IFA Magazine May 2013

RELEASE SCHEMES

ARCH CRU For today’s discerning financial and investment professional

M A Y 2 0 13 ■ I S S U E 2 1

EQUITY

FRONTIER MARKETS

STARTING OUT IN

SOCIAL MEDIA

GOLD FEVER WHAT WENT WRONG?

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This communication is for financial advisers only. Investec Structured Products is a trading name of Investec Bank plc, registered address 2 Gresham Street, London EC2V 7QP. Investec Bank plc is authorised and regulated by the Financial Services Authority.

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Nick Sudbury is a financial journalist and investor who has also worked as a fund manager.

Kam Patel a former deputy editor at Hemscott. He is a qualified investment adviser.

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

Brian Tora a Communications Associate with investment managers JM Finn & Co. Richard Harvey a distinguished independent PR and media consultant.

Gillian Cardy managing director of The IFA Centre.

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See Cover Story opposite

Not So Passive After All

Steve Bee questions another of the industry’s assumptions

Frontiers are risky but the rewards are greatt, says Nick Sudbury

Lee Werrell of CEI Compliance takes a closer look at the FCA

05.13

THE FRONTLINE: All that glisters has turned out to be a big disappointment this year

Our monthly listing of recent publications and the IFA Calendar

Avast there, Gill Cardy buckles her swash and prepares to board the mother of parliaments

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FCA Publications

The IFA Centre

Editorial advisory board: Richard Butler, Michael Holder, Ian McIver and Mark Pullinger

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Pick of the Funds

Compliance Doctor

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Trackers are all very well, says Brian Tora, but isn’t it time to inject a little va-va-voom?

A Migratory Species

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News

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

Editor’s Soapbox

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8

60

Recruitment

You think you know yourself? Maybe an expert can give you a more critical insight

Thinkers: Adam Smith Yes, it’s the man with the invisible hand. The man on the £20 note

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The Other Side

Editor: Michael Wilson

editor@ifamagazine.com

Art Director: Tony Merlini

tony.merlini@thewowfactory.co.uk

Publishing Director: Alex Sullivan

alex.sullivan@ifamagazine.com

Ee, things were tough when Richard Harvey were a lad. 27% inflation, and mortgages on cardboard boxes were like hens’ teeth...

IFA Magazine is published by The Wow Factory Publications Ltd., 45 High Street, Charing, Kent TN27 0HU. Tel: +44 (0) 1233 713852. ©2013. 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

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

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CONTENTS

features 17

COVER STORY

Golden Opportunity Goes West What’s driving this year’s bullion rout, asks Michael Wilson? There’s no point in asking the experts

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INSIDE TRACK

Why RDR Costs Clients

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Yes, RDR was a good thing for clients, yadda yadda. But Simon Webster of Facts & Figures Financial Planners wants to know why costs are hurting them so badly?

GUEST INSIGHT

Structured Argument Structured products are tragically misunderstood, says Gary Dale of Investec Structured Products.

Here’s how they really work

34

Social Media

And why you can’t afford to ignore it any more. Panacea Adviser’s Derek Bradley explains

Separating the bull from the bullion bugs can be trickier than it looks.

It’s all a global conspiracy, you see. They’ve got it in for us, the evil swines...

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Equity Release

The bad boy of the 1990s is gaining traction again, says Kam Patel. But relax, today’s schemes are squeaky clean

GUEST INSIGHT

44

Global Bonds

Wells Fargo’s Chris Wightman explains how a global approach can deliver benchmark-beating performance

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.

IFA Magazine is for professional advisers only. Full subscription details and eligibility criteria are available at: www.ifamagazine.com

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WORDS OF WILSON

SELL IN MAY? ARE YOU CRAZY? WHY ON EARTH WOULD ANYBODY WANT TO DO THAT, IN THIS OF ALL YEARS? AREN’T WE SEEING THE BIGGEST AND BEST REBOUND OF THE LAST HALF DECADE? Isn’t the US market showing solid growth? And aren’t Europe’s financial markets proving what a lot of bunk all this anxiety about austerity is?

Now, let me say that I agree with most of those sentiments.

And I really wish I could give the nod to all of them. I think the momentum of the last five months has been stupendous – and what’s more, it shows once again that there’s a wall of money still on the sidelines, and still desperate to get back into equities.

But you’ve already guessed that there’s a ‘however’ coming, and here it is. The US Federal Reserve has been fretting publicly that the rise in US markets isn’t happening because investors love American stocks. According to Ben Bernanke, it’s because bond yields in the rest of the world are getting so pitifully low that foreigners are now pouring money into anything American that offers them a real return – and if that means junk bonds, then so be it.

That’s potentially volatile foreign money that we’re talking about, and the impact of any sudden withdrawal from Wall Street could be harder than expected. We’d all feel more comfortable if we genuinely believed that the foreigners genuinely wanted to be in those companies. And as it is, we’ve got a 4% surge in the dollar since Christmas and a lot of worried US exporters.

In Europe, too, the question on analysts’ lips is not how much longer the recent equity boom can go on, but why it’s been so strong against such a lousy economic backdrop. The Eurozone will struggle to make 0.3% growth this year, and the banks are looking short of capital, and France looks like blowing up into the next big crisis. And Italy’s government won’t outlast the autumn. And so forth.

What do I think? I think share prices on both sides of the Atlantic are reasonable.

US stocks are trading on a forward cyclically adjusted p/e of about 14, which makes them historically cheap. The ECB’s 0.25% cut in the base rate will encourage business and support bond prices for a while yet.

All we need, in fact, is for the politicians not to mess it up, like they did last year. We have nothing to fear but fear itself.

M ik e

Michael Wilson, Editor IFA magazine

www.IFAmagazine.com

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Write to Michael at editor@ifamagazine.com

May 2013

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shorts

magazine

The new state pension

scheme will start in April 2016, the Government confirmed. Also confirmed was that 35 qualifying years will be needed to access the full state pension.

Employers running contracted-out schemes will have a five year window in which to pass on the costs of falling national insurance contributions through future member accruals or contributions.

LOOSENING THE BELT Just as we were getting over the news that the International Monetary Fund had queried the wisdom of Britain’s painfully ambitious fiscal correction plan, we got the second successive downgrade of our national creditworthiness - this time from Fitch, who agreed with Moody’s February assessment that we were going too far with the belt-tightening.

Then there was that little awkward report from the Organisation for Economic Co-operation and Development, which downgraded our national growth projection for 2013 on the grounds that our recovery was being choked off by a lack of consumer appetite. (To his credit, Chancellor George Osborne had fought back against this with a renewed attempt to get banks lending again. And the home-buyers’ funding announced in the Budget had also cheered up the construction industry – so often one of the mainsprings of growth in past decades.)

Let Them Eat Cake

But this time, the arguments for a gentler sort of austerity came from abroad. In France, the struggling government of François Hollande got a sort of nod

Whoops, it was yet another ghastly month for austerity.

from Germany for its request to be given an extra year to bring its budget deficit into the 3% target zone.

Indeed, it got two extra years from the European Commission. Thus prompting Finance minister Pierre Moscovici to claim, perhaps a little prematurely, that it was okay to proclaim the end of the country’s misguided experiment with austerity.

“Austerity is finished,” the minister declared.

“This is one of the most decisive turns in the history of the EU project since the start of the euro...We’re

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seeing the end of the austerity dogma. It’s a victory of the French point of view.” Germany groaned and protested at the misrepresentation, but the stable door was already open and the horse was halfway across the paddock.

Anyone Got A Calculator?

But all that was as nothing compared with the rumpus that had kicked off a couple of weeks earlier, when it was disclosed that a simple error in an Excel spreadsheet drawn up by two prominent economists back in 2010 had grotesquely misrepresented the case for austerity. And that the world’s economic thinkers had been on the wrong track ever since.

Well, that was how the papers put it. What had actually happened was that an American college student had been checking the numbers in a January 2010 report from Kenneth Rogoff, a former head of research at the International Monetary Fund, and Harvard Professor Carmen Reinhart. Neither of whom was exactly a lightweight in academic circles. And that he’d noticed that a key row of figures hadn’t added up.

That row of figures mattered because it underlay Rogoff and Reinhart’s contention that bad things always happened whenever a country’s national debt exceeded 90% of gross domestic product. And that the international community should therefore do everything in its power to stop any country from breaching that threshold.

R&R’s thesis had turned into a hugely influential book called This Time is Different, in which they described how soaring private debt would lead first to financial crises, then deep recessions, weak recoveries and rising public debts as well. And

NEWS

The Eurozone

Gold

cut its base lending rate from 0.75% to 0.5%, as new studies showed no real signs of an economic recovery. ECB President Mario Draghi declared that he would take “further action” to help, including a possible reduction of banks’ deposit rates to below zero – a step that would effectively make it uneconomic for them to lend.

continued its downward path, with prices settling at $1350 per ounce by the fourth week of May - down from nearly $1700 in January.

Platinum flatlined at $1450. But, to the surprise of some investors, silver also dropped to just $21 by late May, 40% down since early December.

the rest, as they say, is history. You’re living the consequences of that assertion right now.

Yet, as we’ve said, the whole thing rested on a mathematical fallacy. By the time the poor puzzled American student had corrected Rogoff and Reinhart’s Excel sum, by reinstating five heavilyindebted countries that they’d accidentally left out, you found that an average “0.1% decline” in national growth that they’d described turned into a 2.2% average increase instead.

There was, in fact, almost no difference between heavily indebted countries and moderately indebted ones. And the authors’ celebrated case for austerity had completely lost its trousers.

And the Moral?

What are we mere mortals supposed to make of this?

Firstly, that even the finest economic brains need to check their maths from time to time.

And secondly, that some of the crowing and jeering may be premature. There isn’t much doubt that Japan’s recovery, for instance, has been delayed over the last two decades by its vast government debt, which is now around 230% of GDP. But even here, there’s a smidgeon of uncertainty, because Tokyo’s current (and highly successful) recovery programme is built around a wall of quantitative easing which – you guessed it – will expand that 230% deficit even further. Heck, is there nothing you can rely on any more?

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NEWS

F&C Asset Management

reported a £1.5 billion net outflow during the first quarter, as a net inflow of £139 million in its retail business was offset by £1.3 billion of strategic partner withdrawals. But assets under management grew by 3.8% to £98.8bn.

Co-operative Bank’s

chief executive Barry Tootell resigned as the bank’s credit status at Moody’s was cut to junk. Tootell’s departure followed the collapse of a deal to buy 632 UK branches of Lloyds Banking Group, which had failed because of what the bank called a weak economy plus the burden of high capital requirements. Tootell is being replaced by interim chief executive Rod Bulmer.

No Hiding Place Watch out, watch out, there’s a disclosure deal about

So says Chancellor George Osborne, who concluded a meeting of G7 finance ministers and central bank governors in Aylesbury with a warning that the group (comprising the US, Germany, Britain, Japan, Italy, France and Canada) had agreed to move toward an international structure on information sharing, with the aim of eliminating tax evasion and aggressive avoidance.

Well, as usual, that was the headline. And it’s fair to say that it will remain a realistic goal for as long as the current momentum continues. All the G7 nations except Canada have already signed up to a pilot scheme whereby national tax authorities share information with each other, and Britain is pushing at the EU to get all its members to sign up soon, Osborne reminded us in his March Budget that Britain’s offshore territories – Jersey, Guernsey, the Isle of Man and the Cayman Islands, for instance – are all linked in with the plan to stop tax evasion.

“It is necessary to collect tax that is owed,” said the Chancellor, perhaps unnecessarily. “And it is necessary to reduce tax avoidance. And the crown dependencies and the overseas territories need to play their part in that drive and they need to do more.” But what does that mean in practice? It isn’t quite so clear.

“Of course you have to respect that many of these territories have important industries and we don’t want to unnecessarily damage them,” he added, rather hurriedly. Well yes, one step at a time. We’re guessing that the Chancellor’s French and German counterparts would have liked him to go further in reining in his own country’s tax havens. But you can’t have everything.

It’s also a bit questionable whether we can have Luxembourg or Austria on board the EU train. Both countries derive considerable revenues from secretive offshore accounts, and both have been shy of committing to the European Union’s cause on tax. Indeed, we’re probably making more progress with Switzerland and Liechtenstein than with either of these two.

But it still seems like a fairly distant goal to For more comment and related articles visit... achieve anything more than verbal acquiescence at the moment. Offshore tax consultants can www.IFAmagazine.com probably breathe easy for a while yet.

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NEWS

IFAonline.co.uk, run by

the indefatigable Phil Calvert, right, was voted Financial B2B Website of the Year by Headlinemoney. The website, which has branched out into LinkedIn and other social media locations, has recently launched a new service allowing consumers to request confidential financial advice from IFA Online members.

The ten best performing investment trusts of the

last decade have been named by the Association of Investment Companies (AIC). Top of the pile was Scottish Oriental Smaller Companies trust, which made a 775% total gain over the ten year period, followed by F&C Global Smaller Companies (554%) and Aberdeen New Dawn 527%). All three of these outperformed in nine out of ten years. The Aberdeen Asian Smaller Companies made 963%, and the same group’s New Thai trust managed 1,096% despite outperforming in only 7 years.

Excessive Risk-taking Just as we were getting used to the idea that America’s stunning stock market revival was a result of optimism and a cheerful rejection of austerity talk, a new development has come along that might have changed the game Yes, it’s the dollar, which has soared in the last six months – and most noticeably against the Japanese yen, which dropped back in early May to more than 100 to the buck, for the first time since 2009. Now, on the face of it you might be forgiven for thinking that this was an altogether healthy development, because it will make it easier for Japanese manufacturers to export things. And certainly that’s the way the news has been taken in Tokyo, where the stock market is soaring to the highest levels seen since early 2008.

But to Federal Reserve Chairman Ben Bernanke, the rise of the dollar is one massive headache. In a speech which he delivered in Chicago on 10th May, the Chairman confessed that he was worried about the possible effects of a capital influx that might have been based on a short-term international hunger for higher yields. Well, all right, that’s not quite what he said – Fed bosses are famous for being slippery on detail - but it conveys the gist well enough.

The essence of Bernanke’s worry is that global investors have become fixated on yield at a time when Europe has just cut its ECB base rate, and when Asian market yields are being driven lower by quantitative easing. The frantic search for a positive return on cash has brought vast sums to the US - where even corporate junk bonds are yielding less than 5%, such has become the thirst for return. (By comparison, 10 year treasuries were yielding a below-inflation 1.77% in mid-May.) And that thirst for bonds would be why foreigners are driving up the value of the dollar

and delivering an unwelcome dose of liquidity to the stock market. Are you still with us this far?

“In the light of the current low interest rate environment,” said Mr Bernanke, “we are watching particularly closely for instances of ‘reaching for yield’ and other forms of excessive risk-taking.

History Doesn’t Repeat Itself, But It Rhymes Does “excessive risk-taking” sound just a little bit like “irrational exuberance” to you? It does to us. But Mr Bernanke, who retires shortly, will have no wish to be associated with his tarnished predecessor Al Greenspan, who first came out with his catchphrase caution in 1996 – only to cancel it in good time to be swept up in the dotcom boom, and then to have his reputation duly smashed by the 2007 crisis. He really should have stuck with his warning...

It’s a tricky game, running a central bank, and it can turn round and bite you without warning at any moment. Right now, though, economists are speculating that America’s healthy growth might prompt the Fed to water down its QE plans for the second half of 2013.

And what that will do to US share prices, frankly, is anybody’s guess.

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issues at attractive rates. The sales were seen as firm evidence that these countries’ governments are getting to grips with the economic necessities of dealing with their heavy debt overhangs. But no-one is sure, it said, because China’s banks are hiding bad loans.

Banco Santander’s

chief executive, Alfredo Saenz, left, resigned from the eurozone’s largest bank after the Spanish authorities ordered a review into whether or not he could meet new rules governing bank executives with criminal convictions. Sáenz had received a three-month suspended jail sentence in 2009 after making false allegations against four businessmen.

NEWS

Portugal, Italy and Ireland all made bond

Still Safe As Houses?

First, the good news. The average UK residential property price rose by 1.1% in April, according to the latest Halifax property survey And that brought the price level up to 2% above that of a year earlier, at £166,043. Or, if you prefer, the three month average to April was 1.3% above the previous quarter.

The bad news is that the Nationwide has a totally different result. Its own survey produced only a 0.1% rise between March and April, and a 0.9% year-on-year increase.

And every lender seems agreed that, if it hadn’t been for a surge in London and the south east, the national index might very well have fallen. House prices in Wales, Northern Ireland and the north of England are still badly affected.

LSL Property Services, another leading voice in the housing market, reported on 10th May that average house prices had in fact risen by an average £707 in April to £231,170. Clearly, you pays your money and takes your choice when it comes to valuations. But it agrees that London is the only mainspring at the moment: the north and Wales, LSL says, have seen [rice falls of 1.3% and 1.1% in the same 12 month period.

Nor are the experts necessarily expecting a quick recovery. As Halifax’s housing economist Martin Ellis put it: “Weak income growth and continuing below-trend economic growth are likely to remain significant constraints on housing demand during the remainder of 2013.”

But there’s more optimism on show at surveyor eSurv, which reported on 10th May that overall house purchase lending had risen by 2% in April, bringing the year-on-

year increase to a healthy 6%. 54,364 mortgage approvals went through in April, it said, and there was a healthy swing toward high loan to valuation approvals, which had risen by 14% year on year. That, and a surge in loans on cheaper properties, suggests to eSurv that the market is loosening up and that younger and first-time buyers are feeling more confident.

That’s all pretty much to be expected, not just because the workplace economy is improving a bit, but also because of the government’s newly-announced assistance programme – designed partly to help new house buyers raise a deposit, and partly to give government guarantees to lenders who advance loans.

All well and good. But even the relatively bullish LSL agrees that a tightening budgetary situation in British households looks set to dampen demand for some time yet. And meanwhile, the tirelessly property-bearish MoneyWeek editor Merryn Somerset Webb has been reminding us, not implausibly, that if you factor in the effects of inflation since 2005 you find that today’s housing is worth 27% less in real terms than it was. And that prices in the north are down 27-30%, and 20-24% in the south. Even Greater London, she says, is down 15%. Anybody care to check her figures?

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NEWS

Pensions minister

Unilever announced

Steve Webb, right, set out plans to consult on capping pension charges in the autumn. The announcement brought a storm of protest from both advisers and providers, many of whom were worried that the cap might fall below 1% a year – a level which Aviva said would force providers to strip out pension scheme costs. Hargreaves Lansdown’s Tom McPhail said a 1% cap would “massively eliminate consumer choice.” Auto-enrolment fees average 0.52%.

a huge $5.4 billion fillip to its Indian subsidiary, so as to raise its local stake to 75%. Many foreign toiletry and pharmaceuticals firms are currently targeting the urban, and increasingly the rural, consumer sectors.

RBS: Reality Beats Showmanship It was the best of times, it was the worst of times

Sir Philip Hampton could have been forgiven a touch of pride when he stood up on 3rd May to deliver what ought to have been a rousing profit announcement to the stock market immediately followed by a call to attack the holy grail of privatising the stricken bank.

How unfortunate, then, that the bank’s share price promptly dropped by 8.1%, from an already unconvincing 308p to just 283p the following morning. But that’s how it goes with institutions that rely on government support and a constantly shifting wash of asset and loan valuations that can confound an apparently solid result at the speed of a calculator button.

Anyway, the markets took one look at RBS’s pre-tax profit of £826 million in the first quarter of 2013 – after a loss of £2.2 billion in the final quarter of 2012 – and seemed to decide that either they didn’t like it or they didn’t trust it.

Whatever the reasoning, it was immediately clear that the headline figures simply weren’t enough to convince London that the time was surely approaching to launch a new, reinvigorated RBS (82% taxpayer-owned) back onto the stock market as soon as 2014. And it was all a long way from the situation at rival Lloyds Bank, which had published a genuinely strong set of results just a week earlier, and whose share price hadn’t stopped soaring since.

What could RBS’s problem be? The Financial Times pointed out respectfully that

both the Q1 figures and the much worse results for Q1 2012 had been jiggled about by valuation adjustments that were so very large that they swamped the headline numbers completely. The horrible figures for the earlier period, it said, had actually been weighed down by a one-off £2.46 billion accounting charge millstone that made Sir Philip’s year-on-year comparison look a bit sick.

It got worse. RBS’s operating profit, according to the FT, had actually fallen by 28% year-onyear to £829 million – a development which the paper said reflected a particularly steep decline from its investment banking arm, which was being scaled down. Thank you, Lord Vickers.

This didn’t bother the Treasury, which showed every sign of sticking to its privatisation plans. While also adding, a touch defensively: “Given that the stated aim of the largest investor [the Treasury] is to shed its shares, it’s right for the chairman to be ambitious in that respect.”

All well and good. But the cost of the 2008 bail-out to the Treasury came in at 520p per share. As long as the bank’s price hangs around the 300p mark, that’ll be a 42% paper write-down for the taxpayer, or somewhere north of £15 billion. Not an easy thing to sell ahead of a general election in 2015.

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News.indd 16

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20/05/2013 12:55

ED ’S SOAPBOX

All that glitters YOU CAN KNOCK THE BUGS OUT OF THE GOLD MYTHS, SAYS MICHAEL WILSON. BUT GETTING THE MYTHS OUT OF THE BUGS IS ANOTHER MATTER

Now listen carefully, because I’m going to start this article with a confession. I am a reformed addict. I have finally kicked the gold habit, and I have been clean for five months now. Oh yes, I admit that I had some good times riding the bullion train, and the company I enjoyed along the way was excellent, if a little loud and rowdy at times.

But my gold mining shares finally went back to the brokers last Christmas, and I pocketed my 67% profit, after only four years on the rollercoaster - and I did the same with most of my physical gold trackers.

And waited, and waited. And right now, I’m both happy and miserable in equal measures.

Happy because the aforementioned mining shares have dropped by 30% since I sold them. And miserable because I should have piled the ruddy cash into a tracker and allowed the rising tide of the market to float my boat like everybody else.

Fundamental Realities, and Other Myths But then, that’s because I’m a bit of a natural pessimist. Or, as I would prefer to put it, a naturally cautious type who pays a lot of attention to the macro fundamentals and doesn’t like to get caught up in the wild and erratic swings of sentiment that so alarmed John Maynard Keynes. You know the one – about how the markets can stay irrational for longer than you can remain solvent, and all that. So I’m sitting here at the side of the dance hall, missing half the dances because I don’t care much for the macro-economic tune.

That’s not the way that the really committed gold bugs see the world, because they’re all tone deaf. From where they’re standing, or sitting, you buy bullion because it will protect you from the economic Armageddon that will surely strike us all one day. When the central banks of the world have finally ruined every major international currency by devaluing it with their evil quantitative easing, and when the collapse of the government debt circus sends www.IFAmagazine.com

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ED ’S SOAPBOX

magazine... for today ’s discerning financial and investment professional all the international banks into insolvency, your Krugerrands and your American Eagles will come in handy for paying the milk bill.

Does that sound a little, ahem, optimistic to you? It does to me. If the pound and the dollar should ever disintegrate to the point where you can’t buy a morning paper with them, your chances of making it safely to the shops and back with half a gold sovereign in your tiny mitt are likely to be small. You’ll be mugged for the gold plating on your fake Rolex. And don’t think that you get round this little problem by buying gold certificates or gold ETFs, even physical ones. How exactly are you going to get through the doors of the bank’s bullion vault when the keepers have run off to South America with the takings?

Okay, I’ve made my point. Fully-qualified gold bugs are a bunch of nutters who stand round in circles on internet forums, admiring each other’s brave talk and muttering conspiratorially about how the price of bullion is being silently manipulated upward and downward by the Bilderberg group, or by the hidden forces of central bankers intent on deepening their own pockets.

How else, they ask, could the price of this scarce and desirable commodity have plummeted by 24% between last October and mid-April?

Some Proper Numbers - Well, Almost Relax, you’re not alone. What makes this year’s reticence among advisers especially odd is that many advisers still haven’t really got the hang of investment trusts and seem unsure as to how to use them. What makes that seem odd is that the new whole of market rules post-RDR make it absolutely mandatory for them to consider ITs alongside all other types of funds when you’re weighing up the best options for your client.

So where’s the uncertainty coming from?

Every year, the world’s mines produce less gold between them than the market wants to buy – why, China alone buys a fifth of the world’s 2,500 tonne output, and India buys another third

- and right now the physical bullion shortage is likely to worsen further, because the world’s miners have been under-investing in long-term production capacity. How could you possibly lose?

How indeed? If you look at gold as a physical commodity, like copper, it’s easy to see why prices more than quintupled between 2000 and September 2011, the recent peak. And yet it’s all gone undeniably wrong in the last thirty months, and especially in the last six.

So much for supply and demand, then. Back to the drawing board…

So is there anything in that myth about how central banks are rigging the market? The truth is that we don’t know. But in 2010 it was reported that the world’s central banks held 28,398 tonnes of gold in their vaults, while the IMF held another 3,217 tonnes. That was equivalent to 12.5 years’ annual production, or 19% of all the gold (165,000 tonnes) that’s currently believed to exist in the world.

Considering what’s in the vaults, I really don’t buy the gold bugs’ argument that the April gold price crash could have been caused

by Cyprus selling off its 10 tonnes of central bank bullion, do you? But try making that observation on an internet gold forum and it’ll suddenly seem as if you’ve got ten horns and the number 666 burned across your forehead.

Trigger fingers will twitch. You’ve been warned.

A Barbarous Relic All of which is remarkably silly. Gold is, as Keynes observed, a useless metal unless you’re willing to speculate with it. It doesn’t produce dividends or even wealth – and, apart from a handful of industrial uses like specialist paints and electrical connectors, it doesn’t get used up.

It’s popularly estimated that we still have four fifths of all the gold that’s been mined in the history of the world – and that half of it has been mined since 1960. And that those 165,000 tonnes would fill three and a half Olympic swimming pools – where it would be even more useless than ever, if you think

We still have four fifths of all the gold that’s been mined in the history of the world – and that half of it has been mined since 1960 18

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www.IFAmagazine.com

20/05/2013 13:05

ED ’S SOAPBOX

And that there’s enough gold in the world to provide every living person with five gold rings. All we need is a pear tree, some French hens and we’re all set for Christmas about it. And that there’s enough gold in the world to provide every living person with five gold rings.

All we need is some calling birds, French hens and other wildfowl and we’d be all set up for Christmas.

Gold bugs love this kind of nonsense.

And they quite enjoy swapping historical price comparisons, since there are so few logical reasons behind the day-to-day price movements. For instance, they ask, how many oil barrels should you be able to buy for an ounce of gold - and is that number more or less than it was in 2002? Or is there anything in the age-old rubric that says that an ounce of gold should be worth enough to buy you a suit ‘fit to greet the king’? (Oddly enough, that particular exchange rate seems to have held good since ancient Roman times.)

But it still doesn’t get us anywhere. So what will?

Getting To The Fear Factor I apologise if I seem to have been leading you a merry and rather circuitous dance so far. But, as a committed fundamentals man, I couldn’t stand the flippancy any longer. The reason why people buy gold is because it looks nice (52% goes into jewellery) and the rest is all about fear.

Yes, fear. Talk to a truly foam-flecked gold bug, and I guarantee that within two minutes he’ll be wittering on about ‘fiat currencies’ (hawk, spit). We’ve already seen that the bugs have a pathological faith in the universal exchangeability of their gold bricks, and in the relative fallibility of any currency that you can’t bury in the garden.

Why, they ask, would you ever want to hold dollars when Fed chairman Ben Bernanke can print as many of the things as he likes? And in an age when your bank can electronically expand the money supply just by pushing a little button, what’s to stop runaway inflation and monetary devaluation from sinking the whole ship?

The annoying thing there is that, up to a point, the bugs are right. Ultimately, investors who buy gold are gambling that inflation

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Eds Soapbox.indd 19

and loose monetary policies will eventually erode the value of everything and send other investors scurrying to the marketplace to buy ‘proper’ money that will still buy you a suit for your royal appointment, come what may.

Not that many people take it to that extreme, of course. Central banks, who aren’t very interested in Armageddon theories, regard a stash of gold as a firm storm-anchor and an emergency resource that will help to head off even the faintest possibility of trouble. And what goes for such a level-headed, defensive sort of mindset ought to be worth at least a moment’s consideration for the rest of us.

Ultimately, the fundamentalist’s goal is to use gold as a hedge against uncertainty. And that’s exactly what it was doing during the first decade of this century, when its massive sixfold rise occurred against a backdrop of fear that the Fed and the Bank of England would debase their currencies with an expansion of the money supply. Added to that came a feeling that bond yields would be kept low during the recovery phase after 2007 – a good thing, because higher yields would have made gold (no yield) look less attractive than usual. And finally, of course, there was the inflationary factor itself.

No wonder, then, that the gold price soared during those years. But is that still the background now?

It isn’t. The Federal Reserve is going quiet on renewed QE3 issues. Europe seems to be on a slow but steady path toward an eventual resolution of the euro crisis that won’t trash the single currency, touch wood. And the spectre of high inflation is fading, with most major economies now targeting 2%.

At the same time, informed estimates of global foreign exchange reserves have now fallen to their lowest level since 1999, which was before the gold bull market started moving. Since China holds a third of those central bank reserves, and since it seems to be feeling no great need to make its currency stronger than it really needs to

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ED ’S SOAPBOX

magazine... for today ’s discerning financial and investment professional be, there is no obvious trigger that might make Beijing want to buy more gold right now.

The smart money picked up on all this about six months ago. I, being a bit less smart, voted with my feet at Christmas because I was very ably advised to. And I claim no credit for having got out while the going was still reasonably good.

Anything Else?

Finally, there’s clear evidence that the explosion of ETF activity over the last five years has been exacerbating the existing price pressures on gold, and consequently the price volatility too.

Most of the gold-based exchange traded funds now being bought in Britain are founded solidly on physical assets – meaning that there really is a gold bar sitting in a vault somewhere with your fund’s name on it. But many investors are still being swayed by the joys of leverage – either through synthetic funds which trade swaps and futures, or through the ownership of gold miner ETFs which track the fortunes of producers rather than what they produce.

It doesn’t actually matter to the gold price whether you’re a physical or a “paper” gold holder – rather, what matters is that there are six more people claiming to own the right to the gold (or its paper equivalent) than can actually own it at any one time.

If you like, suppose that there are (say) eleven tonnes of claims for every ten tonnes of bullion that are physically in the market. That creates a demand bottleneck which can drive prices up or down just as surely as an oil ETF based on futures.

At some point, the volume of ‘paper gold’ is going to start exerting a back-pressure on the real-world

prices for the physical metal. And at that point, exaggerated volatility must inevitably ensue.

And so to the Miners I’ve said that some of my cash was in tracker ETFs, but some was in gold producers themselves. Now, you’ll have heard that gold miners are undervalued at the moment, and that they’re all overdue for bounce. Call me a cynic, but I can’t help thinking that if a bounce was coming we’d surely have had it by now?

The point about a gold miner’s volatile value is that it is determined by two factors - one of them fixed and the other variable. The fixed value is the known cost of getting the ore out of the ground and smelting it. It doesn’t change much from year to year. So if a company has got an estimated 100 tonnes underground it can reasonably plan on spending (say) £50 million on getting it out.

If the gold price is low, so that this is only going to be marginally profitable, then the company won’t be worth much. But if bullion soars to three or four times the extraction cost, the good times have arrived and the company’s valuation will go through the roof because the gap between the production costs and the value of the output has multiplied.

It isn’t that simple, obviously. Gold miners suffer from labour strikes and natural disasters and interfering governments as well, and these can all pay havoc with the bottom line. But, all things being equal, that’s the way the equation works.

My gold miner’s price was effectively leveraged to the bullion price, big-time. Maybe I’ll take another look some time when it’s all settled down a bit.

But ssssh, don’t tell the bugs. Maybe I’m still a secret addict after all?

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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www.IFAmagazine.com

20/05/2013 13:05

EXCLU S I V E D R I V E EV EN T

e IFA iMAGAZINE IS DELIGHTED n z TO INVITE YOU TO AN a g aEXCLUSIVE ASTON MARTIN m AND BENTLEY DRIVE EVENT IFA Magazine is delighted to invite you and colleagues or clients a chance to experience an incredible driving experience in the heart of the Cotswolds at Bibury Court on Wednesday, 5th June 2013.

The event begins at 1pm. Guests will be registered for their driving slots before enjoying a buffet lunch. Tea and Scones will be served through the afternoon. Each of our guests will be allocated a time for them to drive their chosen car. There are five Bentleys and five Aston Martins to select from.

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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 Eds Soapbox.indd 21

20/05/2013 13:05

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

THANKS A SINCE RDR UNINTENDED COSTS HAVE BEGUN CROPPING UP EVERYWHERE, SAYS SIMON WEBSTER. SO WHERE’S THE CONSUMER BENEFIT?

Stopping bond churning and improving adviser qualifications are laudable ambitions, certainly. But RDR has also had many unintended consequences, and some huge costs.

Five years ago, our firm established a 3 + 1 investment proposition based on internal model portfolios. And then, on 1st January 2013, we had to get 150 clients to sign new client agreements, new fee agreements, and new platform charge agreements. Nothing had changed - it was the same 3 + 1 as before. But we killed half a rain forest on the altar of FSA bureaucracy. Huge costs – and where’s the consumer benefit?

The Fees Millstone

At our firm it costs £500 to open a file, so advice on new regular premium pensions for individuals has been all but killed off by RDR. When a client comes in wanting a plan, we now say “£500 please”. “Hang on,” the

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I N S I D E TR A CK

BUNCH

client protests, “I was only thinking about starting at £100 per month - and you want the first five months’ worth for your costs?”

“We’ve got to cover the cost of regulation,” we reply. “And it’s there for your protection.

But of course, you can always go online instead, where there’s no advice and the website can still take commission!” And so a sad and disillusioned prospective client leaves our office.

In 2012, that particular case would have paid around £500 in commission, and the client would have been charged a 1% AMC with no exit penalties. Internet plans are no cheaper today, and they pay the same commission. But RDR killed the advice channel – so where’s the consumer benefit?

An existing client came into our office for his annual review. He needed to increment his existing plan by £100pm.

His existing AMC is 1%. But we had to charge him £500, because

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magazine... for today ’s discerning financial and investment professional due to RDR the increment is a disturbance, and all commission is immediately turned off.

I am guessing that the FSA mandarins imagined that the commission saving would have been passed onto clients. But of course, it wasn’t, and the product providers get to keep our money. If I didn’t know better, I might almost have thought that the insurance industry had lobbied for this change with some large brown envelopes! An explicit client detriment, and the advisers are stuffed.

More Chargeable Events Let’s look at another example. We have a few bond clients using 5% tax deferred withdrawals. If we disturb an existing plan, or set up a new one, we switch to adviser charge where, our on-going advice fee is part of the annual allowance and client income is directly reduced. Yet more consumer detriment.

If RDR is a price worth paying - I am a banana

There’s more. The demand for clean share classes puts an estimated cost of £63 million on the fund management industry - and I daresay the final cost will actually be hugely more, just as every other RDR cost estimate has been.

The industry proposal was that fund managers should issue one share class at one price, and that each distributor would then negotiate a rebate based on its competitive position - which is a logical system, and relatively cheap to administer and switch. But now fund managers will have to issue multiple share classes at different prices, and a platform move could become a chargeable event. It is a recipe for cost, confusion and consumer detriment.

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So did RDR achieve its aims? Some of them, I suppose. But if the banks can’t make money out of advice with a huge captive client base, and if access to advice is nigh on halved, then, paraphrasing Ian Hislop, if RDR is a price worth paying - I am a banana.

Got a gripe about RDR’s unintended consequences? Write to us at editor@ifamagazine.com, and get it off your chest!

For more comment and related articles visit...

www.IFAmagazine.com

www.IFAmagazine.com

20/05/2013 13:08

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20/05/2013 13:08 19.04.13 17:35

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

A STRUCTURED ARGUMENT

GARY DALE, HEAD OF INTERMEDIARY SALES AT INVESTEC STRUCTURED PRODUCTS, EXPLAINS WHY STRUCTURED PRODUCTS DON’T DESERVE THEIR BAD PRESS

Sadly, the term Structured Products conjures up many pre-conceived notions and ill-conceived ideas about financial products that are supposedly sold by both banks and advisers to unsuspecting investors looking to spice up their portfolio. In this article I’m going to try and set the record straight.

Unfortunately, though, the media has also used the term to describe toxic bundles of debt CDOs or Collateralized Debt Obligations - passed around from one institution to another. One way and another, structured products have been hung out to dry - particularly after the collapse of Lehmans and the start of the financial crisis, often blamed for the heavy losses suffered by retail investors.

What exactly is a Structured Product?

This is an almost esoteric question, to which it is all but impossible to find a common answer.

Structured products can loosely be defined as a type of savings or investment product where the return is referenced to an underlying asset or index, such as the FTSE100, and delivered at a defined date (the maturity date).

It’s a generic term that is often used to describe products with ‘non-traditional’ investment strategies. And it’s an umbrella that includes

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Structured Deposits, Structured Investments and Structured Funds. There are fundamental differences between these three - not just in how they are designed, but also in how they can and should be applied to clients’ investment portfolios.

Structured Deposits The diagram below shows in very simple terms how a Structured Deposit works in practice.

Consider a product that aims to return the initial deposit at maturity plus an interest payment linked to the performance of an underlying asset or index, such as the FTSE100 index.

For every 100p invested, 85p is used to return the initial deposit at maturity. This is because the provider is able to “lock in” a rate of interest over 5 years, sufficient to return the initial deposit. 6p is used to build the product and cover expenses, with the remaining 9p being used to buy financial instruments which then provide the performance element (interest payment).

This performance element could stipulate, for example, that if the FTSE100 should be higher at maturity than at the outset, then a fixed interest payment of 35% will be made – but conversely, that if the FTSE100 finishes lower at maturity then only the initial deposit will be returned.

www.IFAmagazine.com

20/05/2013 13:19

GUEST INSIGHT

{

A typical Structured Deposit

Structured Funds

5 Year Plan Linked to the FTSE 100 Index

Structured Funds are a form of Structured Investment (see below) - but, provided the term is being used correctly, they are completely different in terms of the underlying regulations upon which they are ultimately governed. They are also different in terms of investor accessibility, investment wrapper and, in many cases, the level of capital protection afforded to the investor.

Of course, the return profiles on many Structured Funds might look similar to many Structured Investments. A ‘kick-out’ is a ‘kick-out,’ irrespective of how it is wrapped. But there are many other benefits to a Structured Fund that should definitely be considered.

A common misconception is the belief that Structured Products are an asset class in their own right. I strongly disagree. Structured Products are not a separate asset class, but simply a means of accessing index or asset class returns in a predefined, sometimes more efficient way.

Advisers are able to diversify an investor’s portfolio both at a macro and micro level – for instance, by starting out with the appropriate asset class model on a risk weighted basis and only then diversifying and stock picking within each of these classes.

PERFORMANCE

6p

FEES

9p

OPTIONS

85p

CAPITAL RETURN VEHICLE

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Af t

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ORIGINAL CAPITAL RETURNED (100p)

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magazine... for today ’s discerning financial and investment professional It’s certainly true that most Structured Products offer some form of capital protection, which can make the pay-off profile more difficult to include in a traditional risk-weighted portfolio. But surely it is more appropriate for an adviser to adapt his investment approach, given the product choice available, as opposed to trying to shoehorn a client into possibly a less efficient portfolio?

Why are Structured Products viewed so negatively?

Unfortunately for these investments, the word ‘structured’ often has the negative effect of putting many advisers off from even considering their potential benefits, and from fully understanding both what they have been designed to achieve and how they can achieve it.

Of course, the former FSA - and the European Commission too - both claimed to have identified many weaknesses relating to structured products before the Lehman collapse wreaked its havoc. But many of their findings were centred around failures within the advice processes themselves, which were caused primarily by weaknesses around product suitability, rather than by flaws in the products themselves.

But then, we could have said the same about the majority of mis-selling scandals in the past such as endowment sales, pension transfers and

more recently unregulated collective investment schemes (UCIS). All of which have involved failings with regard to the suitability requirements and not specifically to the products themselves.

The word ‘structured’ in this context simply means ‘pre-defined’, both in terms of upside and downside potential - which, in today’s hugely unpredictable investment climate, should offer a little more comfort to many investors over and above the more traditional type investments.

Sadly however, certain industry commentators and elements of the media have been only too happy over the past few years to attack these plans as “high risk” or as “unsuitable” - with some ill-informed individuals calling for a complete ban altogether.

If researched properly, it is perfectly evident that there are appropriate solutions available in the form of Structured Products for investors who may be looking to add that extra appeal to their portfolio. It goes without saying, of course, that suitability cannot be ignored, and it should be fully considered before ANY product recommendation.

So perhaps the industry should be a little more circumspect when describing these investments?

Advisers Must Step Up to the Plate We can’t deny that some investors have been scarred by poorly designed, poorly marketed and above all, poorly distributed structured products.

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Michael searches out high-quality stocks, mainly blue-chip companies with strong balance sheets – ones able to sustain and grow their dividends over the long term. And through careful selection, he aims for what he calls ‘safety of income at a reasonable price’.

MoneyBuilder Dividend is one of a range of funds cast in the Fidelity income mould. All

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May 2013 Job No: 47060-5

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But, as we’ve seen, a key reason is often the unsuitability of the product when compared to the client’s underlying objectives – or, as has been the case in the recent past, a lack of clarity on the underlying counterparty exposure.

There are two main distribution channels that deliver structured products to the end customer’s portfolio: The first is a financial adviser, independent or restricted (intermediary), who acts independently of the product provider and advises a client based on his own profile, appetite for risk, requirements for income and capital appreciation. The intermediary is obliged by regulation to offer a range of suitable products, without displaying loyalties to any one provider. These recommendations may or may not include Structured Products.

The second distribution channel consists of the tied sales forces employed by the product providers themselves - banks, building societies or other financial institutions. Clients of these institutions will typically be offered these products without any accompanying independent advice. And as a result they may end up with a product or structure that might not be best suited to their needs. As evidenced by various regulatory censures over the past few years!

Either way, the decline in Structured Product sales had dropped by the end of last year to around £6.2 billion, from a

peak of £14.4 billion in 2009. This was mostly as a direct result of declining bank and building society distribution.

Frankly, I don’t think that was necessarily a bad thing, because intermediary sales of Structured Products significantly increased during the same period – and, to my mind, unless we’re talking about true executiononly transactions, Structured Products should be offered in the main by intermediaries as part of a wider investment portfolio.

The Taint of Scandal Structured Products have also been tainted by recent scandals around poor product design involving “precipice bonds” in which many clients lost capital. The furore around the ‘Key Data’ scandal caused, and is still causing, an incredible amount of “noise” - much of which is fuelled by inaccurate and ill-informed opinion within elements of the media.

The only way to avoid these issues in the future, and to impress the need for client suitability to remain a priority, is for providers to work with the media, and with industry associations such as the Institute of Financial Planning (IFP) and The Personal Finance Society (PFS) to ensure that education is at the top of the agenda - and that Structured Products are primarily delivered as part of a holistic investment portfolio.

e dentials. backed by our proprietary research. All actively managed. All designed to deliver sustainable able and growing returns over the long term. So for a core equity income fund with a solid reputation utation – and polished performance – click or call today.

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GUEST INSIGHT

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

“No single product, fund, asset class, wrapper or pay-off is likely to meet the needs of a diversified investment portfolio in full. Choice is key across all of these areas.”

Investec Structured Products offer our range of plans via intermediaries only, and we are committed to developing this distribution channel as well as ensuring that customers who demand direct access are supported in the most efficient ways.

Why can Structured Products make a good investment?

The Structured Investment industry is often hailed as one in which retail investors have a more alternative route to market, in terms of the underlying asset or index and the variety of pay-offs available.

The flexibility afforded by these products means that they literally can be structured to suit not only many different individual risk appetites but also many different investment market cycles.

Our aim, and that of the wider industry, is primarily to encourage more advisers to consider these plans as an integral part of the portfolio planning process. This can be achieved, we feel, by promoting a better understanding and knowledge not only of the products themselves, but also of how we believe to best utilise these strategies within a well balanced portfolio - both from a cash perspective and also as a complement for equity based investments.

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The importance of education and the introduction of RDR Feedback from our consumer panels tells me that consumers are now much more financially literate and possess a greater understanding of the range of financial products available to them and more importantly, how and when to use them.

Combine this with the recent implementation of the Retail Distribution Review (RDR), which removes provider and product bias from the advice process, and logic tells me that, as well as the obvious benefits in transparency and more holistic advice, consumers are now empowered through greater knowledge and education to better consider a wider choice of investment solutions, especially when working with an independent adviser.

Having said all of that, I believe that the key point is this: No single product, fund, asset class, wrapper or pay-off is likely to meet the needs of a diversified investment portfolio in full. Choice is key across all of these areas.

Let’s hope our efforts are not in vain, and that, once and for all, quality structures are accepted as mainstream where the ultimate beneficiaries are, of course our clients.

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20/05/2013 13:19

Webinar

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PA S S I V E

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

NOT QUITE SO PASSIVE AFTER ALL TODAY’S ADVISERS HAVE PLENTY OF WAYS TO COMBINE THE LOW COST AND SECURITY OF PASSIVES WITH A MORE ACTIVE APPROACH, SAYS BRIAN TORA

I have recently attended several of the adviser seminars organised by IFA Magazine, in conjunction with JM Finn & Co. Generally, my role on the platform is to give my take on what is likely to be happening in the market and then to sit down to enjoy the debate. But at the most recent one, held in London, my role instead was to chair the event. And very interesting it was too.

The general theme at this seminar was the question of active versus passive investment – not that the two were actually being seen in a competitive way. Rather, the discussion represented an opportunity for the speakers to demonstrate how these separate facets of the investment industry could work well together.

Passives are, of course, a huge market nowadays. Okay, exchange traded funds themselves might go back only twenty years or so, but the fact is that billions of dollars are now contained within a vast array of instruments, covering a cornucopia of asset classes and a profusion of investment approaches.

Indeed, perhaps the only real difference that now exists between the active and passive domains in the investment product market is that the one has investment managers who you can meet and talk to, and the other doesn’t.

What’s more, this range of options goes way beyond the vanilla flavour of the old index

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tracking retail funds. With a range of bells and whistles that include gearing, reverse strategies, beta enhancement – not to mention some of the more esoteric assets that an investor might from time to time contemplate – it’s a brave adviser who ventures into this fast-growing world without proper preparation. Not for nothing has the regulator taken a particular interest in this segment of the market. But the attractions of this low-cost option are apparent, if not always fully understood.

An Embarrassment of Riches It is all a far cry from the simple products that were first unleashed on to the retail market around a quarter of a century ago. I should know. I was there!

If nothing else, my own involvement in the launch of some of the first index tracking unit trusts taught me that simple products like these could often be rather more complex than one might believe at first glance. It does make me wonder whether some of the advisers expounding their usefulness fully appreciate how they work - let alone the clients whose portfolios hold them?

Let me give you a couple of simple illustrations. In the early days, there were several ways to track an index. Full replication was used, but it was expensive.

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20/05/2013 13:21

ACTIVE

Partial replication was popular, but it always ran the risk of allowing divergence in performance to creep in. Derivatives, too, could play their part, but even these carried their own degree of uncertainty. And, of course, the charging structures applied could vary significantly. Little wonder, then, that vehicles apparently tracking the same index could deliver a variety of outcomes.

Today, the application of index tracking investment solutions is more sophisticated, generally cheaper, and hopefully more consistent in delivering results to expectations. And that’s all to the good. But the other side of the coin is that the nature of these funds has allowed a proliferation of styles that complicate the choice available.

For truly knowledgeable investors, of course, that might be deemed a positive.

For the majority of the investing public, however, it is probably an irrelevance.

Don’t get me wrong, I am not anti passive solutions per se. True, my background gives me a natural bias towards active investment management - but I am not so naïve as to avoid recognising that the majority of active managers struggle to match, let alone beat, the benchmark against which they are measured.

And there are plenty of assets where an ETF is a natural, and arguably more efficient, means of gaining exposure. Whether used in tactical asset allocation, in the delivery of core/ satellite investment solutions, or simply as a means of gaining swift and efficient exposure to an asset class, I suspect ETFs will be around for quite a while

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

DEREK BRADLEY, CEO OF PANACEA ADVISER, EXPLAINS WHY IT’S TIME FOR THE FINANCIAL SERVICES INDUSTRY TO JOIN THE ‘IN CROWD’

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Way back in the 1990s, many businesses, and especially those in financial services, didn’t see why they needed a website, email or even mobile phones. What a long time ago that seems. And how wrong they were.

In a way, social media is exactly the same.

Not everyone understands exectly why they need it, but eventually everyone will.

There is indisputable evidence everywhere you look of the increasing importance of social media. Incite’s recent Social Media Report said that consumers continue to spend more time on social networks than on any other category of website. The report also noted that the total time

spent on social media in the USA increased by 37% to 121 billion minutes in July 2012, compared to just 88 billion minutes in July 2011.

People, Not Machines Here in the UK, the recent proliferation of mobile devices and better, faster connectivity have helped fuel the continued growth of social media. Some 5% of UK households now own an internet-connected smart TV. But ultimately, social media isn’t about technology – it’s about relationship building. And surely all clientfocused business can recognise the importance of that?

But we seem to have a special situation in financial services. The desire

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20/05/2013 13:22

SOCIAL MEDIA

ANIMALS to embrace social media is constantly countered by the urge to regulate it - and regulation and the internet are not easy bedfellows. So does this restrictive attitude from authority go some way toward explaining why the financial services sector has been so slow to engage?

Fear of the Unknown

It could, of course, be simply a question of age. The average age of a financial adviser is considerably greater than you might find in other industries.

But I think it runs deeper than that. I believe the industry’s reluctance stems from a fear of trying to understand how, what, where, when and importantly the “is it compliant?” impact upon the ease for them to engage.

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Providers are also very concerned that engaging with social media will open the floodgates to a tsunami of negative comments that they cannot control. Individuals and businesses care a lot about what their peers think - and, for better or worse, modern technology allows for information on products and services - good and bad, true or false - to be instantaneously shared.

Getting information from the internet can be like taking a drink from a fire hydrant on full flow. But by engaging with that social media flow, influence can move both ways.

That you or your business lack a presence on Twitter, LinkedIn or Facebook does not prevent others from

making negative statements about you. Whereas, by being there, at least you can put the record straight and engage with the same audience.

Persuading the Regulator The old FSA was never keen on the using of social media, because it couldn’t control it.

The guidelines that came from its Canary Wharf head office about the consumer detriment that 140 characters on Twitter could cause displayed a telling ignorance about the fact that, increasingly, consumers don’t search for products and services. Rather, services come to their attention via social media, warts and all.

Pleasingly, the FCA seems

May 2013

35 20/05/2013 13:22

SOCIAL MEDIA

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

“The internet is the first thing that humanity has built that humanity doesn’t understand - the largest experiment in anarchy that we have ever had” Google Chairman, Eric Schmidt

IFA Magazine is pleased to announce, in association with Plutus FX, the launch of a brand new FX service for IFAs and their clients

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20/05/2013 13:22

SOCIAL MEDIA

to be adopting a more considered position. Chief executive Martin Wheatley recently clarified the regulator’s intentions to make better use of Twitter. Indeed, @TheFCA had some 10,000 followers even before the regulator officially came into existence.

And it has been deploying people from throughout the organisation to monitor and engage with Twitter users.

Business usage of the internet has expanded way beyond just making money.

These days, it’s all about brand awareness, reputation, creation, influence, opinion seeking or forming and much more. The power of social media is that it forces necessary change. And any regulator, any adviser and any consumer, should see that as a very big and positive outcome.

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magazine

20/05/2013 13:23

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

MORTGAGING THE EMPTY NEST EQUITY RELEASE, THE FORMER BAD BOY OF OLD-AGE FINANCE, IS POPULAR AGAIN, SAYS KAM PATEL. BUT RELAX, TODAY’S POLICIES ARE VERY DIFFERENT

With retirement nest eggs and pensions under heavy attack in recent years from inflation, rock bottom returns and stock market woes, many retirees on already tight budgets have become noticeably more cash-poor. It’s not so very surprising, then, that growing numbers of the elderly are looking to tap into the one asset they are likely to have that still holds considerable unlocked value - their homes.

The increasing demand among older householders for equity release solutions is a direct result, of course, of a sixfold rise in average house prices over the last 30 years. But we ought to say clearly that there is still some wariness out there which is taking time to overcome.

The public has not forgotten or, indeed, forgiven, the damage and pain that

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some of these products caused in the late 80s and 90s when the marketplace was still run with a light regulatory touch. And no wonder.

The Ugly Past The late 1980s seem like another age these days. A combination of rising rates, rising inflation and falling stock markets had encouraged many elderly people at the time to sign up for equity release schemes that were frankly unsafe - including investment bond schemes and roll-up plans with variable interest rates – all of which combined to bite them badly when inflated property prices burst and lending rates soared.

These offending products were eventually banned - but not before causing seemingly irreversible damage to the public’s trust in equity release solutions and their providers.

By the late 1990s their place

had been taken by Shared Appreciation Mortgages (SAMs), which were at least a bit better – but rocketing house price inflation now made even these a considerably worse deal for customers than had been envisaged.

This unending history of disappointments is not what you’d call a very edifying basis for the revival of the industry.

And to this day, the resulting loss of trust still remains a stumbling block for providers, industry bodies and regulators, as they look to reassure a sceptical public that the new types of equity release are indeed fairer and more rigorously policed, and that consumers are being better protected.

Winning Back Trust But there is growing evidence that the equity release camp is slowly winning its battle. Only last month the Equity Release

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20/05/2013 13:25

EQUITY RELEASE

Council, the main industry body, reported that the equity release market had notched up its best first quarter in four years, with £234 million worth of plans taken out over the first three months of 2013. The average plan value, it said, had also grown by 14% to £55,985 - the highest since quarterly records began in 2002.

And for a second successive quarter, independent financial advisers were responsible for 92% of the value of equity release plans agreed – their largest market share in the last decade.

Research by retirement expert LV, also published last month, provides more encouragement for the industry, revealing as it does that 88% of the 50 advisers it had polled believed that equity release should be a key consideration when planning for retirement.

Furthermore, it said, 95% of advisers considered equity release to be a significant growth

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Equity.indd 39

area for their business. A full 78% said that they expected equity release to become a mainstream financial product within the next few years.

Two Basic Approaches At present there are two main solutions being offered by the equity release industry – lifetime mortgages and reversion schemes.

The lifetime mortgage option entails a sum of money being borrowed against the value of the home to give either a lump sum or a regular income to the owner, who continues to own the home. The loan is repaid to the lender when the property is eventually sold.

By far the most popular solution of this type is drawdown, which accounted for 62.3% of the market by value during the first quarter of 2013 - down slightly from nearly 67% in the same period last year. In this

situation, the customer may take a smaller amount at the outset and then draw down further borrowings as required.

Since interest is paid only on the money taken, the overall cost can be considerably lower. But traditional lump sum solutions still accounted for 37.6% of the market during the first quarter, up from 31.8% a year earlier.

The other main option for consumers is called a reversion or part reversion scheme, and it involves selling the home - or part of it - to a reversion company that will allow the owners to continue to live in it for the rest their lives. Upon death, or upon moving house, the proportion of the home that was sold becomes the property of the reversion company. The remainder passes back to the client, or to his estate.

Stephen Lowe, group external affairs and customer insight director at

May 2013

39 20/05/2013 13:25

EQUITY RELEASE

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

Of the 7.5 million pensioner households in the UK about 90% of pensioner couples and two thirds of single pensioners own their own homes 40 Equity.indd 40

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20/05/2013 13:25

The Income Squeeze Growth, says Lowe, is being driven by several factors, of which high home ownership rates are a key starting point. Of the 7.5 million pensioner households in the UK, he says, about 90% of pensioner couples and two thirds of single pensioners own their own homes. “Most have done well from rising home prices over the years,” he says, “and even recently the property market has remained robust. The result is that the over-65s are sitting on property equity estimated at more than £750 billion.”

“However, the income that older people can generate from their pensions and savings is being squeezed. We are therefore seeing increasing number of ‘asset rich, income poor’ pensioners turning to equity release as a way to boost their spending power.”

Public concerns about equity release remain – and understandably so - but Lowe insists that the industry has made consumer protection a particular priority over the last 20 years. And that the Equity Release Council imposes a rigorous code of

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Equity.indd 41

conduct on its members that includes, for instance, a ‘no negative equity guarantee’ that ensures that people cannot be asked to pay back more than their home is worth.

People purchasing from Equity Release Council members also have the protection of a ‘triple lock’ – which means that they must use both a professional financial intermediary and an independent solicitor to ensure fair play. The plans themselves are of course regulated by the Financial Conduct Authority.

“No-one can sleepwalk into an equity release plan without understanding exactly what they are taking on,” says Lowe.

Lowe is keen to stress that equity release works across a range of scenarios – and therefore, that it isn’t just for people looking for a lump sum or to pay off debts. It’s an option, too, he says, for those who need an income boost because they can’t secure sufficient pension income, or because inflation has eroded the value of the income. And it may play a part in inheritance or care fees planning.

It can also suit those people who either cannot or don’t want to sell up and move to a smaller home – for instance, by using the money released to fund alterations or improvements that will enable them to stay put for longe.

provider offers the best value, but also to consider any impact that it may have on inheritance or state benefits.” (The extra income from an equity release may sometimes result in the reduction or loss of some means-tested benefits.) “Like downsizing, equity release is a long-term commitment, and it will not suit everyone. It is an emotional as well as a financial decision, so people need to feel comfortable.”

You won’t be surprised to hear that Lowe thinks that all advisers should consider this “exciting niche area”, and that they should factor it into their overall business strategies as an option to offer their clients. But he stresses that advisers who want to get directly involved will need to have the correct qualifications and business processes (see below), and that they should seek membership of the Equity Release Council.

Some advisers will prefer to act as a referral service rather than acting directly with clients. Many of the larger providers offer support to help advisers break into the market and build up the scale of their equity release businesses. They may, for instance, provide a suitability report writing service, and perhaps exam revision courses for advisers wanting to upgrade their qualifications.

Advisers Need Qualifications

Although equity release has been around for several decades, in many ways it’s still something of a fledgling market.

Just Retirement’s last survey found that around 8% of older homeowners were ‘very/quite interested’ in equity release which would seem to imply a potential market of about 600,000 out of the 7.5 million pensioner households. But if plan sales last year were fewer than 20,000, then there would seem to be clear potential for much faster growth.

Especially if the plans themselves

It is absolutely critical that anyone considering equity release conducts some basic research.

The Equity Release Council is certainly an important first point of contact, with a useful directory of members including advisers and solicitors. But Lowe also recommends paying a visit to the Money Advice Service, a source of free and unbiased information.

“It is important to take professional advice to explore all the client’s options,” he says.

“Not just to decide whether equity release is suitable, and which

EQUITY RELEASE

Just Retirement, a leading retirement adviser and the second largest provider of lifetime mortgages, says he is confident that the industry has a bright future.

He expects the first quarter’s very strong activity to continue, with 20-25,000 plans being signed this year and with a total value of more than £1 billion.

That would compare with the 17,700 plans worth £925 million that the Equity Release Council reported for last year.

Just Retirement has seen its own sales jumping by more than two-thirds in the last three years. And it says that a recent customer survey found that 96% of clients who had taken equity release had declared themselves ‘very happy’.

Room For Growth

May 2013

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EQUITY RELEASE

magazine... for today ’s discerning financial and investment professional continue to evolve to meet people’s needs.

Independent industry research suggests that equity release may have the potential to lift a million pensioners out of poverty in the coming decades.

That’s a point which is not lost on Age UK, a charity which provides information and advice to the elderly, and which is becoming steadily more interested in equity release as an option for elderly people in need of funds.

Jane Vass, Age UK’s Head of Public Policy, acknowledges that the public in general remain suspicious of equity release, due to its past misdemeanours.

But, she says, “It’s fair to say the industry has substantially cleaned up its act – and, of course, equity release products are now fully regulated by the Financial Conduct Authority.”

Proceed With Caution Age UK’s own commercial arm, Age UK Enterprises, includes an equity release advisory service,

Public concerns about equity release remain but the industry has made consumer protection a particular priority over the last 20 years 42 Equity.indd 42

May 2013

which it runs in collaboration with Just Retirement. But Vass urges anybody considering equity release to be sure that the product is right for them, “as it is difficult and sometimes impossible to cancel an equity release arrangement”.

Age UK recommends that interested parties should: n Take advice from an independent financial adviser when considering equity release; n Make sure that the plan is being bought from a firm that is authorised by the FCA; n Consider the impact of a scheme on any benefits being received, and the possible effect on future entitlements.

“It is our understanding that under FCA regulations only equity release qualified IFAs are able to sell equity release,” says Vass. “And therefore no IFAs should ever be going into this business ‘cold’. Clients should always be directed to advisers with specialist qualifications and experience who can cover the whole market.”

Ask The Family Gordon Morris, MD of Age UK Enterprises, says the service, which is not open to IFAs, provides fully advised

face-to-face appointments in customers’ homes, at which a range of products from various providers can be considered.

Telephone discussions are also offered. But he warns that prospective purchasers should always consult their families.

“Clearly, as this is a big decision, family involvement and discussion is encouraged and the alternatives to equity release available, such as grants, are discussed [at the meetings].

A state benefits check is also undertaken, to check that all benefits are being claimed before proceeding and the effect on state benefits is assessed if an equity release is to be taken on.”

“Equity release is a valuable option for some people,” says Vass. “But growth of the sector is constrained by supply issues - there aren’t many wellknown providers, and policies should only ever be sold by specialist advisers – as well as by customer wariness. “ “People do need to proceed with caution. In order to build customer confidence, it is really important that FCA maintains its current level of regulatory oversight.”

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20/05/2013 13:25

HELLO! WE KNOW YOU’RE OUT THERE IFA Magazine is looking for a strategic, Senior Account Executive in London/Bristol to drive online sales expansion for the company. We are in the process of interviewing sales candidates who have 2+ years of sales experience and who have experience generating new business and growing existing accounts.

To register your interest, please send CV in full confidentiality to HR@ifamagazine.com

A strong candidate will have excellent communication skills, consistent work ethic and a desire to be a part of one of the fastest growing internet companies in the financial space.

Responsibilities: n Sell online advertising, sponsorship and other advertising services. n Conduct face to face visits, live product demonstrations over the phone and weekly webinars. n Identify revenue opportunities and sell far and wide inside their book of business. n Analyse and present monthly analytics reports to advertisers. n Develop industry and account relationships to leverage during the sales process.

We are looking for someone who: n Has experience selling to large and medium-sized direct and/ or agency organisations. n Has strong face to face presentation skills. n Is interested in building upon their successful track record in sales. n Has an out-going, dynamic personality and can build outstanding relationships n Has a “can do” attitude and loves to be challenged n Is metrics-oriented, organized and has a need to win.

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VAN_2238 0.09% 122x155mm IFA_v1.indd 1 Equity.indd 43

27/02/2013 16:16 20/05/2013 13:25

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

WORLD OPPO R

THERE’S STILL MONEY IN FIXED INTEREST, YOU KNOW. IFA MAGAZINE TALKS TO CHRIS WIGHTMAN FROM WELLS FARGO’S GLOBAL OPPORTUNITY BOND FUND 44

May 2013

Guest Insight - Wells Fargo.indd 44

If you really want to know what’s going on, ask a bond specialist.

Never mind all the shouting and panicking and rushing about that passes for normal behaviour in the equity markets – a bond investor always keeps his cool, steady eye on the fundamentals.

That’s a matter of necessity, of course – not just because bonds themselves are geared toward very long maturity periods, but also because bond yields – and, by extension, bond prices - can be unusually sensitive to short-term fiscal and economic fluctuations that the rest of us may be inclined to overlook in our glorious pursuit of equity gains. The language, the methodology and the sheer depth of thinking involved in fixed income strategies can sometimes seem daunting to us lesser mortals.

So it was with just a little trepidation that we asked Chris Wightman, Senior Portfolio Manager with the Wells Fargo (Lux) Worldwide Fund - Global Opportunity Bond Fund, for

www.IFAmagazine.com

20/05/2013 13:28

GUEST INSIGHT

OF O RTUNITY his insights into where the global fixed income markets are heading and where he sees the next opportunities developing.

Would we manage to ask the right questions, we wondered? Would we even understand the answers when they came?

We needn’t have worried. Mr Wightman proved to be an engaging partner who didn’t mind naïve questions one little bit. As you’ll see.

The Fund The Wells Fargo Global Opportunity Bond Fund, a subset of the Wells Fargo (Lux) Worldwide Fund, is an open-ended Sicav mutual fund, domiciled in Luxembourg, which launched last June. According to Trustnet, the fund has returned a total of nearly 8% by the end of April – almost 1% above the benchmark.

As its name implies, the Global Opportunity Bond fund doesn’t aim to cover the usual spread of developed-market paper which has started to look toppy in the last year or so.

Rather, it seeks an enhanced total return based on a mixed portfolio of both developed and emerging markets, and with a mix of sectors.

Thus, for example, the fund currently holds 70.9% of its assets in sovereign bonds of one type or another and 21.9% in corporate bonds. Quasisovereign debt (that is, paper issued by agencies that have government backing but are not themselves sovereign issuers—the European Central Bank comes to mind) make up 7.2% of the fund. But unlike the fund’s benchmark, the Bank of America Merrill Lynch Global Broad Market Hedged Plus Index, there is no exposure to securitised or collateralised debt. (The benchmark, by comparison, contains

www.IFAmagazine.com

Guest Insight - Wells Fargo.indd 45

a hefty 15.3% weighting in this sector.)

The fund’s constituents have an average credit quality of A1 (Moody’s), but Wightman is also clear that his team’s objective is to enhance returns by taking some currency risk on board.

Currency is often treated as a separate asset class, to either protect or enhance alpha. Thus, although the fund is ultimately at least 60% hedged towards the base currency (in this case, the dollar), there is a preference to go for local-currency issuers rather than the hard currency dollar-denominated bonds that might be available at somewhat lower yields.

Wightman stresses that the fund is actively managed in all aspects, in contrast to the passively managed funds. The team aims to actively manage currency risk in hopes of mitigating portfolio risk and adding incremental returns. Additionally, the average coupon on the fund’s holdings is currently 4.51%, which is a fair bit more adventurous than the 3.52% available from the benchmark.

“Alpha is deliverable from a multitude of sources”, says Wightman. “For us, alpha can come from anything from country to currency sector to durational yield curve management. With regards to our overall proxy, we aim to generate risk-adjusted returns, not absolute returns”.

You can’t do that sort of thing successfully without a substantial amount of macro research, he says. “But ultimately, we adopt a value-driven approach—there are no short-term volatility plays, and we do not jump into unsupported market thematics. And absolutely no leverage”.

The average maturity of the fund’s holdings was 7.38 years in March and the annual portfolio turnover was just 12.92%—both of which seem to underline the fund’s focus on stability.

May 2013

45 20/05/2013 13:28

GUEST INSIGHT

magazine... for today ’s discerning financial and investment professional That’s important, he says, because with this fund, the risk parameters are established from the outset. It’s a policy that’s been continuously there since the US version of the fund started in 2003.

Selection Is Everything But enough of the guiding principles already. It was time to ask Wightman about the specifics of the countries that the Global Opportunity Fund currently favours – and why?

What came back was a decidedly rigorous approach to selecting investment locations. There was none of the usual broad-brush approach to emerging markets – BRICS, ASEAN and the standard handful of South American states.

Instead, Wightman insisted, it was important to inspect each individual economy for stability, debt

“If you really want to know what’s going on, ask a bond specialist” levels, low volatility and – not least – the prospect of real yields, something that we rarely seem to see in the major developed markets these days.

We started off by enquiring about the fund’s 4.9% holding in Australian government paper, and its 4.6% exposure to New Zealand? Both countries, Wightman said, have their macro economies well under control and no major worries with debt or inflation. New Zealand’s unemployment is at an all-time low, which is always a good sign. And Canada’s stable environment remains attractive.

Latin America provided some surprises. Yes, he said, the fund is very keen on Mexico, where it has a 3.43% exposure and where it has been overweight for some time. The peso is looking good, and the markets have been cheered by a resurgent economy, a better export performance across the border to North America, and a new government that seems to be getting on top of the domestic security situation.

But Wightman refuses to join the pessimists who have been fretting over Brazil.

The real yield on local-currency paper, he says is still very much worth having.

Asia, we sensed, was much more of a pick-and-choose region. The fund likes the stability of Thailand, where it has 3% of its assets in government paper, but it is also keen on Malaysia, where there is protected growth and where the currency, the ringgit, is looking good. We had a harder time eliciting any real

46

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Guest Insight - Wells Fargo.indd 46

enthusiasm for China, which perhaps wasn’t surprising because bond markets are hard to access for non-US investors.

There was also caution about Japan, with the regime change and the new Prime Minister’s clear objectives.

This has and will entail massive quantitative easing for the jurisdiction.

“There’s better value elsewhere” than the bond market, and the measures will be negative for the currency. The fund remains underweight in both the bond market and the currency.

Wightman seemed breezier than expected about two European markets, Italy and Poland, where others have had their doubts. Both countries are heading towards clearer water, he seemed to feel, and both have well-established government bond markets. Both markets offer differing attractions for bond investment.

The Broader Outlook And the overall feeling? “In the developing and emerging markets, we’re looking broadly at lower yields and a contraction in interest rates”. This would augur well for prices as the global economy regains confidence. “Of course, there will be shocks along the way, both economic and political, and from a global diversification standpoint, we feel we’re set to take advantage of them”.

In the bigger markets, he agrees that there’s little scope for further contraction and that yields are probably set to rise over the longer term.

How about the rumours of a Great Rotation then, we asked, crossing our fingers slightly. Are we seeing institutions and private investors moving out of expensive sovereign debt and into equities? “The evidence is muted”.

How about the balance between sovereign and corporate debt, then, now that the yield gaps are reducing? There’s no obvious reason to change the present ratio, he says. “But if there were to be any movement here, I’d expect it to be towards government debt”.

The Global Opportunity Bond fund is currently 13.2% overweight on government debt.

QED.

For more comment and related articles visit...

www.IFAmagazine.com

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20/05/2013 13:28

Institute of Financial Planning THE PROFESSIONAL BODY FOR FINANCIAL PLANNERS AND PARAPLANNERS Post RDR, it will become even more important for advisers in the UK to align themselves with a relevant professional body or accredited body. Membership of the IFP offers you support and guidance whether you are a Financial Planner or Paraplanner. With a huge range of benefits, why not have a look at some of the ways in which we can help you?

Support you through regulatory change Engage with a community of professionals Follow a structured career path Increase your personal and business potential Harmonise your goals with those of your clients Keep up to date with relevant issues and news

To find out more or join visit www.financialplanning.org.uk or contact us on 0117 9452470

Guest Insight - Wells Fargo.indd 47

20/05/2013 13:28

THE BEE LINE

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

SEASONAL MIGRANTS THE REALLY SMART MONEY IS PLAYING AWAY THESE DAYS, SAYS STEVE BEE You probably don’t want to hear this, but I’m writing this month’s column on a beach in the Algarve. There are plenty of upsides to that, but one major downside is that I’m having to write it on the dopey little keyboard on my iPhone - not the easiest thing to do in bright sunlight, but the editor’s deadline is today so I really don’t have a lot of choice in the matter.

I did mean to write this article last night in the cool evening air, sitting on our ocean-facing terrace after dinner, but I got caught up in a local bar down by the beach watching Sunderland play Stoke in a crunch premiership match.

I watched the game with a bunch of retired guys from the north of England who live over here in Portugal in the winter and live back home in England in the summer. Basically, once the football season’s over they up sticks and fly home in a kind of migratory kind of mass behaviour that mimics the way birds organise their years.

It seems to make a lot of financial sense for them to adopt this idyllic lifestyle. Once the late autumn cold weather begins at the end of the English summer, this loose-knit group of retirees shut up their houses, turn off their central heating systems and turn down their council tax and book a cheap flight to Faro.

Apparently long-term winter lets over here are as ‘cheap as chips’ if you’ve got the right connections, and you can live a frugal healthy life here all winter for less than you’d spend heating a home back in the UK against the bitter winds of January and February.

One of the guys last night told me he now lives a healthy short-sleeved life all year round now, compared to the unhealthy, long-sleeved and beer-bellied life he endured while he was at work. Their descriptions of the ambling coastal walks they often make as a group, eating

48 Steve Bee.indd 48

May 2013

fresh caught fish grilled in the many beach bars that seem to line every cove along this rocky coastline, left me feeling that I’m getting plenty of my lifestyle choices completely wrong right now. Completely wrong.

I always thought that the beach bars here were shut up over the winter, but they’re not. There are plenty of active retired baby boomers from all over Europe who flock here for the winter, where their pension money goes much further.

It seems to me that the way pensions work is kind of turned on its head by this kind of behaviour. If you think about pensions from the Government’s point of view, what’s going on is that people defer income while they’re at

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20/05/2013 13:29

THE BEE LINE

work, and then draw that income when they retire. It’s deferred income and deferred taxtake - but it’s also deferring the day that that taxed income washes through the UK economy.

One of the biggest threats to that simple model seems to me that people might save for their pensions in cold countries, but then spend them in hot countries. For all I know, I saw evidence of just that last night in the bar on the beach.

One chap last night put that rather better than I think I could. When I asked him how long he was intending to keep up his migratory life, he said he planned to do it just long enough that the actuaries who priced his annuity at the turn of the century would come to wish they’d never heard of him. That got nods of agreement and smiles all round in the bar last night - that and a ten-man Sunderland team getting a late equaliser...

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

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PRODUCT REVIEWS

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

ADVENTUROUS INVESTORS WANTING TO BAG THE BIGGEST RETURNS SHOULD BE OUT THERE IN TIGER TERRITORY, SAYS NICK SUDBURY

FRONTIER MARKETS

Tiger, tiger, burning bright BlackRock F rontiers I nvestment T rust

It’s been said that investing in frontier markets offers a similar opportunity to an investment in the emerging markets 20 years ago. Adventurous clients willing to take the risk will be richly rewarded if the claim turns out to be true - but even the most optimistic proponents don’t expect it to be a smooth ride.

The easiest way to reduce the volatility is to invest in a diversified regional fund such as the BlackRock Frontiers Investment Trust (BRFI).

This is a member of the global emerging markets sector, and in the last 12 months it has comfortably outperformed the other eight constituents with a return of 27.8%. Over the same period the MSCI Frontiers index is up just 17.5%.

FUND FACTS BRFI aims to achieve long-term capital Name: BlackRock growth by investing in Frontiers Investment companies operating Trust (BRFI) in frontier markets. Its Type: Investment Co main country weightings are: Nigeria 14%, Qatar Sector: Global 12.2%, UAE 11%, Emerging M arkets Saudi Arabia 9.3% and Fund Size: £99.5m Kazakhstan 9.1%. The Launch: D ec 2010 rest of the portfolio is spread across a further Portfolio Yeild: 2.3% 20 countries as diverse Charges: 1.57% as Vietnam, Bangladesh, (plusp erformancefe e) the Ukraine and Iraq.

Manager: BlackRock Investment Management Website: blackrock.co.uk

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Product Reviews.indd 50

Despite the wide geographic dispersion it is actually quite a concentrated fund with 55 long positions and 3 shorts. The top ten holdings account for 34.7% of the portfolio, with the main sector allocations being: Financials 30.2%, Telecoms 15.5%, Consumer Staples 15.1% and Energy 10.3%. In recent weeks the main contributors to the performance have included a bank based in Sri Lanka and a hospital operator in the UAE. Many frontier markets trade on low valuations and offer high dividend yields. A combination of positive structural reforms, high growth and well-capitalised, liquid banking systems leave several of these economies well placed in the current global environment.

The main downside of investing in these areas is that they are less well regulated and may be affected by political and social instability. Another thing is that they do not tend to operate as efficiently, and there might be issues with corruption and problems with market irregularities and a lack of liquidity.

BlackRock Frontiers Investment Trust had a poor 2011, when it lost around a third of its value, but it has since clawed back all the lost ground. It is currently trading at a 3.6% premium to NAV, whereas historically the shares have been available at a small discount. BRFI offers a well-managed, diversified exposure with a low correlation to the developed markets, yet like all these funds it is only suitable for the most adventurous investors.

BRFI offers a diversified exposure with a low correlation to the developed markets www.IFAmagazine.com

15/05/2013 10:44

PRODUCT REVIEWS

In the forests of the night, Neptune China It’s thought that single country equity funds investing in China have attracted around $50 billion of capital inflows since 1995. As the world’s second largest economy – and the ‘C’ in the ubiquitous BRIC – China is not an obvious frontier market. But upon closer inspection, most of the money has gone into the Hong Kong listed H-shares used by global index providers such as MSCI and FTSE. The A-shares traded on the mainland stock exchanges of Shanghai and Shenzhen have historically been much more difficult for international investors to access. But things are about to change as the Chinese government is planning to increase its quotas to allow foreign investors to hold up to 15% of the free float rather than the current 1.3%.

This would eventually enable these shares to be included in the main global indices.

A move like this would be expected to have a beneficial impact on funds like Neptune China, which is benchmarked against MSCI China and could see a wave of new money and a significant increase in its investible universe. Over the last 5 years it has returned 16.8%, which puts it just outside the first quartile of the 37 funds in the IMA China/Greater China sector. Those who invested when it launched in December 2004 would have enjoyed a gain of 194%, although this is well behind the 271% achieved by its benchmark.

The managers, Douglas Turnbull and Robin Geffen (who founded Neptune Investment

Management in 2002), use the company’s economic and sector research to position the fund in areas that they believe have the greatest exposure to domestic and international growth themes. These include: continued economic restructuring, infrastructure development and the rising spending power of the Chinese middle class. As a result, the main portfolio weightings are: Financials 30.4%, Consumer Discretionary 16.8%, Industrials 12.2%, Energy 11.6% and IT 10.7%.

Neptune China FUND FACTS is positioned for Name: Neptune a modest Chinese China Fund recovery and recent Type: OEIC data suggests that this may be the right Sector: China / approach with various Greater China economic indicators Fund Size: £83.9m turning positive after an 18-month Launch: D ec 2004 slowdown. Turnbull Portfolio Yeild: 0.47% and Geffen see good value in the market Initial Charge and and are fully invested AMC: 5%, 1.75% in what they consider Manager: to be high quality Neptune Investment sector leaders. If the Management economy continues to pick up the fund Website: should deliver a neptunefunds.com decent return.

The fund is positioned for a modest Chinese recovery and recent data suggests that this may be the right approach www.IFAmagazine.com

Product Reviews.indd 51

May 2013

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PRODUCT REVIEWS

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

What immortal hand or eye Aberdeen Latin American Equity One of the main reasons for the incredible growth of the Chinese economy over the last 30 years was the low cost of labour - but unfortunately it looks as though increases in local wage rates are now making other markets more competitive.

It’s an ill wind, and all that. One of the major beneficiaries has been Mexico, which is now attracting manufacturing companies back from places like mainland China. These migrating businesses typically produce high value added products such as cars, planes and medical devices for American consumers just over on the other side of the border.

The safest way to benefit from the growth of a small market like Mexico is to use a more diversified regional fund, such as Aberdeen Latin American Equity.

This has a 20.5% weighting in the country - although its key position is the 64.4% allocation to Brazil, which has many attractions of its own – most notably, a large and youthful consumer population and huge mineral and farming resources.

Aberdeen Latin American Equity has had a bumpy ride, and it is currently up just 6% since it was launched in February 2011. The FUND FACTS main reason for the Name: Aberdeen lacklustre return Latin A merican Eq uity is that the region had a poor 2012, Type: OEIC underperforming Sector: Specialist the developed markets and the Fund Size: £93.1m broader emerging Launch: Feb 2011 markets.

Portfolio Yeild: n/a This in turn was largely TER: 2% because of Brazil, Manager: Aberdeen which suffered Asset Managers as a result of the weakness in natural Website: resources due to aberdeen-asset.co.uk concerns about

the level of global economic growth and China in particular.

The fund’s managers believe that the outlook for the region is more favourable, and that there is the potential for substantial growth. They think that the main driver in Brazil will be domestic demand and characterise it as a stock picker’s market. Mexico is seen as more of a macro opportunity with US companies bringing back manufacturing from China.

This has had a positive impact on local wages and employment and has boosted consumer demand. Higher infrastructure spending should also help to increase growth and improve competitiveness.

Much of the fund’s focus has been on domestically orientated businesses with sustainable earnings and good cash flow, hence the 28.6% weighting in Financials and 22.1% in Consumer Staples. The significant outperformance of these areas has led to some bargain hunting in the more cyclical and commodity-related sectors where the managers look to buy the best-in-class operations with good quality assets. There is no doubting the potential for growth in the region and a successful stock picking team like that at Aberdeen Asset Managers should be well-placed to take advantage.

There is no doubting the potential for growth in the region and this fund should be well-placed to take advantage 52

May 2013

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www.IFAmagazine.com

15/05/2013 10:44

PRODUCT REVIEWS

Could frame thy fearful symmetry?

Templeton Africa Fund It is hard to think of a more exotic region to invest in than Africa, yet in fact there are several specialist funds that offer this distinctive type of exposure.

One such is Templeton Africa, run by Mark Mobius, who is amongst the most respected managers operating in the emerging and frontier markets.

Mobius believes that many of the themes that apply to emerging markets, including strong growth, low valuations, and relatively healthy public and private finances, apply even more strongly to the frontier markets.

He says that these areas are home to more than 20% of the world’s population, yet they only represent around 8% of global GDP. If the gap were to close, it would potentially enable the frontier markets to grow more strongly than their emerging equivalents.

Templeton Africa was launched in May 2012 and is currently up by 26.8% when measured in sterling - well ahead of its Dow Jones Titans Africa 50 benchmark.

The main country weightings in the fund are as follows: Nigeria 32%, South Africa 21%, Egypt 18%, and Kenya 10%.

As you would expect, this is a relatively small fund with assets under management of $59 million – although, like its benchmark, it only holds 50 stocks.

The fund is domiciled in Luxembourg, and it has several different share classes including one denominated in sterling and another in US dollars. As well as investing in African equities, it also holds shares like Old Mutual that are listed elsewhere but have their principal business in the region. At present, three-quarters of the portfolio is in companies worth $5 billion or less, with the largest sector exposures being as follows: Financials 44.5%, Consumer FUND FACTS Staples 18.7%, and Name: Telecoms 15.7%.

Templeton Africa Africa is Type: SICAV very much a niche Luxembourg opportunity, and it carries a high degree Sector: of risk, but Mobius and Emerging Markets his team are highly Fund Size: $59m experienced at investing in these illiquid frontier Launch: M ay 2012 markets. It remains Portfolio Yeild: 0% to be seen whether the world’s second TER: 2 .4% largest and second most Manager: Franklin populous continent Templeton Investments can overcome the many challenges, but Website: if it can the rewards franklintempleton.co.uk could be enormous.

Africa is very much a niche opportunity but Mobius is highly experienced at investing in these illiquid frontier markets www.IFAmagazine.com

Product Reviews.indd 53

May 2013

53 15/05/2013 10:44

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

Lee Werrell, of CEI Compliance Ltd, takes a look at the FCA’s new powers, and reports on the regulator’s publications division Trail Commission: The FSA Giveth and the FCA Taketh Away During the run-up to RDR there was much debate, and much final clarity being sought, regarding trail commissions and the issue of ring-fencing them from the RDR rules.

The FSA confirmed that trail commission would be permitted for relevant business.

But then, alas, a 54-page Financial Conduct Authority (FCA) Policy Statement (PS) 13/1 entitled ‘Payments to Platform Service Providers and Cash Rebates From Providers to Consumers’ was published on 26th April 2013.

This would be mainly of interest to IFAs that operate as: n

Advisory firms;

n

Firms that provide services to, or receive services from platforms;

n

SIPP operators.

Is the FCA Handbook Affected?

The two areas impacted are: n

The Glossary of definitions;

n

Conduct of Business sourcebook (COBS).

What is the History?

The FSA previously published Policy Statement PS11/9 ‘Platforms – Delivering the RDR and other issues for platforms and nominee-related services’. This set out a number of rules which would came into effect at the end of 2012.

In June 2012, the Financial Services Authority’ (FSA) published its Consultation Paper 12/12 , entitled ‘Payments to Platform Service Providers and Cash Rebates From Providers To Consumers’, whereby the regulator consulted on changes to how platforms used by both advised and non-advised consumers would be paid. It was also proposed to prevent platforms in the non-advised market from passing on rebates to consumers in cash, and views were sought on a possible read-across of platform rules on payments for services to non-platforms markets.

The new rules were proposed to be introduced on 31 December 2013 with the proviso that this allowed for a one-year implementation period before the rules came into full effect.

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So What Does The Paper Say?

A broad range of responses were received to CP12/12 from an equally wide range of stakeholders, including some from individual consumers.

Restricting the influence that product providers and platforms have on the promotion of one fund over another is one of the main outcomes of the new rules. This outcome falls in line with the broader Retail Distribution Review (RDR) in its objective of limiting any adverse influence product providers have on distribution, and of aligning the interests of intermediaries more closely to those of their clients.

The rules aim to promote competitiveness in the marketplace by removing product provider influence over the distribution of products and any bias on adviser remuneration as well as improving the transparency and definition of services offered by firms to consumers. This means that the distribution of funds will not be influenced by rebates from product providers to platforms, and, therefore, platforms will have to become squeaky clean and transparent about the services they provide, to justify and demonstrate their charging structures to consumers.

For full details read the PS at: http://tinyurl.com/bnpbu8j

Next Steps, And The Impact on IFAs

The rules will come into effect on 6th April 2014. The rules on legacy payments will come into force two years later.

By 6th April 2016, firms will need to have moved all customers with legacy assets to the new charging structure, with an explicit charging model.

The FCA said it would “generally expect” to see clients shifted onto new ‘unbundled’ clean-fee share classes, which charge sharply lower annual fees from clients as they do not hand back commission payments either to advisers or to platforms in most cases.

This paper makes the extinction of advisers’ trail commission by the time the sunset clause came into force look inevitable - a shift that could see many adviser firms lose a large share of their revenues, therefore delivering an effectively fatal blow to adviser trail commissions. www.IFAmagazine.com

20/05/2013 13:33

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

Forthcoming Publications – What’s on the Radar?

There has actually been little of great substance emanating from the FCA since the new regulator took over the reins of the majority of the FSA’s work. A lot of consultation work is currently planned, but little Policy or Finalised Guidance has appeared that affects IFAs directly.

Future Publications

Whilst we make every effort to ensure it is accurate, the entries and dates on it do not represent firm commitments by the regulator.

From time to time, individual items contained may have a shorter or longer consultation period than the consultation period stated in this update.

Intended Audience1

Module^

Expected Date

Consultation Period

Expected Date of Feedback

All FSA-authorised banks and building societies and significant investment firms

finmar,

Q2 2013

N/A

N/A

Strengthening Capital Standards 4 -consultation on CRD IV - CP (3 star)

Banks, Building Societies and all BIPRU firms

bipru, genpru,

TBC

3 months

TBC

Financial Conglomerates Directive -Technical review amendments - PS to CP12/40

Financial Conglomerates, BIPRU Firms, INSPRU firms

sysc, genpru,

Q2 2013

N/A

N/A

A new capital regime for SelfInvested Personal Pension (SIPP) operators - PS to CP12/33

Pension providers, SIPP operators

Q2 2013

N/A

N/A

Complaints against the regulators (Bank of England, Financial Conduct Authority, and the Prudential Regulation Authority) - PS to CP12/30

Consumers and all firms and individuals that will be regulated, registered or authorised by the FCA, the PRA or the Bank

non-handbook:

Q2 2013

N/A

N/A

Transposition of Solvency II - Part 2 & Feedback to CP11/22 and CP12/13

All insurance firms captured within Solvency II, other insurers, trade bodies, financial advisers

solpru, cobs

Q2 2014

N/A

N/A

Client assets regime - multiple client money pools - PS to Part 2 of CP12/22

Regulated firms and CCPs

cass

TBC

N/A

N/A

Tracing Employers’ Liability Insurers - historical policies - PS to CP12/14

Firms, trade bodies, consumer

icobs

N/A

N/A

Restrictions on the retail distribution of unregulated collective investment schemes and close substitutes - PS to CP12/19

Firms advising on Unregulated Collective Investment Schemes, other unregulated products and providers of these products

glossary,

N/A

N/A

Personal pensions - feedback to CP12/5 and final rules on disclosures by SIPP operators, and consultation on inflation-adjusted illustrations - PS to CP12/29

Life insurers and other providers of personal pensions, and also firms that advise on personal pensions Consumers may also be interested

cobs

Q2 2013 N/A (disclosure) Q2 2014 (inflation adjusted)

N/A

Review of the client money rules for insurance intermediaries - PS to CP12/20

All insurance intermediaries to whom CASS 5 applies, trade bodies, market participants, customers and other interested parties It would also be of interest to insurers, particularly the discussion on risk transfer

glossary,

Q3/4 2013

N/A

HIGH LEVEL STANDARDS Recovery and Resolution Plans - PS to CP11/16 PS12/5 - published feedback statement: Recovery and Resolution Plans: Feedback on CP11/1

sup

PRUDENTIAL STANDARDS sysc, sup

bipru, inspru, solpru, sup

ipru(inv), bipru, cobs

13 & 14

complaints scheme

& handbook

(in general)

BUSINESS STANDARDS

8

cobs, coll

mipru, cass,

Q2 2013 Q2 2013

N/A

sup

See also the listings of FSA publications on Page 56 of this issue

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55 20/05/2013 13:33

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

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

FCA Publications OUR MONTHLY SUMMARY OF THE LATEST OFFICIAL PUBLICATIONS BY THE FCA

Note: The former FSA’s notification service for smaller firms and advisers has now transferred to the Financial Conduct Authority Larger bodies are now covered by the Prudential Regulation Authority based at the Bank of England

Dealing Fairly with Interest-Only Mortgage Customers Who Risk Being Unable to Repay Their Loan Guidance Consultation 1st May 2013 19 pages

Ref: GC 13/2

An exploration of the risks to consumers when interestonly mortgages reach maturity and the borrowers do not have the capital to repay the balance due. The Paper also sets out what the FCA expects firms to do to ensure the fair treatment of customers who are unable to repay the capital sum at the end of the term.

The guidance sets out the FCA’s views on how firms can act in line with Principle 6 to achieve a fair outcome for their customers. It is not intended as a prescribed course of action, and it is not the only way firms can act to abide by Principle 6.

Comments are invited on the proposed guidance in general, including examples of good and poor practice, and specifically on the cost benefit analysis of this proposed guidance (Annex 3).

Consultation ends 3rd June

n making the cost of the platform service clear to investors by ensuring that the platform service is paid for by a platform charge which is disclosed to and agreed by the investor n banning cash rebates for non-advised platforms to prevent these payments being used to disguise the costs of the platform charge These rules will come into force on 6 April 2014 but platforms will have two years to move existing customers to the new explicit charging model. At the end of the two year transitional period (6 April 2016) platforms will have to charge its customers a platform charge for both new and existing business.

FCA Regulated Fees and Levies: Rates Proposals 2013/14 Consultation Paper 9th April 2013 102 pages

Ref: CP 13/1

This CP covers the proposed 2013/14 regulatory fees and levies for the Financial Conduct Authority (FCA), the Financial Ombudsman Service (FOS) and the Money Advice Service.

A Policy Statement is to be published at the end of June.

Updating Disclosures to Reflect the Creation of the FCA and PRA

Consultation ends 9th June

1st May 2013 1 page

FCA Publishes its Approach to Regulatory Failure

A formal reminder, following the creation of the FCA and PRA and the renaming of the public Register, that firms are expected to review their documents and other disclosures as a priority, to ensure they are up-to-date and accurate.

The FCA recognises that in the exceptional circumstances arising out of the creation of the FCA and PRA, it may not have been possible to make all the required disclosure updates immediately upon the change, but (where transitional provisions are not available) firms must be able to demonstrate that they have plans to make these updates at the earliest practicable opportunity.

FCA Sets Out New Rules for the Platforms Industry 29th April 2013

The FCA is making changes to ensure that investors can make fully informed choices if they wish to use a platform and understand what they are paying for the service the platform provides.

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These changes include:

May 2013

FCA Publications + IFA Cal.indd 56

18th April 2013

This paper explains how the FCA will meet its new statutory requirement to investigate possible instances of regulatory failure and provide reports to the Treasury for publication. It aims to make clear when this level of scrutiny would and would not be justified, and it sets out the criteria for determining when the two conditions in the Act have been met.

The two criteria are: n A significant failure to either secure an appropriate degree of protection for consumers; or a failure that had or could have had a significant adverse effect on the integrity of the UK financial system or on effective competition in the interests of consumers; and n The events occurred, or were made worse, because of a serious failure of the regulatory system or on the part of the FCA. n The FCA says that a formal statutory investigation and report for the Treasury is expected to occur only in exceptional cases.

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Australia v British & Irish Lions – 2nd Test Melbourne, Victoria, Australia

30

Final publication of FCA Regulated Fees and Levies for 2013/14

MAY 2013

JULY 2013

13-14

Global Tax Summit 2013 Montreux, Switzerland

1

Lithuania assumes the EU Presidency

15-16

European Business Summit Brussels, Belgium

3-7

Royal Regatta Henley-on-Thames, Oxfordshire, UK

18

Heineken ERC Cup Final Dublin, Republic of Ireland

6

Australia v British & Irish Lions – 3rd Test Sydney, New South Wales, Australia

22

European Council Meeting Brussels, Belgium

10-14

England v Australia – 1st Test Trent Bridge, Nottinghamshire, UK

25

Aviva Premiership Cup Final Twickenham, UK

18-22

England v Australia – 2nd Test Lord’s, London, UK

22

Projected implementation date in EU Europe for AIFM directive

22-24

US Pensions Summit Chicago, USA

JUNE 2013 3

Consultation period ends for Guidance Consultation GC13/2 (Dealing Fairly with Interest-Only Mortgage Customers Who Risk Being Unable to Repay Their Loan)

AUGUST 2013

3-4

Emerging Markets Investment Summit Warsaw, Poland

1

Forum on Industrial Organization and Marketing 2013 Frankfurt, Germany

5-7

World Economic Forum on East Asia Nay Pyi Taw, Myanmar

30

Parliamentary elections in Japan

6-7

G20 Finance Ministers and Central Bank Governors Deputies Meeting St Petersburg, Russia

17-18

G8 Summit Enniskillen, Northern Ireland

19-23

Royal Ascot Week Ascot, Berkshire, UK

22

Australia v British & Irish Lions – 1st Test Brisbane, Queensland, Australia

24-7

Wimbledon Tennis Championships London, UK

27

European Council meeting Brussels, Belgium

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I FA C A L E N D A R

Dates for your diary

29

SEPTEMBER 2013 5-6

G20 Leaders’ Summit St Petersburg, Russia

9

Parliamentary elections in Norway

14

General elections in Australia

17

St Leger’s Day race Doncaster, South Yorkshire, UK

22

Federal elections in Germany

30

Capital-to-assets and liquidity requirements for credit unions take effect

HAVE WE FORGOTTEN ANYTHING? Let us know about any forthcoming events you think ought to be in our listings. Email us at editor@ifamagazine.com and we’ll do the rest.

May 2013

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

MOTLEY CRU GILL CARDY TAKES HER CAMPAIGNING CAUSE TO WESTMINSTER. WATCH OUT, WESTMINSTER

By the time this month’s magazine reaches your desk or desk-top, I will have visited the Houses of Parliament, as the guest of George Galloway MP, to brief Members of Parliament on ‘the Arch Cru situation’. As many as 15-20,000 investors were affected by the failings of the Arch Cru funds. Many cannot expect to get more than half of their original investment returned.

If investors withdrew their funds in March 2009, just days before dealings were suspended, and reinvested in other funds, they could have obtained returns of around 55% in the last four years. Instead, they have been forced to watch their lockedin funds diminish in front of their eyes by a further 40%, and potentially more depending on how much is realised from the orderly wind-down of the residual investments.

Here There Be Dragons So, why am I briefing MPs on this sorry tale?

MPs do not understand what goes on under the bonnet of investment funds, so they defer to those who do – which is to say, Treasury ministers and the regulators. MPs, I suspect, have as little interest in the intricacies of anything financial as the rest of the UK population.

Therefore, when investors and advisers write to their MPs expressing their concerns, their questions are almost always passed on to either the Treasury or the regulator, or both, for a detailed response.

What comes back is a standard letter from the Treasury or the regulator, or both, which says that a redress scheme has been put into place which will ensure investors are compensated for their losses.

Except that it’s only some investors, in some situations. And the compensation will come from advisers or their PI insurers (though more advisers than anyone is prepared to admit are actually not covered for Arch Cru claims, or will find that paying the excesses will bankrupt them). Worse, where firms have departed, either coincidentally as a result of RDR or as part of a deliberate plan to contain their liabilities, the liabilities will fall on all other adviser firms by way of Financial Services Compensation Scheme levies.

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PIECES OF EIGHT!

Avast Ye Scallywags So I’m sure you’ll understand that the task of writing a briefing to set out the events of the last six years, simply, accurately, fairly and honestly, has been a challenge. Our elected representatives are being fobbed off with half-truths, and they have no information to challenge what they are being told.

I will set out how the Arch Cru investments worked, the role that each party played, and what went wrong. I will explain how many investors will never see a return of their investment in spite of platitudes from Whitehall and Canary Wharf, and in spite of the fact that every single party in the product design and delivery chain was authorised and regulated by the Financial Services Authority.

In these days when integrity in financial services and confidence in financial markets has been under the spotlight as never before, it is not too much to hope that well-briefed and knowledgeable MPs will want to hold the appropriate parties to account, for the benefit of individual investors, their constituents, and for the benefit of the financial system as a whole.

Gill Cardy’s IFA Centre has engaged solicitors Harcus Sinclair to set out a case for a better deal for Arch Cru victims. And an online claims centre has been established at www.archcruclaims.org For more comment and related articles visit...

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

TELL IT LIKE IT IS DUMP THOSE ILLUSIONS, SAYS RECRUIT MEDIA’S SAM OAKES So you’ve built a successful career working within an established firm, you’ve obtained all the relevant qualifications in line with your role or beyond, and you’ve developed profitable and loyal relationships with clients and other professionals within the market?

Great! Now you may be starting to notice changes within the market which are making you think, “So what is my next career move?”

You’re not sure? Relax, you’re not the only person who’s feeling disillusioned by what is potentially out there for you.

Our consultants find themselves speaking every day to candidates who are perhaps unsure about what

they want in their career, or who are hesitant to change for various reasons – or, perhaps, people who are all thought and no action and are waiting for that job to simply fall into their lap.

We find that many candidates are put off by the idea of going self-

“Believe it or not, our best results have come from educating our candidates on the truth” 60

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20/05/2013 13:39

requirements and then acting with integrity. If our clients are top-end, we don’t want to just throw them any candidate that comes our way and risk losing the trust that we’ve gained from them.

The same goes for our candidates. We don’t want them to be weighed down by pressure to apply for every job going – and, from experience, this doesn’t bring the best results anyway.

Face The Truth Believe it or not, our best results have come from educating our candidates on the truth - what it’s really like out there in the marketplace, and what competition they are potentially facing. We are not reluctant to challenge a

THE HUMAN RESOURCE

employed, or of working for particular firms, because of certain information they have been told in the past or the uncertainty about job security.

But, with the inevitable changes that are happening (or, indeed, have happened) within the financial services industry, isn’t it about time that people opened up their eyes and saw the reality beyond the dream?

Let me say straight away that we don’t want to burst anyone’s bubble. But we can certainly see a candidate’s worth in the market. The thing is, sometimes he or she can’t.

Many recruiters tend to tiptoe around their candidates, and settle just for submitting them to any client who is hiring, regardless of whether or not the candidate thinks the job is suitable or whether they actually match the criteria. Sadly, this approach can lead to rejections which can put individuals off the job search.

That’s where a really first-class recruiter comes into his own.

We think that a loyal relationship with a client should entail understanding his or her exact

candidate, and we’ll question their thought processes.

And we find that that can help them to see things from a different perspective.

How is this done? Well it’s down to simple questioning, and having the correct information.

Instead of going in all guns blazing through a list vacancies, we ask open and probing questions and give true feedback on their answers.

So ask yourself. What do you want in your career?

What have you done towards finding this ideal role you have imagined? What are your apprehensions about going self-mployed/working for a particular company? What can you bring/offer to some of these companies you have applied for? These are just some of the starter questions that we ask before digging deeper to find out your true aspirations and seeing where you fit in the market.

When we question our candidates this way, we find that they may realise that, in some ways, they are being unrealistic in their search, or that their current role may not be all it is cracked up to be. Equally the grass may not be greener.

It’s true that a good recruiter understands the importance of honest communication with his candidates. It can be the make or break of maintaining loyalty and sincerity, and it is also the pathway towards placing them in their desired role.

We believe that we need to know what to say and how to say it. We listen, we ask questions, and we are prepared for any questions, concerns and or objections that we may receive. Only in this way can a recruiter offer a truly consultative approach, rather than pushing a list of products.

For more comment and related articles visit...

IFAmagazine.com

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Financial Services Recruitment Specialists

Chartered IFA

Self-Employed IFA

Employed IFA

Edinburgh and surrounding areas

Nottingham location

London

Fee based service for individuals and businesses. HNW client bank provided and excellent back office support.

Excellent support towards building your client bank. Generous business split.

Marketing that generates REAL LEADS!

Chartered IFA firm. In house support provided. Active client bank to work from. Fantastic City based office.

My client is a whole of market IFA, they offer true holistic financial advice to their clients.

They have excellent support in place for compliance, a very attractive website that generates 20,000 hits per month and a huge amount of new enquiries per week for at retirement business, annuity, SIPP and Flex draw down business. All leads are passed onto the self-employed advisers and generate £1750+ in fees per case.

My client is a fee based financial planner, they specifically work with clients that hold 250k+ of investable assets. The business is run by two successful partners who also advise and is supported by Para planners and a strong administration team.

The business is set up to offer passive advice not active, so the IFA that comes on board needs to fit this criteria they also no longer advise corporate clients.

My client is focused on supporting IFAs, with experienced administrators, REAL LEADS and the backing of a truly whole of market proposition along with on the job training and support. My client will offer up to 70/30 splits without any on-going charges, a fantastic office, computer desk etc, advertising and marketing that truly works! All FSA fees and PI ongoing costs are covered by the client.

My client is working with top accountancy firms and has a strong presence within the local area; a large amount of business comes through personal recommendations.

An award winning Chartered Financial Planning firm who provide a comprehensive, innovative and practical fee based wealth management service to individuals and businesses currently has a unique opportunity in their Edinburgh office.

My client are seeking a Chartered and experienced IFA to join their growing and well regarded Team and provide a Holistic planning service to HNW clients in line with the requirements of the company.

This is a unique position that will offer the successful individual an established HNW Client bank with trail income in the region of £100k plus a new group scheme to service. Salary depends on experience/ qualifications, but will be circa £50k and you will be eligible for bonus payments, which will increase when income reaches above target revenue of £200k.

To be considered for this role, my client requires a fully chartered advisor who has no less than 5 years relevant industry experience. You will have substantial experience in relationship management and lead generation as you will be developing a client bank of your own and maximising opportunities.

A proven track record in exceeding targets and expectations is essential.

Ideally candidates will be based in or around Edinburgh where the corporate clients are based, with the remaining clients all within a 25 mile radius.

In return for expertise and commitment, my client offers the successful individual the opportunity to work within a mature and driven team environment with full administration and paraplanner support.

We understand how hard it is to become an IFA, with very limited opportunities to enter the market, especially when you are unlikely to have any existing clients of your own.

This role would suit an existing IFA who is perhaps disillusioned with their current home, requires a fresh challenge or is not receiving market support, however our client is also eager to meet other financial professionals such as Bancassurance advisers, Paraplanners, Trainee IFA’s or Mortgage Advisers who are qualified to Level 4 Diploma and see this as their next step in their career.

To be a fit for this client you need to have your own client bank, and advising private clients with 250k minimum investable assets. Clients below this are accepted but need to be paying fees of £2500 per year to meet the business model.

Professional and secure my client is a great home for an already established IFA that is able to win new business, requires the backing and support of an administration team and a competitive basic salary.

Our client has an existing team of IFAs who have all held a variety of positions before they joined, so they have a proven transition model for individuals who are not currently in a financial adviser position.

They require an ambitious and client orientated professional who can embrace the constantly changing environment that is financial services today. All FSA fees and PI ongoing costs are covered by the client.

This is a very unique opportunity, contact Sam Oakes at RecruitUK, in confidence.

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Contact us to discuss our latest opportunities:

T 0844 371 4031

Employed and Self-Employed IFA

E HR@ifamagazine.com

Employed and Self Employed IFA

Hertfordshire location

UK wide

Competitive basic salary / business splits. Excellent connections in place with stockbrokers, solicitors and accountants.

Basic 40k - 70k + bonus.

Paraplanner and Admin support with full home set up or modern and professional office to work from.

My client is a well regarded wealth management firm who are representatives of a FTSE 250 organisation. They are currently recruiting for an experienced financial adviser to work in their prestigious office on an Employed or self employed basis.

Recruit UK Ltd are exclusively working with a whole of Market IFA who are offering a basic salary of 40k – 70k for advisers who have a business plan and established client relationships. They offer a leading x2 salary validation that triggers 50% bonus of all business written (recurring income goes towards yearly target)

My client has an enviable reputation for delivering whole of market holistic advice to High net worth and corporate clients and they have created a loyal client base.

Their core business is investment orientated, specialising in pre-retirement planning, IHT, Pension and long term care and they are consistently seeking new ways to expand the business of their specialist advice, including building connections with local estate agents to help with the selling of property for long term care.

An individual who can bring their own client bank is advantageous however you will generate client through connections and introducers and existing clients. Possibly suit an adviser under restricted covenant.

This is clearly an attractive opportunity and you will join a motivated team but the key selling point is the list of introducers you will pick up as my client have developed strong connections with a firm of stockbrokers, solicitors and accountants, so there is great potential to really open up leads and self generate.

The firm has a strong track record of turning talented individuals with a limited supply of clients into high performing and high earning advisers.

For more information on this and others roles we’re recruiting for please contact Sam at RecruitUK .

Thinkers.indd 63

You don’t need 100’s of clients, what’s more attractive is ‘low number of clients high level of investable assets’ Think about your top 25 clients and the relationship you have with them.

Below is an over view of the proposition and a guide to who qualifies; E.g of earning potential; £40k basicx2 validation = £80k target.

Year 1 n You write 120k of total business = 40k + 20k Bonus n

You attract 4 million AUM in first year @ 1% recurring income = 40k recurring income (for next year).

Year 2 n Target 80k you write 120k new business (on top of 40k recurring income) = 40k basic plus 40k bonus n

You attract a further 4 million AUM in second year @ 1% increases recurring income to 80k.

Year 3 n Target 80k you write 120k new business (on top of 80k recurring income). n

You now earn 50% bonus of everything that you write!!

40k basic plus 60k bonus!!!

Who would be a fit for this company? n

Bancassurance Advisers with strong relationships with existing clients (transferable) who need a basic salary and a route into IFA

n

Hunters able to generate own business, working with own introducers and own clients.

n

Existing IFAs with clients who require support

n

Anyone looking for an industry leading buyout option.

n

Someone who wants to remain in control of their clients.

n

Diploma qualified and competent adviser status along with SPS

n

If you want employed to self-employed (up to 80/20 split).

On top of the excellent levels of business you could be writing, our client offers full support in terms of a dedicated administration team and paraplanner. They have excellent training, point of sale tools and full marketing tools with an online CRM. This is a unique opportunity for the right adviser, if this is of interest please contact Sam Oakes at RecruitUK to discuss in confidence .

20/05/2013 13:41

UK’s Number 1 IFA database Register for FREE unlimited access - Join this rapidly growing community today!

Visit www.MyTouchstone.co.uk to register or call 01236 794 120 “I wish to express my appreciation to MyTouchstone for data on hourly fee rates for IFAs in my area of SE England.

The fact that I had permission to quote the data in my client communication allowed me to justify and amend my hourly rate from £125 to the average for my area of £160”, said Mike Grant of Montgo Consulting Ltd, East Sussex.

How can MyTouchstone help your firm?

1) Investigate ‘Hotspots’ of investor activity on Google maps.

2) Discover your firm’s ranking and market share in our IFA League Table: Per location/per specific area of advice.

3) Adviser Charging Guide: How do your fees compare with your peers in you location?

4) RDR Survey: Understand how many firms are RDR ready and the biggest hurdles still to over come.

5) National & Regional Support Services to IFAs: Rankings for networks, broker service provider, outsourced fund management, wraps and platforms.

6) New Business Trends: Discover how business is changing from one quarter to the next.

7) Access our ‘Fund Focus’ page created in association with FE & Rayner Spencer Mills gain a unique insight into the latest fund selection and performance trends.

8) View our ‘Platform Page’ to find out the latest trends in the platform & wrap market, updated quarterly with the latest stats, reports & insights.

9) Download the latest FSA RDR Guide.

Independent financial advice is changing. Wisdom is knowing what to do next…..

Visit www.MyTouchstone.co.uk for this FREE service or call 01236 794 120 www.MyTouchstone.co.uk

Thinkers.indd 64

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THINKERS

THE INVISIBLE HAND “The real tragedy of the poor is the poverty of their aspirations” Adam Smith Born 1723 in Kirkcaldy, Fife Died 1790 in Edinburgh Enlightenment Man The “father of modern economics”, the “world’s first free-market capitalist” and the man on the £20 note (what, you hadn’t noticed?) was always going to be a bit of a handful for the modern mind to grasp. Not least because Smith grew up in a mid-18th century Scotland where science, religion and philosophy merged in an experimental way that we now find deeply unfamiliar. Smith thought of himself primarily as a social philosopher.

But Smith’s books were not only a weird amalgam of science and belief – they were also interminably long. His Wealth of Nations (1776), a study of Europe’s industrialising economy, ran to five huge volumes, and there are relatively few experts who can truthfully claim to have read them all properly.

Looking After Number One That’s just as well, because the essence of Smith’s idea was simple enough. Rather than needing to be actively organised by the state, he said, society would work most efficiently if the politicians kept their interfering hands off and allowed the individual – whether it was a trader or a consumer – to seek out the best and most inventive result by himself.

Of course, that didn’t give anybody carte blanche for unscrupulous or dirty dealing as Smith would hardly have felt it necessary to add. (He had spent enough years teaching philosophy to take that sort of thing for granted.)

And everyone owed it to society to pay taxes and to contribute to the common good. But Smith’s faith in the workings of the ‘invisible hand’, that inborn tendency to unconsciously produce the best results for society, was absolute.

Keeping Politicians In Their Place Well, almost. Smith didn’t trust the business world quite enough to want

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Thinkers.indd 65

it getting involved in political matters.

Given the chance, he said, business people would soon try to rig the laws and the markets for their own benefit.

And conversely, it was the duty of politicians to keep them out of public policy making. The links and parallels with America’s low-tax, libertarian thinkers are already becoming clear.

Move Over, Henry Ford Smith was one of the first to describe how division of labour could improve efficiency.

If a man set out to make a pin, he said, the 18 steps required would mean that he could produce only a handful every week.

But if ten men divided up the same task in assembly-line fashion, you’d get thousands of pins. Yes, this seemingly obvious thought was new thinking in the 18th century.

Philosophical Works An Inquiry Into the Nature and Causes of the Wealth of Nations, as it was properly called, was rather different in tone to Smith’s other major work, The Theory of Moral Sentiments (1759), which wasn’t laissez-faire at all, but which talked about how human morality depended on “mutual sympathy” between the individual and other members of society. So the one book said that trust was everything; the other said that selfinterest was the way to get ahead. Go figure.

A Strange Bloke Smith may have been a genius, but he allowed himself some odd quirks. He talked incessantly to invisible people, he often walked around with a stupid grin, and he once made a pot of tea by absent-mindedly boiling up bread and butter. (And drank it.) He never married, and he ordered that his papers be destroyed after his death. A pity.

May 2013

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T H E OT H E R S I D E. . .

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

CONFOUNDED INTEREST

SO YOU THINK TODAY’S LOW SAVER RATES ARE A BIG CON, ASKS RICHARD HARVEY? YOU AIN’T SEEN NOTHING YET Lessons From History The folk at my local Lloyds TSB must loathe customers like me. They’re only doing their job, and I do try so hard not be chippy.

But when their Flogger-in-Chief of Cash ISAs phoned me up last month to enquire whether the good lady wife and I would like to reinvest our fund for another year, and when she offered me a rate that was only a smidge north of 2%, my grumpometer went off the scale.

Confirming that inflation was likely to be around 3% in the coming months, I proffered the view that, while it was frightfully kind of them to pay us their going rate, it actually meant that we would be out of pocket by the end of the year. It all went quiet on the other end of the phone.

Anyway, a few days later came the news of the death of Baroness Thatcher, saviour of our nation/destroyer of civilisation (delete as appropriate).

Amidst the blizzard of media coverage, one or two of the more rightwing papers carried backgrounders on the dire economic and political circumstances which had brought Mrs T to power in the first place.

Predictably, they focused on the crushing power of the unions in the Labour Party

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era of the mid-70s; the rampant inflation – in 1975, I recall getting pay rises every three months, just to keep pace; and the inevitable cap-in-hand plea to the International Monetary Fund.

1975, as it happened, was also the year that my publican Dad finally called Last Orders and departed for the celestial saloon bar in the sky. I’m not sure that his old heart could have stood much more anyway, since he’d watched his life savings being steamrollered by an inflation rate which had reached an astonishing 27%.

So, pondering on how history teaches us all lessons, I probably owe an apology to the saleslady at Lloyds. Maybe I should tell her how grateful we are that low inflation means we’re only going to be losing a teeny chunk of our ISA savings, rather than a shedload?

The Mediterranean Job The stunt by the Euro-kleptocracy of raiding Cypriot bank accounts, as part of the deal to prop up the country’s crippled finances, has not only caused dyspepsia to the rich Russians who were among the main losers, but also to the genteel battalions of Brit pensioners who had already left the UK for a sunshine retirement on the cheap.

A friend living in France says his IFA has advised him that the Great Cypriot Bank Heist has set a clear future precedent for governments of other EU countries to snaffle their citizens’ savings if they are so inclined.

Which provides a clear and present opportunity for financial advisers to contact their clients living in the Eurozone and offer a safer harbour for their money.

Right here in the UK. Go to it!.

www.IFAmagazine.com

20/05/2013 13:43