch of with-profits policies that my adviser told me to buy nearly 25 years ago. And sure enough, in the last ten years my ISAs have roughly doubled in value, while my with-profits policies have simply sat there, failing to accumulate any annual bonuses and defying me to cash them in for fear of the inevitable Market Value Adjustment (MVA) that will chop an arm and a leg off the policy if I dare to so much as look at them.

That’s where the unfairness of the system – and the weakness of the FSA – has made its mark on those of us who don’t have much time left to change our financial arrangements. When my adviser helped me so set up my personal pension plans back in the mid-1980s, he advised me to put half my monthly instalments into unit-linked policies and the other half into with-profits. Neither would let me down, he said, but the with-profits

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policies with their irreversible annual bonuses would help me to ratchet up my wealth. No, he agreed, it wasn’t entirely clear how the providers arrived at their “smoothed” discretionary annual payments, but they were honest sorts of people who wouldn’t try to rob me.

How wrong he was. And how telling it is that the investment orthodoxy of 25 years ago has been (rightly) all but abandoned by IFAs, who rarely sell a with-profits plan these days. Now, if I’d had my money in any other kind of long-term losing strategy I could have sold up, taken my money and put it somewhere more productive.

But the MVA effectively holds a gun to my fund’s head and snarls: “One false move and the fund gets it.” So I’ve had to button my lip and stay put.

That would be bad enough, but some of the with-profits providers are playing rather dirty. I had a particularly nasty brush with my own provider just before my 60th birthday (which was my scheduled retirement date at that time.) It was supposed to have contacted me a couple of months in advance to run me through the various options – annuity types, open market options etc - but it simply didn’t.

With three weeks to go, I finally phoned the provider instead and was given a completely wrong fund value quotation - followed two weeks later by a correct value, together with the stipulation that the annuity quote they’d given me was valid for only three weeks, and that they couldn’t say whether it would include a bonus. (It was around new year, when any annual bonuses were due to be announced.) But they still insisted that if I didn’t accept this rather vague and noncommittal quote, it would lapse and they’d automatically shift my scheduled retirement age from 60 to 75.

I am, I hope, an intelligent being, but I couldn’t make sense of that. Especially since the provider seemed to be warning me in the same breath that I could expect to pay a hefty MVA if I tried to cash in at any time before my scheduled retirement age. So were they shifting the goalposts by 15 years so as to give themselves another 15 years in which to hit me with an MVA? I called my IFA. He phoned them, but he couldn’t get a straight answer either.

As it happened, the provider wasn’t planning to hold me to ransom like that, and all was well. www.IFAmagazine.com

But if I’d been an average IFA client with a big commitment to with-profits I’d have been climbing the walls with worry. It simply isn’t acceptable that this kind of a fog can still exist when it’s all about something as important as a pension.

Sex and Sensitivity And so to the bombshell announcement from the European Court about the gender equalisation of annuities and premiums, which comes into force at the end of 2012 – thus intersecting nicely with RDR. For the moment, most of the noise seems to be coming from young women who are objecting to the prospect of paying the same car insurance premiums as their more accident-prone male counterparts. (It’s likely that average female premiums will go up by 30% - but that male premiums will somehow fail to come down.) But pretty soon the public’s attention can be expected to shift to the fact that male annuities of every sort will be chopped by maybe 20% to bring the sums into line.

This is an actuarial nonsense. The reason why female annuities at age 66 are so much smaller than male ones is that women’s better longevity means the money has to last around 20% longer than it would for males – about 19 years, compared to 16 years for males (2009 figures). By ignoring the influence of biology on life expectancy, the Court has bent the laws of mathematics.

Obviously, it isn’t hard to think of excellent reasons why society should want to make that adjustment in the name of fairness. Women have historically had shorter working careers, not least because they took years off work for childraising. And those who worked often took optouts that reduced their pension contributions in favour of their husbands, who they still thought of as the main household providers. That, of course, is no longer a safe assumption. So they’re in a disadvantaged starting position, certainly.

But the point here is not simply that Strasbourg has gone all politically correct on us, and to hell with the maths. It’s also that a man who has spent the last forty years building up a pension fund on the assumption of a certain annuity

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rate has had his lifetime’s calculations knocked completely out of kilter – not because annuity rates have naturally declined (which would have been sad but unavoidable) but because somebody has taken a spanner to the machine and deliberately altered all the gear ratios. And that’s really not a very respectful reward after what might have been a lifetime of prudent financial planning.

When I started my self-employed personal pension plans in the 1980s the common wisdom was that a couple needed £100,000 at retirement to be comfortable. At an annuity rate of maybe 10%, with a state pension coming in as well, that would enable you to retire on a joint income that wasn’t too far short of the national average wage. Two years ago, with annuity rates nearer 7%, my manager encouraged me to think in terms of £400,000. But now, with annuity rates heading for 4.5% in the wake of the European Court’s pronouncement, I’d presumably need something closer to £600,000 to secure the same income. (I am, of course, assuming close-to-zero inflation, something we’re quite unlikely to get.)

Is There a Moral Here?

Only that we shouldn’t be surprised if clients, and young clients in particular, look at pension providers with the sort of enthusiasm normally reserved for the dentist’s chair. The catalogue of failings over the last two decades has been so public, and the wrong decisions so irreversible, that it’s quite remarkable how anybody at all can be persuaded to invest a six-figure sum in a vehicle that’s as inflexible as a pension. So three cheers for NEST. But goodness knows, it’s tough enough steering the right course when you’ve still got thirty years of working life ahead of you. If you’re in your fifties or early sixties instead, with no time to adjust your sails, you’re at the mercy of whatever the winds and the changing tides throw at you.

There’s got to be a better way.

“In the 80s the wisdom was a couple needed £100,000 at retirement to be comfortable.”

Do you have a good reason for the Editor to jump back onto his soapbox? Not that he needs any encouragement, please send your requests to editor@ifamagazine.com and stand well back!

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HEADING FOR THE FALL IT’S NOT YOUR BEEN YOUR AVERAGE AUTUMN SCENARIO. BUT HOW DOES BRITAIN SHAPE UP AGAINST ITS COMPETITORS? AFTER A TROUBLED AUGUST, MONICA WOODLEY PUTS THE ECONOMY UNDER THE LENS

The stereotypical image of a quiet August –children off from school, families taking holidays and not much happening – has been completely torn to shreds this year. In the UK, we have seen the FTSE 100 falling into bear market territory during a fortnight of extreme market volatility, and rioters taking to the streets of London. But what’s this? According to the papers, there have apparently been a few problems outside the country as well - something about a debt ceiling in the US, I think? And a debt crisis in the Euro zone?

London’s Burning As rioters from Croydon to Leeds helped themselves to new trainers and set fire to buses, a series of indicators painted an almost equally grim picture of the UK’s economic health. Manufacturing output fell unexpectedly in June, when it had been expected to rise.

The sector had expanded rapidly last year and earlier this year, helped by the weak

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pound, but the recent drop might indicate that that strong run has now ended. The broader measure of industrial production (which includes mining and energy) was also down, dropping 1.6% in the second quarter. The last time it dropped at that rate was the first quarter of 2009 when the UK was in genuine recession.

House prices (outside of London) continued to slide and sales were thin on the ground. Construction output did rise slightly in the second quarter but not by as much as had been predicted.

The only bright spot was a slight increase in retail sales in July. But, as the figures do not strip out the effects of inflation or the rise in VAT, what seemed like slight growth was actually a slight decline. (Not a particular surprise, because many households continue to pay off debt.) And inflation is of course higher than wage growth, leaving people worse off than usual. It seems that real incomes are unlikely to actually increase any time soon, as recent surveys

of employers find that few are planning to hire and some even intend to cut jobs. Witness the recent cull in the City, which had previously seemed to have bounced back faster than the rest of the country.

Mervyn’s Moment Amid all this gloom, the Bank of England chose its moment to release a quarterly inflation report which said CPI inflation for the year to July had been 4.4% and that there was a “good chance” of inflation hitting 5% this year. Yet, despite 20 months of above target inflation, the Bank’s Monetary Policy Committee has still chosen to keep interest rates on hold at 0.5% - seemingly indefinitely because its consensus view is that raising rates could further knock the country’s fragile economic recovery. That didn’t stop the Bank from lowering its projections of GDP growth for 2011 from 1.9% to 1.7% and from 2.5% to 2.1% for 2012.

Yet the Bank’s outlook is still rosier than most. Economists have been consistently

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AUTUMN REPORT

“As rioters from Croydon to Leeds helped themselves to a new pair of trainers, indicators painted an equally grim picture of the UK’s economic health.” downgrading their growth predictions for 2011 and 2012 since the start of the year. For example, the Confederation of British Industry now predicts 1.3% growth this year, down from 1.7% in May, down from 1.8% in February. The Economist Intelligence Unit currently forecasts real GDP growth of 1.1% in 2011 and 1.4% in 2012.

No Double Dip, Please, We’re British Despite the depressing news, no one is currently (late August) predicting that the UK will actually slide back into recession. Indeed, by some factors, the UK is looking fairly strong compared to many of its developed-market peers.

Whereas the countries of the euro zone, from the debtsaddled south to their reluctant partners in the north, are mired deeply in the continuing debt crisis, UK government debt has been resilient. Our debt levels are not as high as in southern countries like Greece and Italy, and the government has at least laid out clear plans to reduce

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its debt. That’s a lot better than the US, which lost some of its triple-A credit ratings in July as the row over raising the debt ceiling paralysed the political process and weakened President Obama. On the whole, the British public can be relieved that its political parties have been more compromising – something that has reassured both the ratings agencies and the markets themselves. The Footsie’s fall in the first three weeks of August was nowhere near as bad as the S&P’s.

With less AAA-rated government debt in the market (due to the US downgrade), prices on gilts have risen, compressing yields. And despite equities’ recent dip off the back of matters out of the UK’s control – the US downgrade and Euro debt crisis – they have generally remained strong in recognition of UK companies’ efforts to rebuild their balance sheets. In a survey conducted by the Economist Intelligence Unit earlier this year, 70% of UK companies polled had excess

THE AUGUST RIOTS HAVE LED MANY PEOPLE TO QUESTION THE GOVERNMENT’S CHOICE OF SPENDING CUTS September 2011

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AUTUMN REPORT

magazine... for today ’s discerning financial and investment professional cash and were considering the best option for investing it. Indeed, in the last few weeks some astute investors have even taken advantage of the recent slide in share prices to bargain shop, using cash released by profit-taking on gilts.

Give it to Me Straight, Doc, What’s the Prognosis?

So, if the UK government has its debt under control and UK plc is fairly strong (relatively speaking), what are the underlying problems that are causing all those downward revisions of growth and all those scary numbers?

Well, firstly there are doubts about the government’s debt reduction plans. Forecasts released by the International Monetary Fund at the beginning of August cast doubts on the UK’s plan, saying that the economy has less capacity to

the UK is also higher than the government believes.

Whereas the Office for Budget Responsibility states that longterm unemployment is running at 5.25% of the labour force, the IMF says that the true rate is more like 6.8%. And the overall unemployment rate is growing.

The ONS just announced that in the three months to the end of June, it rose to 7.9%, from 7.8% in the January to March period, meaning a total of 2.49m people were out of work.

“70% OF UK COMPANIES HAVE EXCESS CASH AND ARE CONSIDERING THE BEST OPTION FOR INVESTING IT”*

Economists have long argued that recessions destroy capacity, because people who are out of work for long periods lose their skills and the idle machinery in the plants becomes outdated. The second part of that equation is backed up by the Economist Intelligence Unit we survey cited earlier, which found that almost twothirds of companies polled

show that UK employers are operating near peak capacity in the manufacturing sector and close to peak in the services sector. That implies that even a fairly small increase in demand could lead businesses to raise prices quickly, pushing inflation up further.

“Inflation would be on target if it weren’t for the increase in VAT and rising energy and import prices.”

In a letter to Chancellor George Osborne, Sir Mervyn claimed it was these factors forcing up CPI inflation grow than the government believes. While the IMF did not call for a change to the UK’s austerity plans, it did warn that the government needs to be vigilant and ready to alter course quickly if circumstances dictate.

There are also concerns about the impact of the cuts on the UK’s long-term economic health. The IMF has said that structural unemployment in

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had significantly limited their capital expenditure during the recession - with a quarter cutting it completely. While those cuts helped companies rebuild their balance sheets at the time, it does put them in a more difficult position now to take advantage of upswings in demand when they eventually come.

This can be seen in other recent business surveys, which

*Source: Economist Intelligence Unit, 2011

BoE deputy governor Charles Bean has said, with laudable clarity, that this recession has dented the economy’s growth capacity for a long time to come. We have seen the UK economy barely growing over the last nine months, and youth unemployment remains close to historic highs, at 36.7% in the three months to June.

The August riots have led many people to question the government’s choice of spending cuts, because they seem to be impacting hardest on certain social groups. And we need to see signs that the government is tackling this and many other issues that will shape our longterm economic prosperity.

The coalition’s decisive action on an austerity plan may have reassured the markets that we won’t go to the brink of default like the US, or even the euro zone. But the people of the UK still need to be convinced that we aren’t shooting ourselves in the foot by ignoring social and employment priorities.

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MULTI-ASS E

EMMA-LOU MONTGOMERY LOOKS AT A FAST-GROWING SECTOR THAT STILL SEEMS TO DEFY DESCRIPTION, WORSE LUCK. THE GOOD NEWS IS THAT THEY’RE WORKING ON IT. What do all investors want to do? Make money. Simples, as that annoying meerkat might say. But, at times like these, the simple task of making your clients’ money work consistently hard and remain relatively ‘safe’ can be something of an uphill struggle.

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M U LT I -A S S E T F U N D S

S ET FUNDS It’s not just that the equity markets have been rocked by recent uncertainty about the future growth of the global economy, at a time when economic growth seems to be slowing and the future direction of profits is looking shaky. What’s becoming more important is that the whole macro environment for alternative strategies such as bonds and currencies has also been cast into chaos by the growing realisation that we might have been underestimating the general levels of sovereign debt - and overestimating the competence of the politicians who we’ve been trusting to do their sums correctly.

That’s another way of saying that the traditional relationships between equities, bonds, currencies and the like are effectively under scrutiny and review. What an investor often wants in these circumstances is the maximum possible flexibility when it comes to rebalancing between one risk or asset class and another. He doesn’t just want to change horses in mid-stream, he insists on it.

And all within the convenient package of a fund.

No wonder, then, that clients have been opting for multi-asset funds in their hundreds of thousands. These versatile instruments are being lapped up by cash-rich but ‘cautious’ investors keen to make their money work despite the turmoil. And with good reason. For many clients, especially those approaching retirement, this is no time for going out on a limb by committing to only one or two market segments. Multi-assets have the major advantage of being able to rebalance between different instruments – equities, bonds, currencies – in ways that traditional funds can’t normally manage.

That has been evident from the veritable swarm of funds flocking to market. Prudential, Baring Asset Management, Fidelity International, and Schroders to Axa’s multi-manager firm Architas, and even fund supermarket Interactive Investor - in conjunction with Seven Investment Management - have wheeled out multi-asset products over the past months. There are now thought to be over 500 such funds in the marketplace, and Trustnet alone lists more than 350. (See, for example, http://tinyurl.com/42hbmcv)

What’s In A Name?

So one thing’s for certain, choice is not a problem.

It’s choosing exactly which one of these multiasset funds is right for your client where potential complications arise. Because, of course, there is no multi-asset sector in the IMA’s system of www.IFAmagazine.com

‘Managed’ multi-asset funds Managed multi-assets have been going through a boom period in the last two years. IMA figures show that funds in the ‘cautious managed’ sector in particular showed strong growth in sales throughout 2010, with net retail sales growing by 70% to £2.2 billion. And Cofunds reports that the sector also accounted for the highest proportion of all sales in the first quarter of this year.

classification. The words might not even appear in the fund’s name. Instead, you find these multi-asset funds variously spread predominantly across the ‘cautious’ and ‘balanced managed’ categories – with some classified as ‘actively managed’, and with a growing number listed under absolute returns.

With funds variously marketed as ‘defensive’, ‘cautious’, ‘cautious growth’, ‘balanced’ or ‘adventurous’, anyone who has ever tried to compare one multi-asset fund with another will know all too well how, while the classification of funds is supposed to make meaningful likefor-like comparisons possible, in reality multiasset funds have been difficult to pigeon-hole.

Jason Witcombe from Evolve Financial Planning says the labelling of some of these funds can be worryingly misleading: “Words like ‘balanced’, ‘cautious’ or ‘adventurous’ are hugely subjective.

There are ‘cautious’ funds out there with up to 60% in equities. What you want is for the fund to do what it says on the tin. An investor buying into a fund should be able to invest in it with a reasonable degree of certainty about the risk being taken.

“Take a ‘cautious’ managed fund and a pensioner who is investing their life savings in it. Maybe to someone like me, with a longer time horizon, that fund is indeed comparatively ‘cautious’. But the pensioner might be comparing the level of risk with that of a bank account,” Which wouldn’t really be true at all.

The problems of categorising these funds on ‘traditional’ lines, using descriptions such as ‘cautious’, ‘balanced’, etc, is widely September 2011

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M U LT I -A S S E T F U N D S

magazine... for today ’s discerning financial and investment professional acknowledged. And it’s as much of a bugbear for managers as it is advisers and their clients. Some multi-asset fund managers agree that the ‘cautious’ and ‘balanced’ sectors have too large a weighting towards equities - particularly ‘cautious’, where the 60% limit applies. That’s a ratio that could easily mislead investors.

The equity proportion rises to 60% and 85% respectively in the ‘cautious managed’ and ‘balanced managed’ sectors, which is where the majority of multi-asset funds are placed. Whereas many advisers would argue that somewhere in the 30%40% region would be better suited to an investor who says he has a properly ‘cautious’ approach.

How Do They Compare?

Considering the slippery categorisations that characterise the multi-asset sector, it’s not surprising that it’s hard to arrive at any workable benchmarking systems for measuring performance. But Trustnet has a try. Please treat these with all due caution.

Over the twelve months to August, Trustnet says, the IMA Balanced Managed average annual return was an impressive 14.5%. But for the period from 24 months to 36 months the figures showed a decline of 13.8%, and for 36-48 months (i.e. including the 2008 sell-off) it was down by another 8.8%. Over 48-60 months, it says, the return was a more presentable 13.3%.

Absolute return funds have delivered a significantly less bumpy ride over the same period, with the IMA’s index returning an average cumulative gain of 2% over the twelve months to August, an 8.3% return over 36 months, and a 19.8% gain over 60 months.

So the question of classification is both urgent and real for an IFA. But on the flipside are those who rightly argue that the need to fit into one of the investor-friendly sectors also undoubtedly constrains managers who have to stay within sector limits. And it is true that many multiasset funds could reasonably sit in say, either the specialist sector or the unclassified one, but for marketing reasons or because of the manager’s investment approach - or both - they opt for the ‘cautious’ or balanced categories. Indeed, many are popular precisely because, sitting where they do, their asset allocation is more predictable.

One such example is the £68 million JPM Multi Asset Income fund which just this summer switched over to the ‘cautious’ managed sector. The fund, which previously sat in the specialist sector, has an unconstrained mandate.

Its volatility is currently 5.4, compared with the

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‘cautious’ managed sector’s one-year average of 5.28. JPM client portfolio manager Olivia Mayell says the change meant simply that the fund could now be compared with its closest peers.

Catching the Wave Sector-switching is already proving its worth.

Data provided by Morningstar for a recent Money Management survey into this asset class shows that the ‘cautious managed’ sector generated an average return of 8.9% during 2010 - significantly below the overall unit trust average of 14.6%. Yet in 2008, when the average fund lost 22.5% of its value, ‘cautious managed’ funds had lost an average of only 16.9% overall. The clear implication, then, is that cautious managed funds can indeed dampen risk.

Many managers are aware of the tactical approach but say that opting for a dominant marketing approach over an investment one has its limitations. When Rathbones Unit Trust Management launched its multi-asset portfolios it opted to have its funds listed as unclassified, to avoid the restraints on fund composition that would have automatically come into play had the funds been listed in the ‘balanced managed’ sector.

While some advisers automatically exclude funds in the unclassified sector from their clients’ portfolios, that has not hampered the sector’s success. According to the IMA, funds in the unclassified sector have surged in popularity. The sector alone enjoyed £1.5 billion of inflows during the second quarter of last year - equivalent to a staggering 51% of all net retail sales in the fund-of-funds sector.

More Clarity Soon?

Tentative steps are now being taken to simplify things on a permanent basis, although progress is slow. The IMA’s recommendation has been to reduce the number of categories to ‘active managed’, ‘balanced’ and ‘cautious managed’ – or ABC’ to put it really plainly. But no sooner did the IMA make its suggestion than the whole argument kicked off all over again about how ‘cautious’ really wasn’t all that cautious in some cases, and so on.

The ABI has also taken steps of its own.

Earlier this year it replaced labels such as ‘cautious’ and balanced with ‘factual descriptions’ of the level of shares involved. Out went ‘balanced’, and in came ‘mixed investment 40-85% shares’.

Well, at least that one does what it says on the tin. But the only question worth asking is, does it help investors to make the right choices?

It’s clear that there is more work to be done in this area. But, until the industry comes up with a solution, advisers and fund managers will have to work within the confines of the traditional, albeit arguably subjective, categorisation of these most un-categorisable of funds.

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GETTING THE BALANCE RIGHT

THE FSA’s RECENT GUIDANCE ON RISK ASSESSMENT FOR CLIENTS HAS PROMPTED MANY PLATFORMS TO REVISE THEIR TECHNOLOGICAL PROPOSITIONS. NEIL CROSSLEY REPORTS. Ask any IFA to identify the most critical piece of information needed from a client, and the chances are that he or she will nominate that client’s tolerance to risk. It’s a pivotal factor in the success of any financial plan – and yet it can be painfully hard to achieve.

Clients are only human, after all, and they tend either to assess their risk tolerances badly, or else to dismiss the need for a disciplined approach altogether.

And sometimes, of course, they simply misunderstand the

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critical details of the investments they’re considering. In these circumstances, the FSA’s clear preference is that they should be guided decisively, impartially and comprehensively. That’s an assessment requirement that’s probably better met by a technology-based routine than by a fallible human being, however skilled or well-intentioned.

Obviously, technological tools like these are gaining increasingly widespread acceptance among IFAs: over 90% are now thought to be using platform technologies, and around half are using

two or more. But the clincher is of course that the RDR process tightens up the best advice requirements and formalises them in ways that require advisers not just to give the best advice but also to be able to prove it.

The Cofunds Planner One such tool is Cofunds’ Dynamic Planner, an instrument designed to enable advisers to assess how their clients feel about risk and then to propose an asset allocation for their investments that matches their attitude to, and capacity for, risk.

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IT REVIEW

Essentially, Dynamic Planner is point-of-sale software that sits within the front end of the Cofunds platform. At the heart of the proposition lies a traditional scientific routine for psychometric risk profiling – the sort of method that might also be applied to job selection procedures or medical profiling.

As usual, clients are prompted to fill out questionnaires created by psychometric risk analysists Oxford Risk. The questionnaires use highly specific wordings to help maximise the accuracy of results - as Verona Smith of Cofunds explains.

“Within these tools, there are psychometric questions aimed at getting a feel for the client’s attitude to risk,” she says. “The whole aim is to ask questions in a way that doesn’t lead to direct answers. So it can’t simply be ‘How would you feel if you lost all your investments in a crash?’ Because, of course,

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no-one’s going to go, ‘Hey, you know what? No worries’. We don’t want to lead them down a path, so we don’t ask questions that can have only one response.”

Instead, investors are asked to select one of five optional responses, ranging from ‘strongly disagree’ to ‘strongly agree’. The questions, meanwhile, take the form of statements, such as: ‘I would accept potential losses in order to pursue long-term investment growth,’ or ‘I do not feel happy with financial uncertainty’.

Keeping the FSA Happy Cofunds recently revamped these questionnaires after the Financial Services Authority (FSA) voiced concerns about such assessments in early 2011, as part of its consultation on establishing the risk a customer is willing and able to take. One criticism was the absence of “plain English” in risk

Human touch Advisers still have a pivotal role in risk assessment technology, says Simon Thyer, head of wealth solutions with Coutts.

“When we presented our own tool to the FSA, the verbal feedback that we got from them was that they would prefer a firm to have a risk assessment system rather than not. And particularly so with a firm with larger numbers of advisers, where you’re looking for consistency.”

“But there are considerable risks if you just take such a technology ‘off the shelf’ and use it blindly. Advisers need to understand how the tools are constructed. And I think the message is: ‘Don’t just abdicate responsibility to the tool’.”

September 2011

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IT REVIEW

magazine... for today ’s discerning financial and investment professional assessment questionnaires.

Smith accepts that some people in the industry, as in any profession, develop a habit of slipping into jargon, which could confuse clients. She says that Cofunds’ new questionnaires are significantly enhanced.

“They provide advisers with more exact answers, so they can rest assured that they are selecting the best funds for their clients,” she says.

When it comes to the results of the questionnaires, the majority of clients will score a 5, 6 or 7, says Smith. The information is vital in determining the asset allocation model and fund selection, she says.

“From the adviser’s point of view, it provides a full

adviser is advising me to go into these funds. They didn’t just read them in the back of the paper at the weekend’.”

The importance of risk assessment tools in enabling a full audit trail is a point echoed by Simon Thyer, head of wealth solutions at Coutts. He acknowledges that Dynamic Planner – developed

by Distribution Technology – is a very robust model and one of the better solutions on the market. But he stresses that there are inherent risks with any system.

“Generally, risk assessment tools are desirable things to have, because they generate a good audit trail and you can get consistent and reliable output,” he says. “But it needs to be an appropriate model to the customer and client base that it’s aimed

Alternative Systems Of course, Cofunds is not alone in producing risk assessment tools. And the FSA’s revised guidance in July prompted a number of other streamlined risk-assessment tools to emerge onto the market.

One of the newcomers was eValue FE, which announced in late July that it was making its risk-profiling tools available to IFAs through its new subsidiary, Advia Centra. It too offers advisers a choice of questionnaires to assess their capacity for risk.

Bruce Moss, director of strategy, said the service would enable advisers to operate more efficiently and manage compliance risk in a way that had previously only been available to large financial institutions.

“The extra information from advisers who use of our

Joining forces New technology has created a need for greater collaboration, says Ian McKenna, director of the Finance and Technology Research Centre. “IFAs shouldn’t see risk assessment tools as systems that are competing against them. They are not a replacement, they are a massive aide. The client gets a more accurate decision and it gives the adviser more time. I think these tools are only going to increase in importance in the future.”

“Having said that, there are a wide range of issues that need to be taken into account. Basically,

audit trail. It really backs up why they’re recommending a client to go into a certain bundle of funds. The adviser can clearly say, ‘Okay, I did a needs analysis for you, I did a risk profile risk analysis for you and we’ve made a fund selection based on that asset allocation. The client can then follow that through and say, ‘Okay, I understand why my

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I think a lot of people had got into the habit of building portfolios around what a client’s attitude towards risk was, without looking at their actual capacity for risk or their ability to tolerate risk.

“There are a number of us within the market looking at how we can maybe work together to create more understanding for the adviser community. I happen to feel very strongly that it’s an area where those organisations that are producing these tools need to collaborate and come up with more guidance.”

at. For example, some of the questionnaires only have a few questions, and some are designed with ‘yes’, ‘no’ or ‘don’t know’ response options.

So, in effect, you’re then attributing a risk preference based on answers to just a few questions. The design needs to be clear and give a positive outcome rather than a muddled ‘don’t know’. “

risk-profiling tool will help us build the definitive barometer of UK risk sentiment. Investors, advisers and advisory firms will all benefit from the ability to compare risk profiles,” he said.

Another risk assessment product to hit the market in July was the Axioma Risk Model Machine, which, the company says gives advisers the chance

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Verona Smith, Head of Proposition at Cofunds

to build “client-customised models”, specifically tuned to their own investment process.

Verona Smith at Cofunds is all too aware of the range of other risk assessment options on the market. And she stresses that, although Distribution Technology’s tool is attached to the Cofunds platform, advisers using the Cofunds platform are in fact free to use either the company’s own risk planning tool or an alternative produced by another supplier.

The Way Ahead As the industry gears up for the post-RDR world, Smith believes that financial planning and risk assessment tools will become increasingly more client-based, so that the interaction is done with the client actually present. Advisers in turn will place increasing reliance on technology to get information from their clients,

she says, with clients being required to fill in an “online wish profile” before they even sit down with their advisers.

She believes financial planning tools will increasingly improve the accuracy of the adviser’s business, while also adding value in the process.

“We call it a technology solution, but technology’s just the enabler to give the adviser more time to give advice rather than having to sit there with pen and paper, capturing all this information. I think these tools will increase the value of the time that you spend with your adviser. Because the most valuable thing your adviser can give you, at the end of the day, is their time.”

She believes financial planning tools will increasingly improve the accuracy of the adviser’s business, while also adding value in the process.

“We call it a technology solution, but technology’s just the enabler to give the adviser more time to give advice rather than having to sit there with pen and paper, capturing all this information. I think these tools will increase the value of the time that you spend with your adviser. Because the most valuable thing your adviser can give you, at the end of the day, is their time.”.

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IT REVIEW

“We call it a technology solution, but technology’s just the enabler to give the adviser more time to give advice.”

magazine... for today ’s discerning financial and investment professional

LOOKING THE BEAST IN THE EYE BE AFRAID, BE VERY AFRAID. PAUL CLUTTON BELIEVES THAT CURRENT ESTIMATES OF THE INDUSTRY SHAKEDOWN AFTER RDR ARE UNDERSTATED If you open the pink pages of the various trade publications servicing the Financial Services industry, it sometimes seems that every other article is about the RDR and just how many advisers are about to leave the industry.

Of course there will be some who regard 2013 as the final frontier, and who find the prospect of taking examinations abhorrent. These advisers will leave the industry. We must express gratitude for their contribution of over the years and wish them every future success – of course we must. But we also need to remember that they represent only a small fraction of the IFA community, albeit a vocal one. We aren’t about the see the IFA becoming an extinct animal overnight.

However, there are many people grappling with the examinations who won’t make the grade - either because they’ve left the studies too late or because they haven’t reached the required standards. And this section of the community will need consider their futures carefully.

Restricted from giving advice to their clients by the lack of Level 4, a diluted role as an introducer or in some administrative capacity beckons. And that’s not an overly appealing

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September 2011

or lucrative prospect, so once again some migration away from the industry is likely.

The Transfer to Fee-Based Structures Those who pass all the examinations and proudly hold their Diploma status face another set of challenges post the RDR... in the form of a changed charging structure.

In theory, charging fees make great sense as the FSA drags this industry towards a more transparent model – just like all other industries.

But there is a practical consideration...

Suppose you’ve been giving advice to your trusted clients for decades and never charged them a penny, but instead you’ve received your fees in the form of commissions. On the face of it they’ve had your services free. Well, of course that’s not actually the case, but it’s the way it felt to the client who never glances at the small print or takes any notice of “charges” on his statement. (Many don’t read it at all or consider how an IFA is paid.) So all of a sudden you have to explain that the industry has changed and that now any advice given will cost £1,500 a shot. Ouch! Not a comfortable conversation. www.IFAmagazine.com

Self-Stratifying Client Groups Some customers will pay the fees. Most won’t.

Or at least, they won’t pay at the sort of rate the average IFA needs to charge in order to make the ongoing relationship commercially viable. Of course, the High Net Worth market will remain serviced by the quality advisers, and their clients will be happy to pay fees as they do with all other professional advice taken from their accountants, lawyers and stockbrokers. But the mass affluent will be largely uncomfortable with the prospect of paying for a service they’ve not felt they’ve paid for in the past.

Probably these people will turn to the high street banks and buy products off the shelf - somewhat naively ticking the self select box to say they don’t want advice. After all, they are educated middle management types who’ve read the Daily Mail money pages and reckon they don’t need an IFA to tell them which mortgage or ISA to buy!

Then there’s the other mass market that certainly won’t pay an IFA’s fee, given the presence of internet comparison sites and major supermarket chains offering price competitive products in the comfort of their living room or office desk at the mere click of a button. Most of these people just want the cheapest product they can get away with.

All of the above holds true for the purchase of bread-and-butter financial services products. Of course, when there is technical advice required to assist with a pension transfer or a complicated piece of inheritance planning, the IFA’s services will be sought... but that may not be frequent enough.

A ‘Market Rate’? How Low? The average IFA is going to see clients slipping away towards emerging competitors, transparency and greater market accessibility. In the face of this changing price-competitive arena there will soon be a ‘market rate’ for the services of an IFA, just like in all other industries.

THE HUMAN RESOURCE

Most clients will cough, splutter and shuffle uncomfortably in their seats at this prospect, especially in a market besieged with self-select websites and compelling marketing initiatives from competitor organisations keen to capture their business. Financial advisers haven’t really had much in the way of competition for years, but now the dreaded day is fast approaching.

To put it bluntly, I’d suggest that many will regard paying for the services of an IFA as a ‘distress purchase’ on a level with replacing a broken washing machine. The price point will reflect that – placing the IFA in a hierarchical position somewhere below an accountant but above a plumber. I’ll go further and suggest that the price point for advice will be closer to £500 than £1,500.

So, with lower revenue streams as market conditions bite, it’ll soon become clear to some that remaining technically up to date, meeting all the costs, heightened administration and compliance requirements make being an IFA an uneconomical proposition. When that penny drops there will be another swathe leaving the industry...those who simply cannot make a living from it.

The major IFA networks currently anticipate that there will be a 30% reduction in adviser numbers as a result of the RDR. I suggest the figure will be a lot higher. I’d say that mandatory minimum academic qualification, a changed charging structure, increased administration and compliance, significantly greater levels of competition and downward pressure of earnings will reduce IFA numbers by 50% by the end of 2014.

Pause for effect. Okay, the FSA will achieve its target metrics. But is that really treating customers or IFAs fairly?

Rewards for Staying with the Change The answer is yes, and the changes are indeed necessary. The Financial Services industry is one of the least transparent sectors left, and its public perception has been tainted by high-profile collapses within the global banking sector. Competition is good, and more of it is good for the industry. Market forces will dictate the fate of the average IFA. Many, of course, will continue to throw stones at the FSA, blaming the regulator for their woes. For some, however, it’s time to wake up and realise the world is a dynamic place. The Industry will soon change and find a new way forward. With change there is often some pain. But for those who embrace emerging market trends and position their model accordingly, there will be opportunity.

Let’s hope so anyway!

Paul Clutton is a qualified Management Accountant and Director of Professional Recruitment Ltd; specialists in middle/senior management financial services appointments. www.professionalrecruitment.co.uk He is also a Director of TOMORROW, a business realising value for retiring IFAs or those looking to leave the industry www.ifafum.com

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September 2011

45

THE BEE LINE

IS THAT AN ELEPHANT IN THE ROOM? THE PENSIONS REFORM MUST NOT BE ALLOWED TO FAIL, SAYS STEVE BEE I was speaking to some of my friends the other day (don’t look so surprised - I’ve still got a few left!) and we were discussing the new pension reforms that are set to come in from next year. The reforms, as I’m sure you’ll know by now, will lead to something like 1.3 million employers setting up qualifying workplace pension schemes, enrolling their eligible employees into them and paying into them too. While it will be compulsory for employers to ensure their eligible employees are enrolled, no employee is being compelled to save for a pension; all auto-enrolled employees will have the right to opt out if that is what they want to do.

The discussion my friends and I were having went along the lines of: “What if the reforms fail?” and: “If they do, will that mean compulsion will be introduced?” That kind of thing. By ‘fail’ there, we were talking about maybe millions of employees opting out time after time - with the result that we’d have over a million new pension schemes, but with hardly anyone in them. Sort of a ‘what if they held a war and nobody turned up?’ kind of scenario.

My view on all this is that these reforms can’t be allowed to fail, because millions of employees with no pension savings will mean that the spectre of means-testing will come back with a vengeance in the mid-21st century – and, as a result, take the public purse to hell in a handcart with it. That wouldn’t be a good outcome.

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But compulsion doesn’t look too good a solution either. I mean, the system that these new reforms are replacing was based on compulsion.

All employees in the UK have been required by law (ie compelled) to accumulate a workplace pension since 1961. Either their employers provided them with a decent pension through a company pension scheme, or the National Insurance system did it through the state second pension (aka the graduated scheme, Serps and latterly S2P). It has been impossible for employees in the UK to not accrue a workplace pension for over half a century now - even if the state second pensions that accrued were of the unfunded variety.

It would have been easy for the government to switch from the situation where all employees were accruing a workplace pension, but some of those pensions were funded and some were not.

They could have simply have forced everyone accruing S2P benefits to contract-out and put their rebated National Insurance contributions into qualifying workplace pension schemes - job done! In fact, those of you with long memories will remember that was exactly what Keith Joseph’s short-lived reforms from 1974 would have achieved if his State Reserve Scheme had been left to flourish.

But it didn’t happen then, and I don’t think it’s going to happen now either. My view is these reforms are not all about the soft introduction of compulsion; quite the opposite in fact - I think they’re all about the end of compulsion...

Steve Bee, a well-known campaigning pensions activist, is the managing pensions partner at Paradigm and the co-founder of www.jargonfree pensions.co.uk

September 2011

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GOING GLOBAL magazine... for today ’s discerning financial and investment professional

NICK SUDBURY LOOKS AT THE BIG PICTURE. Second helping Diverse Income Trust The man in charge of this recent investment trust from Midas and Milton Funds is Gervais Williams, the former head of the UK smaller companies team at Gartmore. His overall objective has been to put together a portfolio of UK stocks with a small cap bias that will produce an attractive level of dividends together with long-term capital growth.

The remit is similar to the one he had in his previous role when he was in charge of the Gartmore Growth Opportunities fund. Over the 5 years to the end of September 2010 this produced a return of 52% compared to a gain in the FTSE Small Cap index of just 8%.

Williams’s portfolio includes around 10% of FTSE 100 blue chips, with a further 25% invested in the mid caps of the FTSE 250 and the

FUND FACTS Name: Diverse Income Trust (DIVI)

remaining 65% Type: Investment Trust in small stocks including some Sector: UK Growth listed on AIM. & Income Overall there Market Cap: £50m is likely to be between 80 and Target Portfolio Yield: 120 holdings 4% with none having Manager: Midas and a weighting of Milton Funds plc more than 1.5%.

The TER: n/a investment trust Website: is targeting mamfundsplc.com an attractive annual yield of 4% and pays dividends on a quarterly basis, which should ensure that it appeals to income seekers.

There is also an annual redemption facility to protect investors against the share price slipping to a discount to NAV. And despite taking a 4% shock in August it was still commanding a 5% premium. Impressive!

The Diverse Income Trust represents a fresh start for Williams and is a great opportunity to put his UK small cap experience to good use with a new pool of capital.

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PRODUCT REVIEWS

Power to burn Artemis Global Energy Unlike the majority of its peers, the new Global Energy fund from Artemis mainly focuses on the small and medium sized stocks in the sector.

The manager, John Dodd, is one of the original co-founders of the firm and it is believed that he and his fellow staff, friends and family have invested around £4 to £5m in the venture.

He is assisted by Richard Hulf, who specialises in this area of the market, with the two of them putting together a concentrated portfolio of 30 to 40 of their best ideas. For the most part these are Oil & Gas companies, which make up 80% of the initial allocation. The other holdings provide exposure to areas such as energy transmission and generation as well as renewables.

It is very much a bottom-up approach, with the resulting geographic allocation dominated by an initial 63% weighting in Europe and Russia. Around 85% of the cash is being invested in exploration and production companies, with only 15% in refining and power generation.

This sort of profile makes it quite a high risk fund, although the potential volatility is mitigated to some extent by concentrating on companies with existing production that have a good chance of discovering new reserves.

Having said that a portfolio of mid and small cap oil stocks is never going to be an easy ride.

The oil price is currently trading above $100 a barrel, but there is every chance that the increasing demand for energy will push this higher in the years to come. Artemis Global Energy is one way for adventurous investors to benefit.

FUND FACTS Name: Artemis Global Energy Fund (PKGLOE) Type: UK OEIC Sector: Specialist Fund Size: £70m Portfolio yield: n/a Manager: Artemis Fund Managers Estimated TER: 1.75% Website: artemisonline.co.uk

Global presence Henderson International Income Trust This new best ideas investment trust from Henderson Global Investors offers an attractive way of generating an income from outside the UK. It is targeting an initial yield of 4%, which it hopes to grow by between 5% and 10% a year. Launched in April, it was sporting an impressive 7% premium to assets by the end of August.

The cash is mainly invested in a concentrated portfolio of 40 to 60 overseas

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equities, although there is the added flexibility to hold up to 20% of the NAV in fixed interest securities. Four Henderson managers will be contributing their best ideas with the lead role going to Ben Lofthouse.

The portfolio is divided into 3 main equity regions: North and South American, Asia Pacific and Continental Europe. A maximum of 50% can be invested in each,

September 2011

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PRODUCT REVIEWS

magazine... for today ’s discerning financial and investment professional with the initial allocation expected to be 45%, 30% and 25% respectively.

There is also the capacity to use gearing of up to 20% to boost the potential returns.

The fund has a low annual management charge of 0.8% per annum, although there is an additional performance related aspect, which is calculated as 10% of any outperformance over the MSCI World ex UK index. This is subject to a 2% pa hurdle and an overall fee cap of 1.5%.

The best ideas approach should result in a quality concentrated portfolio of international dividend paying stocks. If the shares trade at a discount to NAV the Board has the power to initiate a buy back program and in any case there is a compulsory continuation vote every 3 years.

FUND FACTS Name: Henderson International Income Trust (HINT) Type: Investment Trust Sector: Global Growth and Income Market Cap: ÂŁ40.67m Target Portfolio Yield: 4% Manager: Henderson Global Investors Management Charge: 0.8% Website: henderson.com

New shoots and leaves Global X Russell Emerging Markets Growth and Value ETFs These two US-listed ETFs, first listed in December, are the first to offer a growth and value style exposure to the Emerging Markets. As in the more developed regions, there is good evidence to suggest that these contrasting investment themes perform in radically different ways.

The new ETFs track the Russell Emerging Market MegaCap Growth and Value indices.

These are constructed by screening the underlying universe for higher/lower price-to-book ratios and higher/lower expected growth values.

Research by the index provider indicates that value outperformed growth over the 3 years to the end of December 2010 by 9.4%. Over the last 12 months of this period it was growth in the ascendancy with a lead of 4.5%.

The growth ETF is the more diversified of the two with 141 holdings compared to the 81 value stocks. This reflects the fact that the Emerging Markets tend to be more associated with these fast growing sorts of companies.

The largest country weightings in the growth ETF are China and Brazil, with each accounting for just over 20% of the portfolio. Behind them are India, Taiwan and South Africa at around the 10% level. The main industry exposures are Financial Services and Technology.

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By contrast, the value ETF is mainly exposed to Russia and South Korea, which together make up just over 51% of the assets. The key sectors are Energy and Utilities that between them account for almost 63% of the portfolio.

These Value and growth ETFs offer radically different exposures to the emerging markets, FUND FACTS and each has Name: Global X been predictably Russell Emerging volatile during Markets Growth/Value 2011, with a ETF (EMGX/EMVX) double-digit spike in March Type: ETF (Arca) and a Fund Size: 20% $2.6m/$2.6m drop in August. But an Manager: equally strong Global X Funds bounce-back Management Fee: toward September 0.69% left them 8% down - better Website: than the Footsie. globalxfunds.com

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What exactly is it about flying Upper Class?

Is it the complimentary limo service that takes you from door to door? Is it the business class seat that transforms itself into one of the longest fully flat beds in the sky to give you a proper night’s sleep? Maybe it’s being able to mingle and unwind at our onboard bar. Or is it simply that you get all of this for a business class fare? It may be impossible to pin ‘it’ down, but we certainly think you’ll know it when you see it. Discover more at virginatlantic.com/experience Your airline’s either got it or it hasn’t.

It. You can’t bottle it.

You can’t put your finger on it.

But weirdly, you can fly it.

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*As we pay all running costs out of our AMC, we expect that our AMC will be the same as our TER.

This advertisement is directed at investment professionals in the UK only and should not be distributed to retail investors. The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. The material contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this document does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this document when making any investment decisions. Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Services Authority. © 2011 Vanguard Asset Management, Limited. All rights reserved. UK11/0882/0911

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27/06/2011 14:53

FS A P U B L I C AT I O N S

OUR MONTHLY SUMMARY OF THE LATEST OFFICIAL PUBLICATIONS BY THE FSA. These listings exclude the FSA’s routine monthly handbook updates.

Recovery and Resolution Plans

Platforms

Consultation Paper

1st August 2011 73 pages This Policy Statement reports on the main issues arising from Consultation Paper 10/29 (Delivering the RDR and other issues for platforms and nomineerelated services) and publishes final rules

Policy Statement Ref: CP 11/16

9th August 2011 78 pages Primarily intended for banks, building societies and insurers.

This Paper covers the proposed requirement for certain financial services firms to prepare and maintain Recovery and Resolution Plans (RRPs) and separately, for some of these firms, and others, to make additional preparations in relation to their investment client money and custody assets (CMA) holdings.

Recovery Plans require firms to identify options to recover financial strength and viability should a firm come under severe stress. Resolution planning requires firms to submit detailed information about their business and operational structure in the form of a Resolution Pack.

Consultation period ends on 9th November

Proposed ‘Dear CEO’ Letters Providing Guidance on Issues Relating to Remuneration Guidance Consultation

Ref: GC 11/19

5th August 2011 10 pages Of interest to FSA-authorised banks, building societies and Capital Adequacy Directive (CAD) investment firms. (This generally corresponds to firms subject to MiFID, although exempt CAD firms are not included.)

The revised Remuneration Code came into force on 1 January 2011, implementing the rules on remuneration contained in the EU Capital Requirements Directive (CRD3). These proposed ‘Dear CEO’ letters set out our plans for monitoring implementation of the Code during the coming remuneration round. An annexe also contains proposed guidance for consultation on certain policy issues.

Remuneration Code (SYSC 19A) Finalised Guidance

August 2011 Contains self-assessment templates for Tier 2, 3 and 4 firms, and also various information sheets on frequently asked questions. www.IFAmagazine.com

Ref: PS 11/09

Client Assets Sourcebook Consultation Paper

Ref: CP 11/15

29th July 2011 42 pages The document aims to seek views on the FSA’s proposals to amend the Client Assets Sourcebook (CASS). It covers two main topics: Custody liens policy is being revised in the light of the 2008 banking crisis. Proposals have already been consulted upon in CP10/9, and rules were subsequently published in PS10/16. But one of the proposals included in CP10/9 involved prohibiting firms from granting inappropriate general liens over their clients’ assets and client money derived from those assets. A transitional period is due to expire on 1st October 2011, and interim arrangements need to be tidied up.

Title transfer collateral arrangements (TTCA) are also being amended, in line with the Consultation Paper (CP10/15) issued in July 2010.

Consultation period ends on 28th October

Auctioning of Greenhouse Gas Emission Allowances Consultation Paper

Ref: CP 11/14

25th July 2011 68 pages This Policy Statement reports on the main issues arising from Consultation Paper 10/26 (Pension reform – Conduct of business changes) and publishes final rules The document proposes changes to the Handbook which complement the Treasury’s implementation of a new regulatory regime for platforms that will conduct auctions in emission allowances. The new regime is being put in place ahead of the start of EU procurement processes to select both a common EU auction platform and one or more national auction platforms.

Consultation period ends on 25th September

September 2011

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FS A P U B L I C AT I O N S

magazine... for today ’s discerning financial and investment professional

Proposed Guidance on Liquidity Swaps Guidance Consultation

Ref: PS 11/07

21st July 2011 23 pages Market conditions have prompted banks to seek to diversify sources of liquidity. In particular, the FSA says it has observed an increasing trend of banks seeking to access liquidity embedded within asset portfolios held by insurers by entering into various transactions which we collectively refer to as “liquidity swaps”. This guidance consultation has arisen as a response to these developments.

Key issues include: • Wrong-way risk - use of own-issued or ownoriginated securities as collateral • Limit structures – interdependencies between micro-prudential and macro-prudential risks • Intra-group transactions – conflicts of interest • Pillar 2 considerations and capital Consultation period ends 21st September

The Prudential Regime for Trading Activities Discussion Paper

Ref: FS 11/4

14th July 2011 40 pages Of interest to consumers and consumer representatives, and to all firms involved in retail financial services markets, where their customers are eligible to complain to the ombudsman service. Some applications to non-regulated firms and organisations.

This paper contains final policy, rules and guidance, and consults on a proposed change to the definition of ‘eligible complainant’ in response to feedback received to CP10/21.

It also contains guidance and rulings on remuneration to the ombudsman, and on tighter complaints handling procedures generally.

Consultation period closes on 31st August

FSA Reviews of Credit Risk Management by Central Counterparties Guidance Consultation

Ref: GC 11/16

11th July 2011 10 pages The purpose of this consultation paper is to seek views on the process and scope of review the FSA undertakes when assessing the adequacy of the counterparty credit risk management framework within a central counterparty.

Proposed Guidance on Financial Promotions - Prominence Guidance Consultation

Ref: GC 11/15

8th July 2011 8 pages Clarification for firms on the manner in which the features of financial promotions may be presented, so as to achieve an adequate balance of the features as perceived by the client. Interest rates, fees, charges, relevant risk statements and other key product information are all covered by this clarification.

Proposed Guidance on ‘Buy Out’ Awards to New Staff Guidance Consultation

Ref: GC 11/14

7th July 2011 2 pages Relevant to: • All FSA-authorised banks, building societies and CAD investment firms (this generally corresponds to firms subject to MiFID, although exempt CAD firms are not caught).

• Trade associations representing the above The proposed guidance clarifies the provision of the FSA’s Remuneration Code on the question of when firms may offer ‘buy out’ awards to new staff (i.e. awards to compensate a new hire for the outstanding deferred remuneration that he/she has forfeited by joining the firm).

Authorised Professional Firms and Legal Services Reform Consultation Paper

Ref: CP 11/13

1st July 2011 45 pages Of interest to IFAs, consumers and consumer rights groups From October 2011, the Legal Services Act 2007 establishes ‘alternative business structures’ in England and Wales which leave some uncertainty as to how the financial services activities of FSA-authorised alternative business structures will be regulated.

The proposed measure extends a modified form of regulation to these services, thus closing a potential gap.

Consultation period ended on 12th August

Consultation period closed 10th August

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magazine... for today ’s discerning financial and investment professional

Lee Werrell, Managing Director of CEI Compliance Ltd, gives his personal round-up of the key issues that are currently shaping the compliance agenda

See also the listings of FSA publications on Page 52 of this issue.

Unregulated Collective Investment Schemes What is a UCIS? Investors in the UK are familiar with being sold “Pooled Investments” or Collective Investment Schemes (CIS).

Regulated CIS are those that are authorised or are nonUK CIS that are FSA recognised. The FSA recognition enables overseas CIS to be marketed to the public in the UK and they will only recognise an overseas scheme if certain specified criteria are met. If the scheme fails these criteria for any reason they are not recognised as a CIS and it is therefore Unregulated CIS or UCIS. You can check whether the scheme is authorised or recognised by us using the CIS search facility on the online Register.

UCIS use is rising UCIS can be based outside the UK and dedicate money to a range of different enterprises, including less common investment products and activities like film production, forest plantations and foreign property.

These unregulated schemes cannot be promoted to the general public in the UK, but can be proposed to certain limited categories of investors.

Scheme promotions may be made under the rules of COBS 4 to a section of the public including: n

abolition of the ‘two-stage’ complaints certified high net worth investors;

n

sophisticated investors;

n

self-certified sophisticated investors; and

n

existing investors in UCIS.

The rules are clearly laid out in the specific sections of the FSMA (Promotion of Collective Investment Schemes (Exemptions) Order 2001 (SI 2001/1060) which is known as the PCIS Order, and prescribe the exact methods of promotion, certification or declarations required by the investors. COBS 4.12.1R provides the 8 categories of person, whom promotions for UCIS can be made, but be aware that it does not detail the requirements for an appropriate or suitable sale.

Even though the rules are clearly written the FSA

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have evidenced occurrences where ordinary members of the public are being sold UCIS, with some investors being advised to invest their self-invested personal pension (SIPP) into a UCIS. UCIS, by their nature, are risky products and because the FSA does not regulate them the investors may not have access to the Financial Ombudsman Service (FOS) or Financial Services Compensation Scheme (FSCS) if things go wrong.

The FSA has three main concerns about the advice process and have shown that firms do not adequately consider whether their customers’ are eligible for the promotion of UCIS and often with failing that element compound their poor practices by inadequate quality of advice or suitability which can only be a symptom of poor risk management and oversight by the firm. So these three items impact on breaches of Principles 2, 3, 6, 7 & 9. Any permutation of these breaches is cited in the majority of final notices issued in 2011, accompanying fines and bans from working in the industry.

So what is required?

Some examples of good practice are likely to include where a firm; n

Has a clear and documented sales process.

n

Has a good understanding of what constitutes ‘promoting’ and is aware that it does not solely mean communicating through a written financial promotion, (e.g. marketing literature, email or letter) but also includes verbal communication, (e.g. face-to-face discussion, providing advice, etc.)

n

Uses the exemptions under COBS 4.12 for specific persons for whom the firm has taken reasonable steps to ensure that investing in the collective investment scheme is suitable. They adequately assess their customer’s personal and financial circumstances as well as their knowledge and understanding to ensure the customer is eligible for promoting UCIS.

n

Keeps a record of exemptions which they were relying on when promoting a UCIS, and the

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n

n

n

Use the exemptions under article 21 of the PCIS order for high net worth individuals and retain a copy of statement of a high net worth individual, in a prescribed text and format and dated before promoting UCIS began.

Obtains and retains full KYC, including the customer’s assets, other investments and their underlying assets; their objectives and needs for immediate income, their knowledge and experience in the investment field relevant to the specific type of investments or service; and attitude to risk (ATR) specifically covering capacity and tolerance. The firm uses this to establish the customer’s eligibility for the promotion of UCIS. Issues a written confirmation and highlights all the risks, costs and charges pertinent to their recommended product and its underlying UCIS and clearly explained why UCIS is suitable for the customer. They also explain that UCIS are not regulated, that the customer will not have cancellation rights, and may not be covered by the FOS should they have a complaint about the fund or the FSCS should they need to seek compensation.

More information concerning UCIS can be found at: http://www.fsa.gov.uk/pages/consumerinformation/ product_news/saving_investments/ucis/index.shtml

PS11/09: Platforms The PS covers the following issues:n Defining a platform and distributing products through a platform, which covers the definition of platform service and what the FSA expects of advisers when using a platform. n

Payments to platforms and consumers, on how platforms are paid and the Adviser Charging-related issue of rebating product charges to consumers.

n

Re-registration and capital adequacy, on reregistration of a client’s investments by a platform or other nominee company to another platform or Nominee Company, and the capital adequacy requirements for firms providing platform services.

n

Investing in authorised funds through platforms and other types of Nominee Company, on requirements to ensure that relevant fund information is passed to the end investor.

Key rules, designed to provide better service for consumers, will require: n

n

platforms and other nominee companies to transfer, within a reasonable time and in an efficient manner, assets held on behalf of customers to another person, when requested; and platforms and other nominees to pass on fund information to the end investor.

To enable greater transparency and efficiency in the market, the rules:-

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n

require investment adviser firms using a platform service for the purposes of making a personal recommendation, or arranging the purchase of retail investment products for retail clients, to take reasonable steps to ensure that they use platforms services that present their retail investment products without bias;

n

require platforms to disclose to professional and retail clients any fees or commission they arrange to accept from third parties in relation to retail investment products.

These should be disclosed in advance of the platform providing services to those clients;

n

extend the application of the RDR rules on facilitating payment of adviser charges to facilitation through platforms - for instance, if a platform has client cash accounts, it could enable payments of adviser charges out of such accounts; and

n

require nominees to respond to information requests by authorised fund managers for liquidity purposes.

C O M P L I A N C E D O C TO R

reasons why they apply. They provide their customers with written explanations as to why their personal recommendation was suitable.

On the question of payments by providers to platforms, the FSA said in the earlier consultation paper that its preferred option was to address any conflicts of interest arising from these payments by enhanced disclosure, but not to ban the payments.

On the issue of cash rebates to clients, the FSA consulted on draft rules that would have banned these payments with effect from when the RDR rules come into force. The FSA said in its consultation that the arguments on these issues were both complex and finely balanced; this was confirmed by the wide range of comments received. The FSA decided that it would be desirable, in principle, to ban payments by product providers to platforms and to ban cash rebates to consumers. However, the FSA also accepts that this could have unintended consequences. So, although this is its ultimate intention, the regulator has not yet made rules to introduce a ban of either kind of payment. It plans to carry out further work on this. It will give further details of the work as soon as possible.

Impact: Most IFAs use platforms but the new rules also introduce a warning concerning platform use in Annex 3 of the PS. The FSA do not expect a firm to use a single platform for all their clients.

This due to the Independence rule (where an IFA “intends to provide personal recommendations on packaged products from the whole market “) and that at present, platforms generally have access to a very wide (or even whole of market) range of CIS funds but usually a much more limited range of other packaged products such as investment bonds, personal pensions and SIPPs. Hence, in practice, the whole of market rule can be harder to meet in relation to these products when using platforms.

Details can be found at: http://www.fsa.gov.uk/pubs/policy/ps11_09.pdf Remember: If you have any concerns regarding these issues, please contact your compliance department or an independent consultant who is a member of the Association of Professional Compliance Consultants (APCC), recognised as a trade body by the FSA.

September 2011

57

The new land of opportunity is the land of opportunity.

It’s no wonder that in today’s uncertain financial environment, many investors are looking towards the US once more as a land of opportunity.

Since its launch, in November 2008, the UBS US Growth Fund has continually outperformed its sector, being consistently ranked top quartile1.

Fund performance % 3 months 3.9 1 year 9.3 2 years 48.1 Since launch² 61.2

Sector average % 1.9 4.1 40.6 45.8

Quartile

1 1 1 1

How have we delivered such impressive performance?

Through a combination of strategy and expertise.

Using their established research process, our experienced team identifies companies that are attractively priced and have strong growth potential but which possess different characteristics.

The portfolio manager then looks to diversify risk, whilst creating a portfolio focused on delivering performance.

To find out more about this opportunity to invest in the land of opportunity, please call us on 0800 587 2111 or visit www.ubs.com/usgrowthfund

We will not rest

This document is for Professional Clients only. It is not to be distributed to or relied upon by Retail Clients under any circumstances. 1 Source: Lipper. Performance is based on NAV prices with income reinvested net of basic rate tax and in Sterling terms to 30 April 2011. Sector is IMA North America. 2 Fund launched 10 November 2008. Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and are not guaranteed. Investors may not get back the amount originally invested. Changes in rates of exchange may cause the value of this investment to fluctuate. The Fund is managed in a concentrated manner with the aim to optimise long-term capital appreciation. Issued in May 2011 by UBS Global Asset Management (UK) Ltd, a subsidiary of UBS AG, 21 Lombard Street, London EC3V 9AH. Authorised and regulated by the Financial Services Authority. Telephone calls may be recorded. © UBS 2011. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

THINKERS

HERO OR VILLAIN?

FEAR NOT, YOU CAN NOW BLUFF IT WITH THE BEST OF THEM, THANKS TO IFA MAGAZINE’S MONTHLY CRIB-SHEET ON ALL THE GREAT THEORISTS.

“I’m only rich because I know when I’m wrong... I basically have survived by recognising my mistakes..”

George Soros Born 1930 in Budapest, Hungary, and still going strong A close call with the death camps Born into a Jewish family, Soros was 13 years old when the Nazis invaded Hungary, and he might not have escaped death but for the protection of a junior government officer who took him in. In 1947 he emigrated to Britain, where he studied philosophy at the London School of Economics under Karl Popper. But he soon found more satisfaction in the world of banking, and in 1956 he emigrated to New York, where he worked as an arbitrage trader and later as an analyst.

Early career It was only in 1969, aged 39, that Soros was given his first hedge fund to manage. But the following year he left to found his own Soros Fund Management - later known as the Quantum Fund. In 2000 the wildly successful Quantum group was remodelled to create the Quantum Endowment Fund - thus permitting the development of numerous charitable and philanthropic works on the back of Quantum’s enormous profits. (It is thought to have returned 32% in 2007 alone.)

The big idea Soros’s great perception has always been that an investor should back his convictions right to the absolute hilt with capital - but that he should still remain permanently open to the idea that he might have got it wrong, and be prepared to withdraw abruptly.

As a hedge fund manager, Soros pioneered the technique of juggling asset classes to the maximum – arousing fear and dread among those who regarded him as an unprincipled pirate.

Reflexivity is the concept at the heart of Soros’s theoretical writings. There are periods, he says, when the markets are influenced so strongly by what groups of investors think that the character of the market actually changes in order to accommodate their biases - and a spiral of selffulfilling prophecy can then result. If enough people think housing prices will go up, the banks will increase the volume of money available for

www.IFAmagazine.com

mortgage lending, and the ensuing rise in house prices can practically be guaranteed – thereby sucking in new investors and yet more new lending.

Until, that is, the process crashes into reverse….

Reflexivity is usually a destabilising force.

The ‘evil’ profiteer By 1990, Soros had become the living epitome of reflexivity, because so many people were watching him that he had acquired the ability to sway entire markets with his every action. This gave him enormous power, for better or worse. British investors remember him mostly for the occasion in 1992 when he made a quick $1.1 billion by short-selling $10 billion of sterling as it crashed out of the European Exchange Rate Mechanism. East Asian states later accused him instead of precipitating the financial crisis of 1997 by shorting the Thai baht and the Malaysian ringgit – thus starting an outward stampede of international investment which lopped the region’s dollar GDP by 32% in 1998 alone.

The philanthropist Soros’s difficult reputation was eventually rehabilitated in most of ASEAN, but by then he was already working on his various philanthropic projects, to which he is so far believed to have given more than $8 billion . Ever since the late 1970s Soros had been supporting help for southern Africa (then under South African apartheid), and most notably the political undermining of the Iron Curtain cultures prior to their downfall. Work for these regions is still critical to him. But since 2002 he has also campaigned for the legalisation of some soft drugs in the US, and for voluntary euthanasia.

He is also an enthusiastic donor to the Democrat Party, and he campaigns for Roma gypsies.

Postscript In July 2011, Soros announced that he was closing his Quantum Fund to outside investors. But will that stop Soros-watchers from shadowing his portfolio? You bet it won’t.

July 2011

59

magazine... for today ’s discerning financial and investment professional

Visit our website at

www.bwd-search.co.uk Senior Financial Planner - Investment Management Firm, London

Senior Financial Planner / Manager - Wealth Management firm, London

Basic salary up to £75,000 plus benefits and bonuses

Basic to £200,000 plus benefits and bonuses

An excellent opportunity has arisen for an experienced Financial Planner within a leading Investment Management firm in London. They specialize in providing Investment Management and Financial Planning services to HNW clients and are looking to expand their London team with a high quality adviser. There is no requirement for this individual to draft across any existing clients of their own and there are generous packages and bonuses on offer. The ideal candidate will be at least working towards Chartered status and have experience in providing high caliber financial planning solutions to HNW clients.

Our client is a top-end investment management and wealth management firm with an impeccable reputation within the HNW & UHNW market. They are currently seeking a senior level Financial Planner and man-manager to assume responsibility for their financial planning team. Working closely with the Head of Financial Planning this individual will operate in a player-manager capacity, leading and developing an existing, team of very high quality Financial Planners whilst maintaining a client facing focus themselves, writing high levels of business and bringing in significant levels of new funds.

Please contact Danielle at: danielle@bwd-search.co.uk or on 01727 884 662

Please contact James at: james.woods@bwd-search.co.uk or on 01727 884 662

Pensions Specialist - Midlands

Financial Planning Area Manager (IFA)

£45,000 basic plus £85,000 OTE plus car and managerial benefits package

Up to £60,000 including bonus and full benefits

An opportunity has arisen with a leading life and pensions provider to join the company as a Pensions Specialist within the Midlands region. You would be responsible for the region's pensions' target, mentoring / training the team of field based Sales Consultants and developing new business relationships with a hand full of business accounts. Interested candidates must be diploma qualified, have pensions experience within the broker sales arena and have sales experience.

A hybrid advisory and management role; you will supervise a team of HNW Private Client focused IFA's with the majority of time and duties focused on advising rather than management. You will be responsible for driving business forward, attending joint client meetings with IFA’s, leading the team by example generally; coaching IFA’s with training and development duties included.

Applications are invited from experienced financial planning professionals qualified with Level 4 Dip PFS. You must have experience of managing a successful team of financial planners, be adept at generating new business through professional introducers and a track record of success.

Please contact Gareth at: gareth@bwd-search.co.uk or on 0113 274 3000

Please contact Neil at: neil@bwd-search.co.uk or on 0113 274 3000

Financial Planner - Manchester

Financial Planner - Accountancy Practice - North East

Basics to £50,000 plus benefits and bonuses

Basic to £55,000 plus benefits and bonuses

Our client is looking for an experienced Financial Planner to provide independent advice to both HNW/ UHNW individuals. The role will see you maintaining and developing relationships with existing clients as well as developing external professional relationships with a view to generating new business. This is a fantastic opportunity to work for an RDR compliant business, working in a non-aggressive environment and being given the support and time needed to develop a profitable book of business. Diploma qualified is a pre-requisite along with evidence of progress towards Chartered status.

We are currently seeking a experienced and successful Independent Financial Advisor to work within the North East region of this leading national firm of accountants. The role requires extensive experience of giving tax focused independent financial advice to HNW individuals coupled with the ability to build strong relationships with the accountancy partners.

This excellent opportunity with offer the successful applicant the opportunity to truly fulfil their potential given the amount of client opportunity available. The Diploma qualification is a pre-requisite for this role.

Please contact James at: james.rhodes@bwd-search.co.uk or on 0113 274 3000

Please contact Gary at: gary@bwd-search.co.uk or on 0113 274 3000

Unit 3, Woodside Mews, Clayton Wood Close Leeds, LS16 6QE Telephone: 0113 274 3000 Fax: 0113 274 3031

Suite 4, Ground Floor, Breakspear Park, Hemel Hempstead, HP2 4TZ Telephone: 01727 884 662 Fax: 0113 274 3031

the financial services e-learning specialists

Get your skills up to date the easy way

Wanted: Quality financial advisers ....Only those with Level 4 Qualifications need apply More and more large groups are demanding that candidates have already achieved at least Level 4 qualification. In fact, many haven’t even picked up a book yet. Without large numbers of qualified advisers the FS sector has a difficult future to say the least.

The BWD Group, an established search & selection firm, have taken action to help with the launch of a new service - BWD development.

• Advisers and others taking the Level 4 exams can now access e-learning programmes and on-line mock exams.

• This allows candidates to learn at their own pace - at a time and place to suit them • They can take on-line assessments along the way and take up to five mock exams to make sure they are on track to pass the live examination

If you like the sound of this, go to www.bwd-development.com where you can see a full demonstration of the service or call BWD development on 0845 850 9995 T 0845 850 9995 F 0113 274 3031 E info@bwd-development.com

60

September 2011

www.IFAmagazine.com

Business owner / entrepreneur THE COMPANY

A change in direction can be daunting especially when that change means a step into the self employed but taking hold of your financial future and becoming a leader of your own destiny need not be such a complicated transition when you have the support of the right network.

Keillar Resourcing is working in conjunction with one of the UKÕ s leading IFA networks.

With UK wide coverage and a brand name thatÕ s synonymous

with excellence you can be assured of the right levels of support along the way.

Commission rates are high and you can decided on the right levels of support from a variety of choices and only pay for the support you decide to utilise and that means you donÕ t pay more than you have to. This RDR ready network can support you with everything from office to admin and might even supply the odd lead or two!

ABOUT YOU

Maybe this is the right time to take hold of your own financial future? If you think it could be, then get in touch and we will tell you how this network could be just the ticket!

THE PACKAGE

With excellent commission rates up to 90% the eventual level is entirely up to you.

LOCATION

Genuinely national so wherever you want it to be.

To learn more about this exciting opportunity contact Paul Mullarkey on 0131 557 9668 or 07875 341758 for the inside scoop or email him on paul@keillar.com

www.keillar.com

keillar Resourcing operates as a recruitment agency T10268 Tenet Recruitment Ad 24/05/11_T10145 Tenet Recruitment ad 24-08-10 24/05/2011 09:28 Page 1

I want to be part of a

winning team

The Tenet Group are the largest independently owned adviser group supporting over 5,500 advisers nationwide.

We’re looking for Independent Financial Advisers to join our winning team.

IFA’s Scotland – Negotiable remuneration deals available.

Employed IFA Positions x 4. Midlands, North West, Middlesex, South Yorkshire.

IFA – Midlands. Renowned Business with excellent support/lead gen sources.

Employed IFA – Hove Brighton.

CAS or Trainee

We are an established IFA firm with offices in Edinburgh, Aberdeen and Dundee. Due to our unique lead generation model we are looking for advisers to cover all areas of Scotland to service introduced business along with self generated referrals. Along with leads we are able to offer Paraplanner support, admin support, office space if required, back office systems and mentoring support. You must be CAS and working towards diploma.

We are a well renowned IFA business based in Leicestershire and have been serving the needs of our clients since 1982. Our business benefits from working closely with 3 substantial solicitor firms along with a number of accountancy practices acting as introducers. A further lead generation source are the seminars we run regularly to new introducers, affinity groups and IHT clients. Having recently established ourselves with the UK’s leading independent network we are now looking for additional advisers to join our business on a self employed basis.

All firms are supported by a leading financial support provider, leads are provided from existing client banks, in-house accountants, retirement seminars to professional groups and estate agent introducers. All salaries are negotiable, car or car allowance, DIS and medical care benefits provided. Office or home based with full office support provided for all positions. You must be CAS and diploma (or working towards)

We are looking for a customer focused individual to join our established IFA firm. You may be newly qualified or have been working in a tied or multi tied environment and want to make take the step into the IFA arena. You will be given access to 1500 clients, receive support from in house administration, paraplanner, compliance and sales support. Diploma study program is also available.

We are also looking for advisers on a self employed basis who are looking to alleviate the business burden of trading on their own. Commission splits are fully negotiable.

Please contact Mark Ford on 0113 239 5312 to discuss any of these positions or email your cv to mark.ford@tenetgroup.co.uk

www.IFAmagazine.com

September 2011

61

magazine... for today ’s discerning financial and investment professional

You are in demand iFa: accountancy Practice: directorship Prospects n.Yorkshire £competitive basic + bonus + package

iFa: Professional Practice: managerial Prospects manchester c.£45-60,000 basic + bonus + package

Join the financial planning division of this established accountancy practice. This is an excellent long-term career move offering a future directorship. You will be responsible for continuing to service and develop an existing client base whilst driving forward the financial planning business. Experience of working as an IFA within a professional practice environment (i.e. solicitors or accountants) is beneficial. You will have excellent client relationship and business development skills together with a highly professional and ethical approach. Good quality clients are provided, therefore own client bank is not required. ref: 1368370 linda.leon@hays.com or 0161 929 7039.

This is a first-class career opportunity to work within a professional practice providing holistic and truly independent advice to a well established client bank.

Ability to identify your clients’ requirements and provide bespoke advice to achieve financial goals will be recognised and rewarded. Own client bank is not a requirement as you will have good quality clients to work with. Your clients will typically include business owners, company directors and higher net worth individuals establishing their personal financial planning requirements to ensure a quality independent advisory service is provided. Managerial opportunity available if desired. ref: 1432036 linda.leon@hays.com or 0161 929 7039.

hays.co.uk/financialservices FS-03476-1_IFA_Pg_June.indd 1

Senior Financial Planner Location: Devon

Salary: £35,000 Ð £60,000

Our client is one of the South West's most foremost Financial Planning Firms, delivering creative solutions across comprehensive and bespoke financial planning, investment portfolio management, tax and estate planning. They are seeking an experienced Diploma Qualified Senior Financial Planner with a proven record of success in the field and previous management skills. This role will require some travel to Bristol for training purposes, and will involve liaising with the current incumbent with a view to running the practice upon their retirement.

Skills Minimum 5 years experience in similar role Diploma in Financial Planning (Dip PFS) Competent Adviser Status (CF30) Experience of holistic financial planning, and dealing with HNW clients Ability to manage a small team and delegate tasks accordingly Excellent communication skills, both written and verbal Strong IT skills, knowledge of 1st Software would be an advantage Benefits Competitive salary, depending on experience and qualifications, 23 days holiday, Group Life Assurance scheme (4 times salary), Private Medical Insurance for employees, their spouses/partners and any dependent children, Permanent Health Insurance scheme, Employer's Pension Contribution (7% of basic salary), Free on-site parking

62

September 2011

02/06/2011 09:07

Heat Financial Services provides a highly tailored service to the UK Financial Services industry assisting Clients across the Banking, Life & Pensions, Mortgage, Investment and Stockbroking Markets, consistently assisting Clients to adapt and respond to the relevant regulatory and industryÊ challengesÊ inÊ partnershipÊ withÊ HeatÊ TrainingÕ sÊ FinancialÊ ServicesÊ Trainers.

Heat Financial Services Specialist Consultants are consistently updating their industry knowledge to allow them to provide high level assistance to Clients in both niche areas of the industry and the general Financial Services Market, whilst working closely with Clients on each individual requirement to ensure they fully understand the organisation and the position(s) they are looking to fill.

Heat Financial Services Specialist Consultants will only present relevant candidates, with the experience and knowledge that matches the Client requirements.

A quality approach to business makes Heat Financial Services a key partner in the recruitment process, coupled with Specialist Financial Services Training via Heat Training. The proposition for Clients and Candidates alike is a one-stop shop for all Financial Services Industry Recruitment and Training needs.

ContactÊ oneÊ ofÊ HeatÊ RecruitmentÕ sÊ SpecialistÊ ConsultantsÊ toÊ discussÊ anyÊ ofÊ theÊ above:Ê Ê fs@heatrecruitment.co.ukÊ Ê orÊ Tel:Ê 0845Ê 375Ê 1747Ê Ê Ê

www.IFAmagazine.com

Professional Recruitment is a specialist consultancy providing comprehensive recruitment solutions within the Financial Services sector from offices in the South West of England and South Wales.

Current Vacancies Senior Financial Planner

Paraplanner

Senior Consultant

IFA

Bristol. Employed salary up to £45k plus excellent benefits & bonus

Bristol. Employed salary up to £35k

Reading. Employed salary circa £60k+ benefits

Bristol. Employed salary £40-£60k plus bonus – realistic OTE £Six figures

RDR ready firm seek Diploma or Chartered level Financial Planner to service existing Devon client base.

Strong emphasis on quality service and holistic planning in a fee based environment.

IFA division of a respected South West of England Accountancy practice seek a technically astute paraplanner. Must be minimum Diploma status with ability and ambition to become an Adviser – support provided.

Accountancy firm with offices in South and South West of England seek Senior Consultant with client portfolio. Suit well qualified (min Diploma) experienced professional accustomed to complex/corporate planning in a highly polished environment.

Long established but contemporary IFA firm seek seasoned Adviser with trail. Business development support and internal resources will enable considerable fee income. Minimum Diploma qualification. Suit an individual with drive & hunger for success.

For more information please call 0117 344 5115, apply directly on careers@professionalrecruitment.co.uk or visit our website www.professionalrecruitment.co.uk

I FA C A L E N D A R

a g

e n zi

a Dates for your diary m SEPT ‘11- FEB ‘12

SEPTEMBER -

IBC’s investigation into the UK banking structure due for publication.

-

Martin Wheatley becomes chief executive designate of the Consumer Protection & Markets Agency.

NOVEMBER Child ISAs introduced. Maximum annual investment has been increased from £3,000 to £3,600.

10

Ladbrokes St Leger Race, Doncaster. Unofficial end of the summer slack period.

1

21

Consultation closes on FSA Consultation Paper CP 11/12 (Financial Crime: a Guide for Firms).

3 4 in Cannes, France.

21 25

29

Consultation closes on FSA Guidance Consultation GC 11/18 (Proposed Guidance on Liquidity Swaps).

Consultation closes on FSA Consultation Paper CP 11/14 (Auctioning of Greenhouse Gas Emission Allowances).

End of transitional period for auditors with regard to declaring Client Assets (Policy Statement PS 11/05).

OCTOBER 1

New provisions and guidance come into effect from FSA Policy Statement PS 11/08 (Pension Reform - Conduct of Business Changes).

1

Revised start date for FSA Policy Statement PS 11/06 (The Client Money and Asset Return).

6

Money Management Financial Planning Awards.

World Economic Forum Summit on the 1011 Global Agenda, Davos, Switzerland.

World Economic Forum Summit on the

2123 Middle East and North Africa, Jordan.

27

25th anniversary of the ‘Big Bang’ deregulation in London.

31

Deadline for self-assessment tax returns 2010/2011 (paper only).

www.IFAmagazine.com

G20 Summit

8

AIFA annual dinner, London.

17

FT Advisor Service Awards.

Financial Planning Week (Institute

2026 of Financial Planning/NS&I).

Planning/NS&I)

DECEMBER 31

FSA restructuring process (CPMA, PRA etc) scheduled for implementation.

31

Basel III Capital Framework - All major G-20 financial centres scheduled to have committed to the regime.

2012 JANUARY World Economic Forum Annual

2529 Meeting, Davos, Switzerland.

31

Deadline for self-assessment tax returns 2010/2011 (online only).

FEBRUARY 15

(to be confirmed) Unbiased.co.uk annual ‘Media IFA of the Year’ awards ceremony.

Have we forgotten anything? Let us know about any forthcoming events you think ought to be in our listings.

(Sorry, press and official events only.) Email us at: editor@ifamagazine.com, and we’ll do the rest.

September 2011

65

A N D F I N A L L Y. . .

magazine... for today ’s discerning financial and investment professional

SWEET FSA FREDERICK SMYTHE-ALLINSON BUCKLES HIS SWASH AND GETS ALL MISTY-EYED OVER THE BARBAROUS RELIC. A Salty Tale It was Mark Twain who first declared that a mine was a hole in the ground with a liar standing at the top. And sadly, some things just don’t seem to have improved much since those days. This year’s rather reckless splurge of bullion investments has brought back heady memories, for many, about the swashbuckling early eighties when gold hit today’s equivalent of $2,500 an ounce. But, for Allinson it’s also brought back some vivid warnings about just how very physical this mining business can be.

The first of this month’s memento moris dates from October 1995, when a Canadian penny share company called Bre-X went stratospheric after announcing that independent tests on its Busang mining concession in Indonesia had indicated gold deposits of up to 70 million ounces. Seven months later its shares peaked at C$ 286, giving it a market cap of US$ 6 billion in today’s money. And no less a company than Placer Dome was trying to buy it.

It was inevitable, with hindsight, that the downhill trajectory should have started straight away. Chemical studies by the mine operator quickly showed that Bre-X’s samples had been (ahem) ‘salted’ by somebody with a bag of gold dust - some of which had apparently been made from ground-up jewellery. (9 carat, perhaps?) At which point the chief geologist accidentally fell out of a helicopter into a jungle, leaving a corpse that was conveniently identifiable only by a few teeth and a stray thumbprint. Hmmm….

The Toronto Stock Exchange went into shock, and the fraud and insider trading prosecutions duly started. The Bre-X scandal prompted a belated tightening of Canada’s mining company supervision, but for many pension funds it was already too late. Aaaah, they don’t make frauds like that any more. Thank goodness.

Bunkered You’d have to go back even further than that to find the time when the silver price last hit $50 per ounce – the level it (almost) re-attained earlier this year. All the way

66

September 2011

back to 1980, in fact. Allinson’s father still goes wobbly at the recollection of how Nelson Bunker Hunt and his brothers had the temerity to try and corner the world’s silver supplies – and how the world’s richest man experienced terrifying success followed closely by crushing failure, prosecution and bankruptcy.

They say the easiest way to make a small fortune is to start out with a big fortune and take it from there. And the Hunts certainly had the beginnings right. The son of legendary Texan oilman H.L. Hunt, Nelson Bunker Hunt had already made a quick ten billion out of Libya’s luxuriant oilfields by the time he was 40. At which point an ungrateful Moammar Gaddafy had seized the lot and left him with just the stub end of a fortune originally estimated at $16 billion.

Undeterred, Hunt and his brothers started buying silver at a mere $1.50 per ounce, in such vast quantities that they eventually had $4.5 billion worth of metal sitting in their vault.

Which was quite a large proportion of the world’s liquid stocks, really, and enough to push the spot price to $50 – mostly because the markets were caught like rabbits in the headlights.

The Hunts were frightening everybody.

But why did they do it? You might well ask.

Bunker Hunt still says he sincerely believed that fiat currencies were about to crash, and that he needed to be in solid assets. But the prosecutors who eventually charged him with criminal marketrigging were less generous. And the Bunker Hunt scheme for world domination was foiled overnight by a rule that simply imposed limits on the amount that any trader could buy in a day.

And that was what burst the bubble.

Within weeks, silver had dropped nearly 80% to just $11 as Bunker Hunt found he couldn’t meet his margin calls. In 1988 the brothers were convicted of conspiracy, and bankruptcy soon followed. So thank goodness for Hunt Snr’s $200 million legacy, which had thoughtfully been placed in trust and therefore out of reach of the courts. Nice one, pop. www.IFAmagazine.com

MAR

Very good in its make up and content. Sets itself aside from other publications in the marketplace.

Excellent. Thank you. Really refreshing. High quality e production i nwith some good thought provoking articles z and useful information. Good useful content. Up-toa g useable, very good and easily read. Very dateainfo good m articles, relevant to my work. Very interesting, extremely useful. Very impressive read and lots of OOK nice to see it in “magazine” style format usefulLarticles rather than usual newspaper. A comprehensive read. Very good layout and informative. Good content, appealing to the female reader as many publications are very male driven and focused.

Squality ANTS magazine for IFA Thank you. AAN IFA’s. ’s. Good paper D SINNERS with good content which is plain talking. Good layout and easy to read. Not seen anything like this for IFA market. Really crisisgood. Worth reading. Interesting content. Very professional and upmarket, exactly A USthe ifa community. Absolutely what is needed in fantastic. Not cluttered by endless comparison tables. Punchy contemporary style.. More of the ur ed same in the monthsstthto please. A very readable ru ctcome in ki ng publication. It looks like an interesting and enjoyable read that I would be happy to have delivered to the office - not something I could say about magazine manyThe financial publications! Great - look forward to subsequent editions. Brilliant!IN AVery impressive FTER the top IFA’s YSIS B R I TAR I O T S N A L like and all interesting publication.

Looked and felt A T N THE MME O C a proper magazine rather than other cheaper IEW REV S are talking about...

W NE looking publications. Breath of fresh air and topical get your free subscriptionI’m going get it instead of the in biteTosimply size chunks. fill out the form online at: professional adviser papers and financial adviser www.ifamagazine.com/ content/subscribe papers. Enjoyed the read. Keep up the good work!

2 0 11

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THE FSA HAS FINA LLY HAD ITS PRAY ERS ANSW ERED OVER PPI MIS-S ELLIN G

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N E W S R E V I E W C O M M E N T A N A LY S I S

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