Ifa33 August

For today ’s discerning financial and investment professional

Women in Finance India, a Shining Prospect AIM Portfolios and IHT

NEVERENDUM? SCOTLAND HAS SPOKEN Now The Shouting Is About To Start

SEPTEMBER 2014

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ISSUE 33

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CONTENTS C O N T R I B U TO R S

Brian Tora an Associate with investment managers JM Finn & Co. Steve Bee founder of Jargon FreePensions, and of Jargon FreeBenefits.

Lee Werrell a senior compliance consultant and industry adviser.

Richard Harvey a distinguished independent PR and media consultant.

Nick Sudbury known for his columns in many leading financial magazines.

Gillian Cardy Network Development Director at ValidPath.

Neil Martin has been covering the global financial markets for over 20 years.

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

THE FRONTLINE: The union lives to right another day. “For a generation”?

Maybe not.

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

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Salmond’s Legacy

And where we go from here

16 Putin’s Bluff The Russian president has had a fine run of luck, says Michael Wilson. But it won’t last

20 Women in Finance Anne Richards and Julie Jones discuss how women are demolishing the glass ceilings

24 AIM and IHT Relief Andrew Banks from JM Finn discusses a wrinkle that’s worth considering

26 The Seven Ages of Income Part One of a three-part series on using income products during critical stages of life planning

31 Downing Goes VC IFA Magazine talks to Downing’s Matt Penneycard about a forthcoming high tech investment venture

35 What’s Wrong With Cash Jeremy Roberts, Blackrock’s Head of Sales, says UK investors will need a healthier risk appetite

Editor: Michael Wilson

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Art Director: Tony Merlini

The Penny Drops

Publishing Director: Alex Sullivan

Yes, that’s right, says Steve Bee, your pension fund is your own money. Great idea, isn’t it?

editor@ifamagazine.com

tony.merlini@thewowfactory.co.uk alex.sullivan@ifamagazine.com

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CONTENTS

43 Doctor, Doctor Independently-minded IFA Ian Coley on reform, regulation and having great clients

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Discounts Feeling the Squeeze IT discounts are narrowing, says Brian Tora.

Whatever can it mean?

48 India – Back To Growth Three senior fund houses share their thoughts about the exciting task that awaits Narendra Modi

52 Dealing With An Investigation Lee Werrell concludes his two-part guide to mopping up after a regulatory mistake

56 FCA Publications and IFA Calendar In the news, in print and in court. Our monthly listing of what’s new in FCA-land

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IFA Magazine is for professional advisers only.

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

Assessing Risk Wouldn’t it be nice if we could all agree on how much risk is risky, says Gill Cardy?

‘IFA Magazine’ is a trademark of IFA Magazine Publications Limited. No part of this

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publication may be reproduced

Thinkers: Amartya Sen The man who redefined poverty, and changed the world

or stored in any printed or electronic retrieval system without prior permission. All material has been carefully checked for accuracy, but no responsibility can be accepted

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for inaccuracies. Wherever

The Other Side

research and where necessary

Somebody’s going to make money from the pensions splurge, says Richard Harvey.

Unfortunately it might not be you

appropriate, independent legal advice should be sought before acting on any information contained in this publication.

IFA Magazine is published by IFA Magazine Publications Ltd, The Old Wheelwrights, Ham, Berkeley, Gloucestershire GL13 9QH Tel: +44 (0) 1179 089686 ©2014. All rights reserved

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WORDS OF WILSON

September 2014

Buried Treasury Digging in my veggie patch the other week, I came across a reminder of the past that seemed almost too timely to be true

There among the onions lay a George I Hibernia farthing, dated 1723 and completely immaculate after nearly 300 years in the Wiltshire soil.

A hurried Google history lesson followed. It seemed that King George, anxious to stamp his authority on the dispossessed Irish, had minted huge quantities of these coins in 1723, for use in Ireland only. And that the ungrateful wretches – unimpressed, perhaps, by the imperial roman laurel wreath that the hated George was wearing - had largely refused to use the Hibernia coinage. Whereupon George sent most of the coins to out the American colonies, where they didn’t want them either.

Making Fiscal Independence Work Fast forward 291 years and with the independence referendum now safely in the background - we can probably afford to muse pleasantly on what might have been. Yes, Alex Salmond is going to be able to keep the UK pound which his predecessors would have probably spat upon while also running his own fiscal show up in Edinburgh.

That’s a bit of a logical contradiction, of course, because you can’t tag along with somebody else’s currency unless you’re also willing to support the underlying central bank with your own responsible policies.

If Alex’s boys decided to swamp

Scotland with new regional spending and borrowing, that would thump the pound in London. A bit like, err, what Greece did to the euro….

Fortunately that’s not on the cards either. Devo Max – sorry, the “Scotland Act”, which is scheduled for next January – allows Scotland such a big degree of fiscal autonomy that the talk about a federal UK isn’t as wide of the reality as you might think.

But look, other nations have coped with extensively federal fiscal set-ups too.

Germany, Australia, Canada, and of course the United States. Not many losers there, wouldn’t you say?

Mike Wilson, Editor

The stroppy Scots would probably have given George a similar raspberry at the time.

Scotland had finally acceded to the union with England in 1707 - but under widespread public protest, and largely because the Scottish parliament had spent itself into the ground. (Those ironies just keep on coming, don’t they?) As it happened, though, the Scots had eventually settled for issuing their own sterling banknotes, and that was that.

They still do.

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NEWS

Uh-Oh Just when Barack Obama didn’t want it, a hint of an early autumnal chill appears to have settled over the US economy

It’ll probably sound a little odd if we say that the reason for this sudden chill is the news from the Bureau of Labor Statistics on 5 September that the country added 142,000

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new jobs in August, and that the unemployment rate dipped to 6.1%, from 6.2% in July and 6.7% in April. What makes that hopeful fact trickier is that until now America has been adding a much higher average of 212,000 jobs a month. And that, with autumn coming on, and the construction and agricultural jobs set for a seasonal decline, the outlook is really not as rosy as the traditionally optimistic US press has been hoping.

Too Little Slack?

That in turn puts a question mark under Fed Chairman Janet Yellen’s hopes to raise US interest rates in the next couple of months.

Ms Yellen had originally been thinking in terms of mid-2015, but she had been hinting about bringing the hike forward so as to meet with a reasonable level of confidence in the economy.

Back in March, the Fed’s line was still that the economy had significant slack and that it was a long way from reaching full employment. But as the jobless proportion had narrowed, she’d changed her line. At an August economic policy symposium in Jackson Hole, Wyoming, Ms. Yellen had suddenly broadened her terms of reference. The central bank’s assessments of the degree of slack, she

Janet Yellen, Chair of the Federal Reserve

With the US President gearing up for his last midterm election on 4 November – and with Syria, Iraq and Ukraine already eroding his pledges to stand by his previous promises – the Prez is looking at what may be a weakening of the US situation.

A combination of so-so growth figures and unhelpful job statistics have... but no, make your own mind.

The central bank’s degree of slack “must be based on a wide range of variables” that require difficult judgments about “the cyclical and structural influences in the labour market”

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NEWS IN BRIEF

said, “must be based on a wide range of variables” that require difficult judgments about “the cyclical and structural influences in the labor market.”

Well yes, that seems obvious enough.

For the record, the evidence as far as it goes is that housing demand has improved a bit in recent months; that consumer spending and tourist spending wasn’t doing too badly; that lending was up in most areas, apart from mortgage lending, which remains sluggish; and that manufacturing activity appears to be broadly stable – not growing, not shrinking.

In short, it could be worse, but it could be better too. Independent estimates in the United

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In short, it could be worse, but it could be better too.

Independent estimates in the United States currently favour a final-quarter uptick that will cancel out the generally disappointing third quarter

States currently favour a final-quarter uptick that will cancel out the generally disappointing third quarter – but it seems doubtful whether 2014’s final GDP growth will exceed 2% - less than the 2.2% outturn for 2013.

Will 2015 be better?

The same estimates project 3% growth in 2015, which would be excellent for Obama if it happens. But there are still worries that this year’s rather good profits growth might come unstuck. And with the cyclically adjusted p/e on the S&P 500 nudging 26 (compared with a trailing twelve month figure of 18.4), “fully valued” might not be an inappropriate way of putting it.

Independence Day Worries over the Scottish independence vote were widely blamed for a relapse in UK share prices, as the markets considered the potential impact of Scotland being forced to abandon sterling. Standard Life, Lloyds and RBS had all announced plans to migrate their headquarters to London in the event of a Yes vote.

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NEWS NEWS IN BRIEF

Crude Behaviour Oil prices fell in July and August, conpounding fears that tensions in Ukraine and the Middle East might result in a supply squeeze. Slowing growth in China was widely believed to be responsible.

Common Sense We can all

Steve Webb MP, Minister of State for Pensions

breathe out.

At long last, the Government has confirmed that the ridiculous remaining

Switch Hit for Six

restrictions on

Bank account switching is progressing less quickly than expected, FCA chief executive Martin Wheatley declared.

New results from the Payments Council revealed that in the first 11 months of its operation, 1.1 million customers had switched their accounts – a 19% increase on the previous period. But only 2.2% of current account holders had used the system overall.

annual NEST

A Nice Surprise Jean-Claude Juncker, the recently-elected president of the European Commission, gave David Cameron an unexpected present when Britain’s Jonathan Hill (above), a former leader of the House of Lords, was appointed European commissioner for financial services. Mr Cameron had earlier called Juncker’s election ‘a disaster for Europe’.

No hard feelings, Dave.

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contributions are to go Pensions Minister Steve Webb has announced that the current cap of £4,600 a year will be history after 1 April 2017, and that the inward transfer of funds – such as from a previous pension - will no longer be forbidden.

So why did it take so long? We mean, since automatic enrolment is already cracking the whip behind the Government’s drive to get people saving?

Unfortunately, it looks as though Brussels may have been to blame.

“I am pleased to announce the government intends to remove the annual contribution limit and transfer restrictions on NEST,” said Mr Webb as he made the announcement on 8 September. “This

is a common sense decision. By convincing Europe to support us, we’ve achieved a victory for consumers.”

The View From Brussels So far, so cryptic. What it’s all about is that the European Commission has been cagey up till now about letting statefunded pension schemes like NEST do too much, in case they should distort or even threaten the prospects for competition from private pension firms. But the Commission has now accepted assurances from David Cameron’s Government to the effect that the scheme won’t be allowed to interfere – and, more to the point, that shackling NEST now would make it practically impossible to deliver its auto-enrolment commitment on time.

“The UK is concerned that, due to these two constraints, SMEs will expend resources seeking alternative automatic enrolment provision but find they have no alternative to NEST very late in the preparation timetable,” said the document (http://tinyurl.com/ mtte5ep). “This would undermine its ability to deliver its SGEI effectively during the introduction of automatic enrolment and consequently damaging confidence in the pension reforms more generally.”

“Removing the cap on contributions

by April 2017 means that the cap will be gone before minimum contributions increase from their current level (2%) to 5%,” said NEST chief executive

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Tom McPhail, Hargreaves Lansdown

Prevails Tim Jones. “That not only simplifies things for employers, but also helps NEST members in building up their pots in the longer term.”

The industry itself is right behind the Government here.

“Auto-enrolment is working better than expected,” said Tom McPhail from Hargreaves Lansdown on 8 September. “The argument in favour of artificially restricting NEST’s ability to compete directly with its pensions industry peers is no longer relevant.”

National Employment

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Savings Trust (NEST), which was established by government as part of the 2008 auto-enrolment reforms, is a national defined contribution workplace pension scheme specifically designed to be available to all employers so as to help them meet their new duties. At present the scheme has over 1.5m scheme members and works with over 8,900 employers.

NEWS IN BRIEF

A Bit of a Nightmare

“The argument in favour of artificially restricting

Bitcoins had another wretched month, with their value falling to US$477 by 11th September, down from $647 in early July and $1,147 in December 2013.

The news came as a new service was announced allowing consumers to run Bitcoin “wallets” within the euro payments system.

NEST’s ability to compete directly with its pensions industry peers is no longer relevant”

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NEWS NEWS IN BRIEF

Heading Down in Rio Brazil formally went into recession in the second quarter, with a 0.6% GDP contraction that followed another 0.2% fall in Q1.

The development disappointed BRICs investors, who had been hoping for better things.

New Velvet Glove, Same Old Iron Fist Okay, we admit it. For a short while earlier this year, we were wondering whether the last man working at the Financial Conduct Authority’s publications

Crime Pays Britain’s official GDP figures received a bizarre backdated boost from the adoption of new EU-standard calculations that incorporate the probable impact of ‘hidden’ activities such as prostitution and illegal drug dealing. The ONS valued them at £8.4 billion in 2012 – sharply down from £10.5 billion in 2007. So that’s all right then.

Spring Loaded Mark Carney (above) reiterated his belief that interest rates could rise in the spring. The Bank of England governor told the Trades Union Conference in Liverpool that a gentle increase next year, followed by ‘very gradual’ further increases, would see inflation settling at around its 2% target and a further 1.2 million jobs being created.

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department would be kind enough to turn out the lights before he nodded off to sleep? How wrong we were...

Those readers who consult our regular FCA Publications listing on page 56 could have been forgiven for wondering what was going on?

From March to June of this year, the regulator had seemingly abandoned the whole mammoth task of issuing the usual stream of updates, consultations, discussions about consultations, discussions about discussions and everything else, in an apparently all-out drive for a soft-touch consumer-friendly approach instead.

Indeed, hadn’t CEO Martin Wheatley explicitly said at the FCA’s inauguration in April 2013 that the

more rules there were, the less the public understood them?

So, for a while, you might have noticed that our FCA Publications pages featured press releases, consumer videos, court judgements and an endless stream of something called Thematic Reviews. All very woolly. But the last two months have released such a pent-up flood of ‘proper’ FCA publications that we’re almost wishing we’d kept our mouths shut.

We’d counted 20 major new announcements by mid-August, and there have been plenty more since. Sipps, social media, mortgages, banking accountability, ISAs, price comparison websites.

Talking To Consumers What’s going on?

To some extent, the unseasonal tidal wave from the FCA will have been due to the lengthy lead-times that the transition from the old FSA had necessitated – to put it simply, the regulator has needed this long to get its own consultative processes working well. But it’s also because of the FCA’s new powers with regard to consumer lending – payday lenders and the like – and because of the heavy burden of redefinitions resulting from next April’s pension changes. Not to mention Brussels’s own inner workings, many of which have

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NEWS IN BRIEF

to be translated into national law over here.

What’s coming through, though, is that Martin Wheatley is proving himself to be an adept communicator, with an eye for a camera and an ear for a soundbite. The public have good reason to be appreciative of his genuine concern for consumers - and we’re not hearing too many complaints on that score here at IFA Magazine.

That Old Right Hook But that’s not to say that the iron fist isn’t still there. Just that it’s becoming harder for advisers to tell where it is until it actually lands a blow. Take, for example, the FCA’s declaration that it will henceforth feel able to

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publish the names of suspected wrongdoers as soon as proceedings against them are opened – and not, as previously, only when they’ve been fined. The regulator has sensibly stepped back a little from its original position on naming and shaming – but the flood of new consumer warnings are clearly telling advisers not to push their luck, or else...

At the same time, as Compliance Doctor Lee Werrell pointed out in June, the regulator is toughening up on affirmations by directors and SIFs in ways that will catch many advisers out. By attaching much more importance to so-called attestations, he said: “The regulator is currently laying the

ground for pursuing far more cases against executives individually as well as collectively - possibly leading to obtaining fines and criminal prosecutions.

“This means a far greater concentration on personal accountability resulting from legal affirmations - and it’s something that needs to be treated seriously by all senior executives who are being required to sign on the dotted line - and thereby, to stake their professional reputations and their personal authority on the quality of their firm’s compliance processes.

You can read Lee’s article on the IFA Magazine website at http://tinyurl.com/ofxpceg

Don’t Stop Thinking About Tomorrow Britons take their personal pensions at an average age of 58, a new European survey revealed – earlier than the French (59) and the Germans (61), and among the earliest in Europe. But a doughty 20% of British over-65s were still working - by far the highest proportion in Europe.

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September 2014

S C OT L A N D

Neverendum?

Michael Wilson reads the political runes after the rejection of the Scottish independence initiative in September’s referendum I’m indebted to the good people of Quebec for having given rise to the word neverendum. Canada’s main French-speaking province held a succession of independence votes in the 1970s – all of them unsuccessful, but each one leaving just enough questions open for the subject to be raised again and again.

And again, and again...

As it happened, Scotland didn’t go that final inch, and the referendum proposal failed by 2,001,926 votes to 1,617,898 – a good clear margin of more than 10%. Which, in theory, should have shut the lid on the nationalists’ demands for independence for quite a long time. David Cameron has declared that Scottish independence is now off the table “for a generation”.

It was David Cameron who originally declared that there would be no Devo-Max option in Scotland’s September 18th referendum – and boy, is he paying for it now. His insistence on a final binary outcome came within an inch of getting a reluctant Scotland to commit completely to a course of action that few had previously dared to hope for.

Devo-Max Revisited It’s already clear, however, that it isn’t. No matter how much this magazine has deplored the dodgy tactics and the dubious statistics from Alex Salmond, he deserves sincere credit for having comprehensively outwitted Westminster – which is now going to have to concede most of the proposals the nationalists originally wanted. But Salmond

has also sent out a message to his people – namely, that the nationalist cause is very much worth fighting, and that Mr Cameron can expect Salmond’s team to keep on piling up the pressure for as long as it takes.

That might be a long time. Meanwhile, Cameron’s own position has come under fire from the Tory faithful for a badly bungled campaign.

At the time of writing, the grass-roots insurgency against the government’s scheme for enhanced fiscal independence – Devo-Max in all but name – is growing. The Prime Minister may not last long enough to put the EU membership to the referendum that he promised as early as 2017. Chancellor George Osborne, who has kept his head sensibly below the parapet, may end up being the political beneficiary.

Despite some dodgy tactics and dubious statistics, Alex Salmond still deserves credit for outwitting Westminster

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September 2014

Either way, we can assume that Alex Salmond is now in the policy driving seat despite having lost the referendum.

Having humiliated the Prime Minister, he can press his advantage. And he’d be a fool not to do so. He is not a fool.

What We Don’t Have to Worry About But back to the referendum issues. At least it looks as though we don’t have to worry about the currency issue any more – a Scotland that stays in the UK won’t run into the huge problem of having to piggyback on a currency from London which have no effective control over its domestic fiscal policies.

And that in turn puts paid to the problem of whether Edinburgh will need to go unwillingly to Brussels instead for a currency. It was always going to have a problem with that one, because Scotland’s projected debt ratio of 90% (the country’s share of UK debt, divided into its gross domestic product) was well wide of the 60% ratio that Brussels demands from any aspiring Euro Club member.

centred in a country that didn’t have the resources to bail them out if they got into trouble.

Why not? Let’s put some comparative numbers on the situation. As things stand, the total assets held by Lloyds and RBS alone amount to twelve times the national GDP of Scotland. Now, under the usual banking rules the state is ultimately required to underwrite most of that money if the banks were ever to be wiped out by a financial crisis like 2008’s. How could a separate Scottish central

David Cameron has declared that Scottish independence is

bank have ever got its hands on that kind of cash?

Answer, of course – it couldn’t. Whereas the Bank of England could, thanks to its lower deposits/GDP ratio of five or thereabouts. And it’s that knowledge that the big Scottish banks couldn’t be bailed out that would have driven them out of Edinburgh and into London.

RBS has been quick to declare that it won’t move south. And a good thing too, probably. Lloyds will probably shift more of its key operations toward London regardless.

But the critical argument, surely, is that EU rules specify that a bank must have its headquarters located in the country where most of its loan exposure lies. At a pinch, RBS and Lloyds can claim that they fulfil this obligation because Scotland is (still) part of the UK, which means mainly lending

now off the table “for a generation”

In fact we can probably afford to put the question of national debt on the back burner. Salmond’s reckless talk of reneging on a part of Scotland’s share of UK debt was always frightening, but it isn’t on the table any more.

Where To Site The Banks?

There’s been more heat than light so far in the arguments about how, or why, Scottish financial institutions had been planning to migrate south to London if the populace had opted for independence. And although the vote as not forced the issue, there’s a fair chance that they may decide to go anyway. This disagreement has cast a searching public light on a situation that was never very satisfactory in the first place.

First, there was never any truth in the Royal Bank of Scotland’s claim that Scottish banks could have continued to operate normally while still

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September 2014

S C OT L A N D

the Prime Minister is on the back foot despite his victory, and the pressure will be on him to step up the devolution process, probably much faster than he’s like

to England. But now that the anomaly has been exposed, it seems possible that Brussels will start to lean toward a more literal interpretation of the spirit behind the rules.

Oil’s Well The referendum result has also sidestepped the thorny issue of whose oil it is that lies underneath the North Sea. For the time being, at least.

But just how long will it take before the issue resurfaces?

Mr Salmond’s claim is that there are a massive £1.5 trillion worth of oil reserves in the North sea – enough to make Scotland the Norway of the British Isles - and that they all belong properly to Scotland. Not correct, alas.

Current industry estimates run all the way from £1 trillion down to £120 billion, if you assume the very maximum level of undersea fracking activity, which would be risky and unpopular. What we do know is that production has fallen by two thirds since the 1990s, and that some estimates

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give it as little as eight years before the wells start to dry.

(The most sanguine estimates give it 15 years.) Production has fallen by 38% since 2010, and exploration in 2013 was running at 28% below 2012 levels.

Which brings us to the abiding question as to whether Scotland’s oil reserves can truly be ascribed to the country, or only the ones that have been found so far? Would new discoveries count? For technical reasons it isn’t as easy to say as you might expect.

But these sorts of issues are likely to preoccupy the Scottish parliament for a very long time to come. It was primarily London that spent some £13 billion a year on developing the Scottish fields in recent years. And Edinburgh won’t be allowed to forget that.

A Federal Future?

Maybe that’s putting it too strongly. But the Prime Minister is on the back foot despite his victory, and the pressure will be on him to step up the

devolution process, probably much faster than he’s like.

Mr Cameron was quick to regain the post-referendum initiative by announcing that Lord Smith of Kelvin, a former BBC governor, would be overseeing the implementation of more devolution on tax, spending and welfare. Draft legislation would be ready by January, he said – pretty much keeping to Gordon Brown’s most recent commitment.

A “command paper” is due to be published by the end of October, setting out the broad proposals, followed by a white paper at the end of November. And finally a draft new “Scotland Act” law is to be published by Burns Night (25 January), for approval by the House of Commons.

So will that be in time to get the Tories through next spring’s general election, which happens in May at the latest? Possibly.

Will Mr Cameron be leading?

That’s another question. And will the SNP keep pushing for more and more influence? That’s a Neverendum possibility.

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ONGOING CHARGES COMPARED Region

Fidelity

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Vanguard

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US

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0.18%

0.17%

Europe ex UK

0.10%

0.18%

0.12%

0.20%

0.19%

Japan

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0.23%

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0.21%

Pacific ex Japan

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0.19%

0.23%

0.22%

0.27%

Emerging Markets

0.23%

0.26%

0.27%

0.43%

n/a

World incl. UK

0.18%

0.21%

n/a

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Source: Fidelity and Morningstar. Table shows ongoing fees charged by fund providers to retail investors on widely available clean share classes. n/a is where no equivalent strategy is available. Fidelity Index Funds ongoing charges are shown for the P share class available through FundsNetwork. Fidelity compared with the four largest managers offering a broad range of index trackers.

web: fidelity.co.uk/index call: 0800 368 1732 This is for Investment Professionals only and should not be relied upon by private investors. The P share class is available on FundsNetwork and selected wealth managers. Other share classes are available. Excludes any platform fee. Data source: Fidelity and Morningstar as at 01.09.2014. Basis: Index funds domiciled in the UK or Ireland, excluding ETFs. Copyright © 2014 Morningstar, Inc. All Rights Reserved. The investment policy of Fidelity Index Funds means they closely match a stated index. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by FIL Investments International, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity Worldwide Investment, the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited. RM0914/3768/SSO/1014.

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19/09/2014 14:27

September 2014

SOAPBOX

Can Putin Hurt Us? Russia’s leader may be living in a bubble, says Michael Wilson, but the situation is not without dangers for the West Don’t dismiss Vladimir Putin yet, because he’s had a pretty good summer on the whole. Standing up proudly to Russia’s traditional enemies in the west; overseeing the humanitarian delivery of food, medicines (and maybe just the occasional tank column) to support the oppressed pro-Russians in eastern Ukraine; and enjoying the people’s well-orchestrated praise for his stalwart leadership in the face of a relentlessly hostile world.

Ah, the things you can do when you control the media.

Meanwhile, the roll of the global geopolitical dice has also been good to Mr Putin. The emergence of the murderous Islamic State jihadists in Syria and Iraq has not merely diverted the world’s attention away from Russia’s support for the equally murderous President Assad in Syria – it has actually forced the West to abandon its military support for the Syrian rebels and to think about cosying up to the dreadful Assad himself.

What a simply brilliant irony.

Slipping And Sliding The upshot of all this is that the world has had too much on its mind to be spending very much time on the ruins of the

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September 2014

Malaysian airliner MH17, which crashed over Ukraine on 17th July after being hit by what Mr Putin called a Ukrainian air-to-air missile, but which the rest of the world calls a Russian-built Buk surface-toair missile - presumably fired by pro-Russian separatists.

Not that anybody can ever be completely sure either way, mind you, because, by the time the pro-Russians had finally allowed western observers into the crash site, large parts of the original aircraft appeared to have mysteriously gone missing while assorted other bits of aircraft metal had reportedly been scattered in their place.

At the time of MH17, it was easy to imagine the Russian president stomping round the Kremlin and spitting teeth with fury at the incompetence of the Ukrainian rebels who he’d entrusted with the Buk missiles. But Putin’s ability to withstand all this has been impressive. Unmoved by Western trade sanctions against his country, he has lobbed a few retaliatory threats of his own into the war of words.

And sadly we can’t afford to dismiss them as the impotent rantings of a sad dictator.

Some of them will hurt us.

throughout the summer and early autumn, and the optimistic assumption is that Russia’s trade losses from collapsing westward energy sales would be so disastrous that not even Mr Putin could contemplate the financial impact.

Fair comment. Oil and gas account for 55% of Russia’s exports, and the energy industry accounts for 20% of the value of the Moscow stock exchange. Without those export revenues, Russia’s ability to put food on the people’s tables might soon be in doubt.

The Rouble Plunges – Allegedly Equally serious is the speculation that the Kremlin’s own coffers might start to suffer, perhaps to the extent where it became difficult to meet debt

obligations. That’s still a very long shot, but surely there have got to be reasons why the rouble has plummeted in value in the last year? (From fifty-ish in September 2013 to sixty-ish in mid-September 2014.)

It’s a good theory, but unfortunately the drop in the exchange rate doesn’t seem to have been related to the Western sanctions that were announced in late July, in early August and again in early September. Actually, all the damage was done in the six months to February – from then on, the rate has rumbled along at roughly 60 roubles to the pound.

One way the squeeze is certainly being felt is that Russian companies can no longer simply raise cash on the

The Gas Issue For starters, Putin’s men have doubled the price of Russia’s natural gas supplies to Ukraine and demanded payment in advance. With just a hint of a warning that they might shut the Ukraine pipeline altogether.

So what’s that got to do with us? Simple. Our problem is that we haven’t yet worked out what we’ll do if Russia really turns off the gas this winter. Western Europe gets 15% of its natural gas from the pipelines that cross Ukraine, and there isn’t going to be any easy way of substituting for it. We’re not going to get any assistance from Barack Obama, because America doesn’t have the physical capacity to feed us on LPG through the winter At the moment, certainly, nobody is panicking. The oil and gas price has held steady

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It was easy to imagine the Russian president stomping round the Kremlin and spitting teeth with fury at the incompetence of the Ukrainian rebels

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September 2014

SOAPBOX

damage to the West’s financial economy would be worth putting up with. “As the Prime Minister and Chancellor have said,” a spokesman asserted in early September, “the costs of the sanctions fall much more greatly on Russia than they do on the rest of the world...Russia needs Europe and others more than the other way around.”

Ah, but the real issue, surely, is that Europe has no appetite for military action against Putin over the Ukraine issue. Nor does America, as Barack Obama squares up for his last mid-term election in the knowledge that he’s being sucked back into Iraq and Syria. Putin’s luck is holding.

In Q3 of 2013 foreign institutions owned around 70% of the Russian stock market – some $121 billion, out of a combined

So What of the Stock Market?

market capitalisation

You might, of course, imagine that the steady slide in the rouble would have thumped the Moscow stock exchange, damaging the country’s domestic investors.

But you might be wrong.

of $213 billion

western markets in the way they used to. The Economist magazine recently reported that the flow of international dollar loans from foreign banks had fallen to just $7.9 billion in the first half of 2014, from $25 billion in the same period of last year. That has forced them to approach the state-controlled Russian banks for money instead. And what tightens the screw still further is that Bloomberg reckons that Sberbank, Gazprombank, VTB, and Vnesheconombank are going to need to refinance $15 billion worth of bonds denominated in dollars, euros and Swiss francs during the next three years. If they can’t raise that money, their creditworthiness may come into doubt.

The Name’s Bond, Dumped Bond Speaking of which, I had suppress a giggle when the Moscow Times ran an article on 1 September entitled “New EU Sanctions Could Cut Off Access to Russian State Bonds”.

Europe’s threatened measures against Russia might debar European investors from buying

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new Russian government bonds, it said. Sorry chaps, it hadn’t really crossed my mind to try.

But, since we’re here, why don’t you tell us why I should?

Because, Moscow thunders, if we don’t feed more of our money into Russia’s treasury, its state institutions might soon be forced to start selling off their sizeable holdings of Western bonds, which in turn might drive down our bond prices. And that would be just awful. Just at the moment when we want yields to stay tight. (Snigger.)

Mind you, the West is going to feel the pinch in other ways.

The announcement of new EU sanctions in early September – which include restrictions on the sale of equipment for the oil and defence sectors, and the sale of dual-use technologies to military end-users – has already prompted Moscow into retaliating with its own sanctions – such as banning most agricultural imports from Europe and the U.S. Downing Street has been robust in its insistence that any

According to the chillingly hard-line Russia Beyond the Headlines website, foreign institutions still owned around 70% of the Russian stock market in the third quarter of 2013 – some $121 billion, out of a combined market capitalisation of $213 billion. Another $29 billion was owned by Russian banks, RBTH said, and only around 10% of the market was actually owned by bona fide Russian civilians. That was because ordinary Russians had been badly spooked by the 2008 crisis, it said, and there had been a general reluctance to get back in.

The awkward fact, for most of us, is that in mid-September the Russian stock market, as defined by Thomson Reuters’ country index, was trading at a price/earnings ratio of 5.9 and an attractive dividend yield of 4.7%. That wasn’t very different from China, which was on 6.1 and 4.9% respectively. And compared with India (18.1 and 1.6% respectively), Moscow looked like a screaming bargain.

Double drat, it’s been rising in the last month and is back to last winter’s levels.

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September 2014

WOMEN IN FINANCE

The Right Stuff Julie Jones, Director of Sales and Marketing at DFM Myddleton Croft, talks to IFA Magazine about how women are challenging male assumptions One of my best friends once said to you me, ‘you look like a woman but you think like a man!’

Fortunately I took that as a compliment, and she’s still a best friend. Coming from a family where I have three brothers and no sisters, you do learn a man’s perspective whether you like it or not and it has helped. So I have never felt uncomfortable in an environment which is predominantly male, whether introducing myself for the first time or presenting. It became an advantage.

Times have changed so much in the last decade that women’s presence in financial services, fund management and investment/product sales roles has increased. Not only is there encouragement in education, from high school to university; the ‘older male IFA’ has also been an exponent of seeing their daughters joining them in their IFA practice, with succession planning now high on the agenda.

And of course, we cannot ignore the current employment issues facing postgraduates who

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are struggling to find places in the career of their choice so the ‘family’ business is an option that has to be considered.

Whatever the reason, women can be more adaptable.

Breaking Into the Male Preserve And so to the predictable question as to whether women are better at financial planning than their male counterparts?

Well, that’s not a debate I’m comfortable entering into. Early in my career, financial planning was still very much a maledominated area, and so was the investment management arena. I was tasked with meeting IFAs, stockbrokers and discretionary managers to discuss investment funds and related investment products.

It felt like a huge challenge from the outset. Not only was I one of only three female industry sales personnel at the time - I was also based in the North of England. And developing a reputation as someone who was credible, knowledgeable and committed to providing a high standard of service took time to establish. The average age of the intermediary was in the 50s, and some were rather

old fashioned regarding the advent of women in a man’s world. Determination became part of my persona, and the respect of my male colleagues and introducer connections soon followed along with my developing business success.

Ingrained Assumptions Many years ago, investment industry marketing events were not only held in the UK but also in Europe. And therein lay another potential challenge. When the ratio of male to female is extremely biased, and when you are one of the investment company sponsors, you are always on duty and even on alert.

At the well known annual Investment Management Association Dinner (previously UTA – yes, I’ve been around that long), which is held at the prestigious Grosvenor House Hotel, dresses were always worn long, and so were the sleeves. As a female host, it was never advisable to drink if you wanted to make sure that your guests were taken care of.

It was important that you had to behave ‘respectfully’ - and that, whatever the faux pas,

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September 2014

natural disaster, you would have thought it was safe to assume that communicating with all your clients would be a priority. However, with my contemporaries that wasn’t always the case.

One of my best friends once said to you me, ‘you look like a woman but you think like a man!’

your sense of humour allowed your business reputation to remain unerringly strong.

The Communication Advantage Other challenges came along over the years.

Maintaining contact with clients when things weren’t going so well became very important. When stock markets are crashing about our ears, due to some economic or political announcement or

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The time to talk to your clients more is at times of extreme stress, not bury your head in the sand and hope that all is well once the crisis has blown over. People need to hear from people, even if the news is not what they want to hear; to be reassured that, even when the current investment pain is acute, it will pass and once again opportunities will present themselves. What better way to embed a strong relationship than ‘being there’ in the difficult times, and not just the good times?

It’s also worth remembering that during those formative years there were no mobile phones or satellite navigation. It was a case of using a telephone box to contact your office and an A-Z road map to get to meetings - and if you were running late, could not find a place to park and needed a natural break, you were in trouble!

I do believe that women are more patient and take the time to get to know an individual and what their financial servicing or business needs are - whether it’s an IFA talking to a prospective new client or an investment/ product Sales Manager endeavouring to engage with a potential new introducing IFA or Wealth Manager.

However, whether man or woman, learning to listen

and being aware of that all important body language, is a skill that has to be learned over time. There is no doubt that many an industry salesperson has missed the ‘buy’ signal because of lack of awareness, confidence or because of something basic as not listening.

Flexible Thinking What also comes with experience is the ability to know when to step back, review the situation and approach the client or IFA in a different way and, if necessary, let it go. One thing is definitely certain - no amount of qualifications can necessarily make someone the best at what they do, how you communicate your knowledge in a patient, practical and helpful way is what’s important.

By listening and presenting solutions that could add value to an IFA’s business by enhancing their service offering to their clients, will earn you the IFA’s respect and trust.

Women tend to understate themselves more than men.

Thankfully the draconian ‘alpha’ male is dying out in the financial services industry - and any woman worth her salt, when confronted with said male, should spare no more than 15 minutes before politely leaving the building!

All of this said, if you simply turn the tables and ask yourself: “Would I let this firm manage my financial affairs and my investments?”, it’s the answer that is the key - regardless of whether it’s a man or a woman.

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September 2014

WOMEN IN FINANCE

A Matter of Balance Anne Richards, Global Head of Investments at Aberdeen Asset Management, tells Michael Wilson says that diversity is essential to corporate strength Sometimes you wonder where people find the energy. When she’s not leading Aberdeen Asset Management’s investment committee - a role she’s fulfilled for the last eleven years - Anne Richards can be found sitting on the Financial Conduct Authority’s Practitioner Panel, or speaking at international conferences on all kinds of investment, pensions, economic or market related topics.

Or working on the World Economic Forum’s Global Agenda Council, or the UK Digital Skills Task force. Or maybe as one of the BBC’s #ExpertWomen team, or sitting for the Board of Leaders for 2020 Women on Boards. Then again, Ms Richards is also the Chair of the CERN & Society Foundation, the charitable arm of the high energy physics project in Switzerland where she first cut her teeth as a researcher back in the 1980s.

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In short, we’d have had a hard time finding anyone with broader experience of what it takes to really make it as a woman in business. So how does Ms Richards see the equality situation shaping up in a sector where women have too often struggled for opportunity?

Patchy Progress We’ll start with the good news.

It’s encouraging, she agrees, that major companies in general are finally opening up their senior boards to both sexes. The last all-male FTSE-100 company, Glencore, acquired its first female director in June. And at present, according to Boardwatch, women hold 22% of FTSE-100 directorial positions - up from 17% in 2013 - and are taking up 26% of all new appointments.

But what about the financial sector? How have things been developing for women in the 22 years since she started in the business? Is the democratisation of the senior boardroom getting

through to fund management?

Unfortunately Richards’s answer wasn’t quite as reassuring as I might have hoped. Although she didn’t have any firm figures, she stressed, it did seem to her as though the proportion of women wasn’t improving - and indeed, “I think we’ve lost women from the industry over the last 20 years. We can see that we have some challenges there.”

Male Brain, Female Brain...

It was time to take a deep breath and ask the dangerous question. You know, the really sensitive one. Does she put this differential treatment of women in the industry down to any perceived difference between male and female abilities?

Such as that trusty old saw about how men’s brains excel at maths while women are better at broader and more inclusive (and creative) thinking?

“No,” she said - rather nicely, I thought, but firmly.

“I challenge that theory. I’ve

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September 2014

“Awareness that you want to attract a broader mix - not just gender, but a much wider definition of diversity - leads worked with many women who were complete specialists and were utterly focused on their areas of expertise. Top-level analysts and so forth. And many who were ultimate polymaths.

And actually I don’t believe that you can differentiate men and women that easily.”

But, she conceded, there did seem to be one key behavioural difference when it came to risk appetite. “Whether it’s the hormonal thing that men are susceptible to ratcheting up the testosterone and cortisol-which may make their ability to judge and balance risk and reward increasingly challenged - women are far less susceptible to that interplay, and less likely to display those extremes of risk-taking.”

“When that male risk-taking pays off, it’s ascribed to skill.

And when it doesn’t, it’s ascribed to bad luck.” Testosteronedriven males tend to dominate higher-risk areas such as private equity or hedge funds, she says - which by no particular coincidence, are among the last bastions of old-style male-bonded culture. That’s got to change.

A Strategy For Reform Achieving a gender balance in a team matters, she said, because effective decisionmaking relies on the optimum mix of personalities, talents and experience. “I believe in celebrating difference in general.

Teams work better when people from different backgrounds and skills and cultures come together - incredibly powerful teams. You have to get over that

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back to how you frame your appeal, how you encourage potential employees, and how you reach your clients too.”

that may mean a woman doesn’t even get a chance to apply?.

Check Your Biases

initial hurdle of managing the differences, but then you’re going to get to a better outcome. Just by being female, you will have had a different set of experiences, and bringing that to the table is valuable. And I don’t think we have enough difference in the fund management industry at present.”

So what can be done to improve the situation and get more women into teams?

Firstly, said Richards, a firm needs to acknowledge that it has a Problem. That’s something that not everybody is likely to accept, or even notice, because it’s too easy to hide from the facts. So secondly, the firm needs to invest in data gathering that will make it completely clear whether or not similarly talented people of both sexes are being treated equally. Are the men being paid more than the women? Do they get promoted more quickly? Do you promote through an informal process

And thirdly, we need to get down to some unconscious bias training. It starts by acknowledging the possibility that a company might be harbouring attitudes that are so ingrained that they’ve completely disappeared from view. “We all have biases. It’s not that we’re evil people, but we are humans, and we are the product of our society. And understanding that we might have a bias allows us to implement processes and systems that can mitigate this.”

Take a look at your website, she says, and count the male and female images. Listen to the language you’re using in your communications. Is it designed to appeal to men, or will it appeal to women? And when you do promotional activities, do you focus on activities which enforce biases? Do you, for instance, only sponsor male sports people, and could that be shaping your clients’ perception of you?

“Awareness that you want to attract a broader mix - not just gender, but a much wider definition of diversity - leads back to how you frame your appeal, how you encourage potential employees, and how you reach your clients too.”

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INSIDE TRACK

September 2014

AIM for IHT Efficiency Andrew Banks, Senior Investment Manager at JM Finn, discusses a business property relief exemption that many advisers miss

IHT is an ever-increasing issue for many high net worth individuals - but over recent years, more and more routes to avoid paying the dreaded tax have been closed off.

There is one route, however, that is not only still available but has also been enhanced in the last 12 months - namely, Business Property Relief via investment in shares traded on the Alternative Investment Market (AIM).

And why do most investors (neaClients can build portfolios of qualifying shares up to any value, and after just two years of ownership they will fall outside of those individuals’ Estates for IHT purposes. The usual seven year period for exemption from IHT is usefully shortened.

Clear Encouragement The enhancement that has made the difference was introduced last August. AIM-listed shares are now eligible for holding within an ISA, meaning that these already tax efficient wrappers are now even more tax-effective. The change demonstrates that the Government considers that AIM has come of age, and that it has moved on from the perception a few years ago that it was the “wild west” of stock markets. A further advantage is that, from April this year, Stamp Duty is no longer payable on purchases of AIM shares - meaning that it is cheaper to own these shares than their fully listed counterparts.

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Where appropriate, clients can now transform established ISA portfolios into IHT efficient vehicles. The increased annual ISA allowance also means that a husband and wife, for example, can now shelter their investments from income tax, capital gains tax and inheritance tax more quickly than previously.

Controlling Risk Yes, AIM shares are deemed to be high risk - but within this broad categorisation there are varying degrees of high risk. As you’d expect, many of the 1,100 or so companies that are listed on AIM are early-stage, start-up, high technology, biotechnology or other shades of high risk/potentially high reward situations; but there are also many opportunities to invest in established, profitable, cash-generative, financially sound and dividend paying businesses.

cashflow and growing dividend payments in particular, are very important to us.

Our objective is to build a portfolio of companies that can withstand economic downturns and deliver solid returns over the cycle. We are not looking to make huge capital returns, but to minimise risk and protect our clients’ hard earned capital as far as possible whilst also sheltering it from IHT. This, I believe, is what most investors require.

The key is to know your way around the market; to understand the BPR rules; and, ultimately, to pick the right stocks. This is where an experienced and expert fund manager is crucial.

I spend most of my time meeting company management teams and assessing their businesses and their strategies for growth. And, as I alluded to above, there are certain attributes that we insist upon before we will make an investment for BPR/ IHT Portfolio purposes.

These qualities are a good indicator of a company’s health;

Our objective is to build a portfolio of companies that can withstand economic downturns and deliver solid returns

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19/09/2014 14:33

INCOME INVESTING

September 2014

The Seven Ages of Income Michael Wilson begins a three part series on the role that income investing can play in financial planning Take it from us, we’re going to be hearing a lot more about income investing in the next six months or so. As next April’s pension reforms come in to eliminate the requirement for retirees to buy annuities, there are going to be an awful lot of people looking for alternative investments that will allow them to keep the capital value of their pension pots.

Those people will be looking for a combination of high income – probably not usually as high as the 4% or 5% annuity rates that a 65 year old couple can currently hope for, but this time with the additional prospect of capital gains. Accordingly, in the coming months we’re expecting to see a profusion of new income funds directed at exactly this market.

The wraps are still in place for most of these funds – but not for much longer, we suspect...

Who Needs Income Funds?

But don’t run away with the idea that income funds are just for wrinklies. As this sector of the market expands, we’ll see more interest from other sectors of the demographic spread:  Children and aspiring students. Favourite aunts and uncles. People with long-term illnesses who need as much financial security as possible.  Anyone who’s anxious to defend a rainy-day savings pot, or a one-off inheritance, or a divorce settlement.

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 Charities. Anyone who’s managing a trust on behalf of a minor. Anyone with powers of attorney.

No Way of Eliminating Risk Don’t get us wrong. Even though the traditional trend among equity income stocks leans toward larger (and hopefully safer) companies, there’s nothing necessarily super-safe about an income investment per se.

Europe where it simply hasn’t been fashionable until recently for companies to distribute their profits to shareholders.

The growth of demand for dividends has created a self-fulfilling groundswell in income share prices.

And there’s no reason to suppose that it’s over yet.

During the twelve months to mid-September 2014, UK Equity income funds from market leaders such as Blackrock, Perpetual, M&G, L&G or Aviva achieved total returns in the 6-12% range at a time when the FTSE-100 was making less than 4%. And comparable figures for Global income funds would been almost as high.

Logic says that you’d need to be some way into the equity risk zone to bring in a 4% pure dividend yield when the AllShare is only scraping 3% and the US barely 2%. And if it’s bonds your clients prefer, they’d either be locking themselves into ten year maturities or else flirting with BB grades before they managed to beat 2% by any serious Trustnet UK Equity Income index, September 2014 margin.

1m 3m 6m 1y 3y 5y Much of the

% cumulative growth 1.6 0.4 2.9 7.6 47.1 62.9 rest would probably come from capital appreciation.

One thing you’ll notice about Fortunately, the tide of history is on income investing’s side, especially for equities. The last few years have provided conclusive evidence that higheryielding stocks, as a group, are outperforming their peers in terms of the capital appreciation.

Especially in America, in Japan and in parts of continental

the following pages is that we’re keeping a constant close eye on how much risk our various demographic groups can afford to tolerate. For some, it’s a lot – for others, none at all. It’s all about their respective stations in life.

Which is part of the appeal.

Over to you, Shakespeare...

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September 2014

birth Aah, doesn’t everyone love a christening? The hats, the flowers, the vicar, the scrummage of fond aunties competing for the photographer’s attention.

And, in the middle of it all, the next generation making its little presence felt, generally in the loudest way possible.

It’s one of those tenderly dynastic moments that focuses the mind wonderfully on the needs of tomorrow. Which is probably why the arrival of a new baby is an excellent time for your clients to pass the hat round and to get the savings habit started. It’s not just that the long-term compounding effect of money is - as Einstein remarked - the most powerful force in the universe. It’s also that the child is ideally positioned to make the most of any unused tax breaks on income. Remember, each child is eligible from birth for a full income tax personal allowance and a full annual capital gains tax exemption.

It’s up to the family to use it.

Do We Really Need To Reduce Risk For a Baby?

Whether it’s a Junior ISA or a complex legal device or just a bare trust administered by an adult, the options are as open to a small child as to any adult.

Cash, bonds, high yield or capital growth - the choice is the child’s. (Or rather, its parents or trustees who’ll make the decisions.) But, to be sensible, in most cases it’s likely that the investment will remain untouched for long periods - during which it may remain poorly supervised.

Parents are busy people too.

birthday and £175,000 at age 65.

And that’s assuming no further in-payments after age 18. It looks like Einstein was right.

But hang on. Isn’t it a bit counter-intuitive to opt for the relative safety of an income investment for such a young child? Surely the Barclays Equity Gilt Study taught us long ago that UK shares – as measured by the Barclays UK Equity Index - have produced an average real annual return of 5.5% over the last 50 years, compared with 2.5% for gilts and a pathetic 1% for cash? And surely, history tells us that even the worst equity crashes reverse themselves. Isn’t it enough that the sprog’s nestegg would have the next 18 years in which to recover lost ground?

to babies. We humans are born with something called Loss Aversion imprinted on our primitive brains. If push comes to shove, and if all else is equal, we would rather avoid the risk of a loss than enjoy the chance of a gain. Strange, but we’re just made that way. And it’s never more relevant than when we’re looking down onto the gurgling, vulnerable infant at the font.

Never mind the mathematics – and they’re not that bad, actually – the relative safety of income investing is likely to prove one of the best ways of separating grandpa from his cash. The sentimental old softie. And remember, it can be IHT-efficient too.

That Protective Instinct Well, maybe. But there’s a particular reason why safety is attractive when it comes

birth And one man in his time plays many parts His acts being seven ages.

At first the infant, mewling and puking in the nurse’s arms…

The same early-start logic goes for a pension fund of course. It isn’t at all ridiculous to start one at the christening – if the grandparents agree to pay £30 a month into a fund producing 5.5% a year (after charges), the £6,480 in-payments are likely to have become a pot of £13,200 on the 18th

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19/09/2014 14:34

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19/09/2014 14:34

INCOME INVESTING

school days

schoo days

Shakespeare’s generation didn’t have the opportunities that today’s youngsters enjoy, of course – but nor did they have to grow up in a world where if you weren’t educated you weren’t going to get a job. And these days, the better the education, the better the child’s chances.

It’s no surprise, perhaps, that despite spiralling fees, there are now 620,000 children in independent schools - about one in fourteen children nationally or one in six in London. Day-school fees now average £7,500 a year at age five and well over £12,000 at secondary level. It could all tip the scales at £130,000 just for the basics – equivalent to nearly £250,000 for a 40% taxpayer.

How to pay for all this?

Bearing in mind, of course, that it comes out of the parents’ after-tax income? Well, it used to be common to set up covenant schemes that would mitigate the tax costs, but nowadays the tax opportunities revolve around trust planning – and, of course, funding the expense through the child’s own unused allowances.

(Warning, however – the exemption won’t usually work if the assets come ultimately

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September 2014

And then the whining schoolboy, with his

satchel and shining morning face,

Creeping like snail unwillingly to school

from the child’s parents.

Better to fund the scheme through capital gifts from grandparents or other relatives.)

Shorter Term Need, Lower Risk Appetite

There are specialist advisers who do nothing else but set up these schemes – some of which are not much more than ‘holistic’ diversionary tactics that aim to utilise all available resources – perhaps by re-assigning life policies or investment bonds. But what they all have in common is that they’ll encourage the client to ‘lock in’ the growth as far as possible. It would be just disastrous if junior couldn’t make it through school because the fund had bombed.

Remember, unlike a new baby with an 18 year savings horizon, your schoolchild may have

only a five or six year window within which to get it right.

Income funds have an important role to play here.

And for most, an predictably unadventurous balance of risk will fit the bill in most cases. But of course, the decision on exactly how much capital risk can be tolerated - if any - is a very personal one which requires intense care at the planning stage.

Next Month – The Lover, The Student and The Mortgage Warrior Another problem they didn’t have in Shakespeare’s day was the need to have a college degree if you wanted to make it in business. These days that’s another £9,000 a year for tuition - probably £35,000 by the time he or she is through. But that’s another question, which we’ll look at next month.

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Compatibility: Requires IOS 6.0 or later. Compatible with iPhone, iPad, and iPod touch. This app is optimized for iPhone 5. Available on Android.

Seven Ages.indd 30

Twenty Four Seven IFA Magazine, Britain’s premier online portal and print publication for financial advisers, has launched its ver y own app designed to help you stay up to date with all the latest financial and economic news as it happens.

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19/09/2014 14:34

GUEST INSIGHT

September 2014

The Countdown Begins Neil Martin talks to Matt Penneycard, manager of Downing’s forthcoming Growth 4 Venture Capital fund

Investing in the high risk tech sector can be a lonely business, which perhaps explains why venture capitalist Matt Penneycard has come in from the cold and joined forces with London based firm Downing.

A hardened venture capitalist who spent five years at the sharp end of the technology sector in New York, Penneycard is starting a series of funds based on high risk, high return tech stocks within a new part of Downing. Called Downing Ventures, it will target the early-stage technology sector, and Penneycard hopes to raise around £15 million for the first fund by the end of this year.

Penneycard explains that his reasons for joining the firm just a month ago were to get together with a group of likeminded individuals with whom he could share the investment decisions. “I didn’t really like making investment decisions in a vacuum, just one guy. You can get stuff wrong easily, and that’s the beauty with being part of a team.

It’s better.”

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A Different Process Penneycard says it was his own decision to go out and find a partner. And that, after meeting a number of City firms, he had opted for Downing.

“Downing ported me in, together with my investment strategy, my pipeline of deals, and

I always wanted to invest with other people, so I know most of the VCs and a lot of the angels.

I’d rather have three smart brains than one brain looking at an investment

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September 2014

the way I invest in this sector, and rebranded me as Downing Ventures.” That, and the fact that he had previously worked with Downing’s own Head of Investments, Chris Allner, at Octopus for three years and knew him to be a successful VC in his own right.

“I now get the best of both worlds, in that I get to run the business but I also get the support, I get all the back office, and the clients, and the accounting. Now, when I want to do a deal, I take it through an investment committee instead of writing the cheque on my own judgement.

Having to persuade or explain investment opportunities to a group of our partners gives a discipline that I like.”

“I always wanted to invest with other people, so I know most of the VCs and a lot of the angels. I’d rather have three smart brains than one brain looking at an investment.

If I’m looking at something, it will be pretty unusual for me not to call up someone I know who knows them.”

EIS Focus Downing for its part has been in business for 28 years, but this is the firm’s first foray into the high risk, high return space. “Until now, it has managed lower risk, lower return assets,” says Penneycard. “They have engaged me to run a venture capital fund that invests in high risk high return investments.”

Downing Growth 4, the firm’s first fund to contain the higher risk situations, will invest in EIS and seed EIS qualified companies within the UK tech sector.

Individual investments will range from £100,000 to £1m.

The fund will focus on very fast growth situations which are, as Penneycard admits, at the risky end of the sector.

But then, Penneycard is no stranger to such situations, having spent most of his

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GUEST INSIGHT

tech companies are still private assets, and require a lot of capital to really scale. If you’re raising more than 20 million dollars there, I personally find that quite a scary place to be from a valuations perspective.”

career working in the private business equity sector. Starting at investment company Octopus in 2002 and then moving to Hermes Private Equity, he eventually went to the US in 2009, where he co-founded a Venture Capital Company called DTI Capital in 2010. Upon the success of that company, he became an angel investor in the tech sector, investing in both UK and US companies.

“But where I’m investing, the seed deals we’re investing in are typically 100,000 to 150,000. And we’re using a pre-money valuation of about five or six hundred thousand, so we feel comfortable there.”

‘Very Pregnant’

Transatlantic Attitude Gap

There was no point in ducking the inevitable question about Penneycard’s own track record with his own investments in the States. “I have had successes, yes,” he says, “but I haven’t had a full exit yet.

For example, one of those investments is written up over ten times. We haven’t sold the company yet, but our investment is worth more than ten times. So you could say I’ve got a portfolio which is very pregnant, but I haven’t given birth to anything yet.”.

Penneycard says he will contemplate pure seed deals, as well as larger deals. He cites the example of Downing’s joint venture with Ploughshare, which manages the commercial licensing to industry of defence technology developed by the Defence Science & Technology Lab. This is part of the MOD at Porton Down, and Penneycard and his team are the organisation’s venture capital partner - meaning they get first shot at any intellectual property which comes out of Porton Down that has no military application.

Small Is Beautiful Asked if he’s worried that the high-risk sector is a hard place to be, he says that actually it’s the late-stage venture rounds that make tech VCs sweat.

“That’s the rounds where the pre-money valuations are at least 100 million. If you look at the private markets where companies like Uber, or Dropbox are situated; these big

We touch on the main difference between being a tech investor in the US, as opposed to the UK. In the States, he says, it’s part of the culture and most investors want a share of the pie. Even Penneycard’s US dentist had a tech portfolio, he says. And what’s more, failure is seen as a badge of honour over there, rather than the stigma that gets attached to people who have failed in the UK. Investors in the US worry mostly about what they’ll miss out on, rather than worrying about the decision to invest.

Will UK Advisers Like It? But how will IFAs react to being presented with this high-risk, high return fund from Downing? And in the post RDR environment, too?

“Well,” he laughs, “that’s part of the due diligence I did on Downing before I started to bring my life over here.”

“I said to them, you’ve raised money for lower risk assets in the past, but how likely are we to raise £10m, £15m for this strategy? The very strong sort of steer I got is that the IFAs are continually asking the business development managers at Downing: “When are you going to bring us high risk, high return products.”

“It does seem that there is an appetite for say five per cent of the portfolio to have some exposure to things which may return you significant multiples of money.”

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September 2014

Skin In The Game Penneycard and the partners at Downing have all agreed to invest significant personal amounts into the fund. “It’s a bit suck and see,” he agrees, “because although Downing has been around a long time, its their first real foray into a high risk growth fund. There is a track record there, but this is the first time they have actually recruited somebody to lead the effort and invest exclusively in this sector.”

He continues: “I presented the fund to the whole salesforce some weeks ago and they were all really excited, and couldn’t wait to get the materials out to their IFAs.” Part of this excitement is driven by some of the valuations that tech companies are currently achieving. As Penneycard points out: “People see Facebook paying $19bn for WhatsApp and they want to know what’s going on there.”

However, as he points out, he has to manage expectations.

“These are high risk, high return assets, and we expect a percentage of the portfolio to fail completely - that’s the nature of investing in startups, after all. So that’s why you have to have a large portfolio, and spread that across several different companies.”

From Roadshows To Signing On The Line Once Penneycard has finished his IFA roadshows, he will be joining the firm’s regional BDMs and meeting professional advisers around the UK. And although he thinks he’s pushing at an open door – because IFAs are undoubtedly receptive to higher risk situations - he knows he’ll still have his work cut out to get them to sign on the dotted line.

Penneycard and his team are the venture capital partner for the Defence Science & Technology Lab, part of the MOD at Porton Down, meaning they get first shot at any intellectual property which comes out of Porton Down that has no military application

But this might just be a case of the right man at the right time. Okay, the UK can’t compete yet with the likes of Palo Alto, but if Penneycard and others like him have their way, it’s not going to be behind for long.

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19/09/2014 14:38

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19/09/2014 14:38

INSIDE TRACK

September 2014

Not Enough Risk Appetite Brits are still not thinking ahead, says Jeremy Roberts, Blackrock’s Head of Sales. Neil Martin reports

Here’s a conundrum for you. Why are nearly 60% of all UK private investors unwilling to take any risk whatsoever with their money, even though most financial advisers are broadly optimistic about the markets over the next three years?

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19/09/2014 14:41

September 2014

And why do most investors (nearly 70%) keep their savings in cash, and say they intend to put more of their money into cash, even though the projected lengths of their lives after retirement is growing and cash alone won’t provide a good enough income?

Perhaps it’s because only 14% of UK investors use a financial adviser. Well, that’s what emerged from our recent conversation with Jeremy Roberts, Head of Retail Sales at BlackRock.

A Difficult Mission Roberts sees the education of the British public and their money as one of the most important roles for the IFA community to get right.

“The vast majority of advisers are focusing on retaining clients,” he says, “and they need to persuade the public that their advice is worth paying for. And they need to articulate the value of that advice, because staying in cash is not a great solution for the end consumer.”

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INSIDE TRACK

Roberts spends his working day liaising closely with IFAs, a job which includes hosting their own Blackrock conferences around the country.

After each conference he quite bravely asks the assembled IFAs to fill out feedback forms - and it is these, plus a number of Blackrock surveys, which builds a picture of the current advisory sector.

“We ask our advisers their current thoughts on markets, where they are potentially going to allocate more money to, less money to, how optimistic they are, and so forth. So it’s really taking the temperature of the advisers, and of course the end consumers in line, that’s a big thing for me.”

Roberts sees the education of the British public and their money as one of the

Groundwork

most important roles

Roberts also pays a large number of personal visits to IFA firms in order to gauge the temperature out in the field.

And this, he says, helps him and his team continue to provide the products and services that they think the IFAs need.

for the IFA community to get right

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19/09/2014 14:42

September 2014

The fact that IFAs now have more on their plate than ever has led to an inevitable outsourcing of fund selection and asset allocation - but Roberts sees this as a positive, because he says it allows IFAs to focus on their core competency of financial planning.

Asked how he thinks IFAs have handled RDR, he is generally upbeat. “On the whole, they’ve coped pretty well.

I think the IFAs which have really benefited have grabbed the opportunity to redefine their businesses and to differentiate themselves from focusing on the quality of the service they provide for their customers.”

“Clearly, this has meant that they had to ensure that they were appropriately qualified; that they communicated the changes to their clients; and that they produced a simple and clear charging structure for the advice they have advice they’re providing. So I think on the whole they have coped pretty well.”

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“It’s undoubtedly a better industry where fees are more transparent, where there’s enhanced professionalism and it has also meant that the quality of advice has had to improve.”

IFA Clients Are Happy Quoting his surveys again, Roberts points to the welcome news that although only a small percentage of people use an IFA, nine out of ten among those that do are happy with the service they get.

“Those investors who do use a financial adviser told us that they are more confident about making investment decisions, more confident, and more positive about their financial futures. So I think we have a duty quite frankly to continue to improve the financial education that we provide to the investing public.”

Another bright spot is that some 65% of the advisers questioned said they intended to take further professional qualification over the next two years.

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September 2014

INSIDE TRACK

That All-Important Longer View

that was always in my blood”.

On a more negative note, however, Roberts shares the common industry concern that the retirement bomb is ticking more loudly than ever and that the British public are simply not doing enough to fund their longer-term retirements.

“Then after graduation from University, I worked as a temp in financial services for about nine months, doing literally as many hours as I could fit in so that I could fund a five-month trip around the world. That was in 98. Then, on my return to the UK, I went for an interview after Mercury Asset Management. I joined in October 99, and it was a truly fascinating start in the City, from dot.com boom – “isn’t life fantastic?” - to subsequent crash, so it taught me a lot about taking risk. And then, 15 years later, a couple of mergers and acquisitions of course along the road, and here I am at Head of Retail Sales at Blackrock.”

“We are all living longer,” he says, “and on the one hand that is great – hurray! But what it does mean is that we have to take saving for our retirement for the future more seriously. Most IFAs tell us that their clients are not factoring in a longer life expectancy into their savings and retirement plans, and that they are too focused on short term returns.”

An Eventful Ride I then asked how Roberts got his entry into the financial service industry. He explains: “My father has been an insolvency practitioner for many years, so I guess I’ve always taken an interest in financial services, what drives businesses to succeed and fail, so I suppose

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What does he do in his spare time? His family fills most of his time outside of the office, he says; and you get the feeling that Roberts is a very busy individual who has little time to develop his love of golf and tennis. “We never have a summer slowdown at Blackrock,” he says. And nor, we suspect, would he want one.

“It’s undoubtedly a better industry where fees are more transparent, where there’s enhanced professionalism and it has also meant that the quality of advice has had to improve”

IFAmagazine.com

19/09/2014 14:42

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19/09/2014 14:42

September 2014

STEVE BEE

Real Money Wow, says Steve Bee, the young ‘uns are starting to get the hang of this pensions lark

I was talking to a younger acquaintance yesterday about pensions. He’s quite a lot younger than me - he’s just 30, in fact.

For once it wasn’t me who brought the subject up; this young chap actually sought me out and started talking about pensions to me. In fact, what he said was: “You know a bit about pensions don’t you?”

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19/09/2014 14:47

September 2014

“Yeah, a bit,” I replied. And that led to him handing me a piece of paper and asking me if I knew what it was?

I did. It was a statement from his company pension scheme.

A Glimpse of Clarity He said that his personnel manager at work had written to him and all the other employees, to explain to them that from next year the pension rules were changing and that they would not need to buy annuities in the future. He wasn’t sure what that meant, but he’d read through all the stuff the personnel manager had written and he thought he understood it - but he just wanted to check with me that he wasn’t misunderstanding what he’d read.

“Can you see this figure here?” he said, and pointed to the current fund value of his pension on his 2013 pension statement. My eyesight’s going a bit as I’m getting older, but I’m not blind, so I confirmed that I could indeed see it. “It’s nearly £35,000!” he said. (It was £34,832.) “I know,” I replied. (I’ve always been good with numbers.)

The Penny Drops “Does all this change stuff mean that when I’m in my fifties I can get that £35,000 out and spend it on anything I like?”

“Yeah.”

“Wow! So it’s like real money?”

“It always was real money. It was real money when you got the statement last year, nothing’s changed in that respect...”

But he wasn’t listening any more. He’d taken the statement back from me and was on his way out of the door.

As he reached the door he turned around and waved the piece of paper at me and said “Wow!” again as he left the room smiling.

I doubt that we’ll ever talk about pensions again. He’s just 30, and he’s had his pennydropping moment. Later on he’ll doubtless find out that his employer’s 10% contribution to his pension each year is very generous, and I’m sure he’ll come to value that.

I’m pretty sure he’ll put his pension statements away somewhere safe now too and watch them eagerly as the funds mount up over the coming years.

Like he said, it’s real money...

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Investors should be aware that prices may fall as well as rise and that the income derived can go down as well as up. When buying or selling any investment that fluctuates in price or value you may IFAmagazine.com get back less than you invested. Past performance is not a guide to future performance. Arjent Limited is authorised and regulated by the Financial Conduct Authority (FCA 41 No. 197330). Arjent Limited is registered in England. Registered No. 4077864. Registered office: Arjent Limited, 25 Christopher Street, London, EC2A 2BS. VAT Registration No. 888 5631 63.

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19/09/2014 14:47

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Steve Bee.indd 42

19/09/2014 14:49

I FA V I E W

September 2014

Doctor, Doctor

Neil Martin talks to Ian Coley, an IFA with his heart firmly in the independent camp

One of the pleasures of working on IFA Magazine is the number of really interesting people you get to meet along the way.

But it’s been a while since we’ve met anyone quite so personable and engaging as Ian Coley, joint managing

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September 2014

I FA V I E W

partner at Godalmingbased Medical Investment & Advisory Services LLP (MIS). A man with 40 years of conviction about the ethics and the daily practice of an independent business – and about what needs to happen now if we’re going to keep the reform process on track.

But then, MIS has been preparing for RDR for all of those 40 years ago, if you see what we mean. Through all the years when commission-led sales dominated the market’s thinking, Ian was telling anyone who’d listen that it was all about building your business on the primacy of providing advice.

Okay, he admits that this has been made easier by the fact that the firm’s customer base predominantly consists of medical professionals - mainly doctors and surgeons - who are attracted to the firm’s willingness to build a long term relationships with its clients. It’s a niche that has served MIS well.

“We think we operate in the ideal optimum manner,” says Ian, “the way all financial advisory firms should operate.

Okay, I appreciate that not all firms have the same cash model as us, so you could say we aren’t as constrained as most firms, perhaps, when it comes to having to make commercial decisions. And it does mean that we can afford to adopt some reasonably high moral ground in terms of our approach. That in part is luck, but it’s also in part because the firm was set up in the right way about 40 years ago.”

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Medical Record MIS can trace its history back to 1974, when two young independent financial advisers spotted an opportunity to provide medical staff, especially junior doctors and housemen, with sound financial advice.

Junior doctors are notoriously short of time, so having a trusted adviser who could be relied on to watch the finances was a major bonus.

The firm has grown into a major advisory business which has an enviable client list. The firm does not tout for business, but mostly relies on word of mouth recommendations between medical staff and contacts with a number of professional firms.

For Ian’s sake, it’s perhaps just as well that the firm does not employ hard sell tactics. By his own admission, his first job as a life assurance salesman did not turn out well. He confessed: “I started off by being attracted

IFAmagazine.com

19/09/2014 14:50

September 2014

A Robust Appraisal “I think that at the end of the day, like any other organisation, they’ll have a mixture of extremely capable people, steady people, not-that-good people, and actually very poor people working for them. It would be nice if the regulator were staffed by people who were capable of rationalizing all the issues into a cogent argument and making the right decision every time, but they’re not.

Instead they are full of ordinary people really, who are capable of messing up like anybody else.”

“I lived off Barclaycard

The problem, Ian says, is that you might dare to hope that above all these middling layers of competence there would be someone “who can actually make a decent decision as to whether they perhaps ought to open their collective mouths before they actually say something.

curries for six months and then got a proper job with an insurance broker who had a small life assurance business”

by a tacky advert in the Evening Standard which basically told me I could be rich in a very short space of time by selling people life assurance products. I quickly discovered that I couldn’t get people to do something I didn’t think was right, so that was a good lesson, although I went hungry as a result.”

“I lived off Barclaycard curries for six months and then got a proper job with an insurance broker who had a small life assurance business, but they did it reasonably ethically. As a direct salesman, I was very poor indeed - but I say that with immense pride.”

General Diagnosis So how are things going, post-RDR? Well, Mr Coley had plenty to say on the subject of the regulator.

“I think the FCA is probably doing better than the FSA, but it still remains a bit of a curate’s egg. I think the

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regulators are trying hard, but they do have a history of shooting themselves in the foot - sometimes in the most unbelievably stupid manner.

A number of their former luminaries have managed to come out and say the most incredibly stupid things from time to time, which has completely undermined that which they are trying to achieve in the first place.

“I can see where their focus is now, and why there are focusing in that way, and I think it’s generally the right thing to do - but then, all of a sudden we discover that they haven’t noticed this massive problem that’s been in the background for some time, and it’s staring people in the face, but they don’t do anything about it.”

Now, of course, the FCA is getting properly stuck into the reform process. But how, I asked him, did he see the FCA staff themselves?

“But instead you tend to find that it was the person at the top who made the faux pas in the first place - before they got helicoptered out to some cushy job with PWC, Barclays and so forth. Only, perhaps, to find that they couldn’t actually cope with the new job, so that they ended up on gardening leave before eventually going on to something a bit less demanding. ” I can’t possibly imagine who Mr Coley can have been talking about, can you? But, for all his general satisfaction with the regulator, he also believes that it’s up to IFAs to be more vocal with the FCA, and to stand up to some of the decisions which dramatically affect the industry.

So there you are, Ian Coley in a nutshell. A proven career failure when it came to the hardsell operative, but all the better for that. An IFA who takes pride in the fact that he can’t twist someone’s arm and get them to buy an investment which works for the firm and not the client.

If you had to seek a business for surviving as an IFA over the next decade, the approach adopted by MIS could be seen as a good example. Focus on advice and get to know your clients.

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September 2014

B R I A N TO R A

Feeling the Squeeze Narrowing investment trust discounts are starting to pinch, says Brian Tora

Anyone who knows me will appreciate that I have a soft spot for the investment trust sector.

Not only have I served on the board of an investment trust - I once ran a discretionary portfolio management service invested exclusively in investment trust shares and have also worked with the sector’s trade body, now called the Association of Investment Companies, on a number of projects.

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I also own shares in a number of investment trusts, so to find myself preaching a little caution on the sector feels somewhat strange to say the least. My concern, though, is the narrowing of the discounts over recent years which has contributed to some excellent share price performance.

While the industry as a whole undoubtedly views this as a positive development - it makes new issuance easier, for a start - it suggests a rethink in how you assess which to own.

A Matter of Fashion?

Even during the unsettled period ushered in when the summer was at its height, discounts have held within a tight range.

In their monthly report on the investment trust sector published in August, Winterflood Securities estimated that the average discount is a little under 6%, excluding private equity, hedge funds and direct property. While this is a little wider than the lowest point (a little over 4% according to Winterflood), it is still a far cry from the double-digit

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J

September 2014

discounts that were the norm until comparatively recently.

The reasons for discounts coming down are difficult to determine accurately. The more level playing field created by the introduction of RDR may have played a part, but it is unlikely to be the sole – or even the major – influencing factor. The greater availability of savings schemes and a more proactive approach to discount management, through share buy-backs and the use of treasury facilities, will have played their part.

Interestingly, though, investment fashion may also be contributing to investor activity and thus driving smaller discounts in some sectors. The demand for trusts offering higher yields has risen significantly, with non equity assets, such as infrastructure and debt, accounting for an increasing proportion of this universe. Indeed, often these trusts stand at a premium to

net assets. Even equity funds with higher yields now enjoy a smaller discount – less than half that of lower yielding trusts.

Not Much of A Cushion The problem with shrinking discounts is twofold, as I see it. First, a cushion that might protect the share price at times of difficult market conditions is effectively removed. In the wake of the financial crisis of six or so years ago, discounts ballooned.

With the benefit of hindsight, this provided a massive opportunity, but it didn’t feel like it at the time. Should any of the geo-political issues bubbling away around the world lead to markets retrenching, we should expect discounts to widen.

Second, small discounts remove part of the attraction of owning an investment trust’s shares in the first place. Obviously, one of the big arguments often used is that

buying a basket of investments worth £100 for £90, or even less, made good sense, but that case gets more difficult to make when the purchase price is nearer to par. There are other perfectly valid arguments for owning investment trust shares, but to lose one advantage is a pity.

A Barometer of Taste Make no mistake, I am not advocating eschewing investment trusts when it comes to portfolio construction.

Rather I am advising careful research and just a little caution when this throws up a particularly narrow discount or even a premium. And perhaps some patience in the future. After all, discounts can be viewed as a barometer on investor sentiment, so when the outlook appears bleak, it is natural for discounts to rise. That is just when good opportunities arise.

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BURNING ISSUES

September 2014

India A Shining Future This month our Burning Issues panel looks at the prospects for a resurgent India, following a decisive election victory

It’s no great exaggeration to say that Narendra Modi’s victory in last May’s general election was the stuff of post-war history. Not since 1984 has any Indian party swept the polls with such a decisive outcome as Modi’s Hindu nationalist Bharatiya Janata party, which won an incredible 282 of the 543 directly elected seats in India’s lower house – giving it a commanding 340 seats by the time you’ve included its allies.

Now compare that with the demolition of the outgoing centre-left Congress Party, which had governed India for all but 18 of the past 67 years but which this time won only 44 seats. India’s voters were signalling clearly that they’d had enough of the slow growth, the policy paralysis and the stillendemic corruption that has halved their country’s economic development over the last three years or so.

Something had got to change.

Prime Minister Modi is known as a dynamic probusiness type who favours bringing in foreign economic involvement, and who plans to dismantle many of the investment obstacles that still block the way forward.

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That’s good. Less good is the fact that Modi has never held any national office, and that his Hindu party has a difficult history when it comes to its past relationships with the country’s 14% Muslim population.

That’s something that he will need to address with sensitivity.

But for now, the mood is upbeat. Recent figures showed that India’s economy grew by an annualised 5.7% in the first quarter – beating forecasts by 0.2% and topping the final-quarter 2013 figures by 1.1%.

Meet the Panel Rajendra Nair and Rukhshad Shroff co-managers of the JP Morgan Indian Investment Trust

Ajay Argal Head of Indian Equities at Baring Asset Management

Adrian Lim Senior Investment Manager for Equities, Asia, at Aberdeen Investment Management

Our Panel We asked our panel of India fund manager experts for their views on where it’s all going, and we think their insights are fascinating. Our thanks, therefore, to: Rajendra Nair and Rukhshad Shroff, co-managers of the JP Morgan Indian Investment Trust; Ajay Argal, Head of Indian Equities at Baring Asset Management and Adrian Lim, Senior Investment Manager for Equities, Asia, at Aberdeen Investment Management.

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September 2014

Ajay Argal

Question 1: Does Modi have the determination to loosen the restrictive rules on foreign investment?

Loosening the rules on foreign investment would be a welcome development, and there is no doubt that India’s economy would benefit from the foreign investment that would follow. At the same time, we need to recognise that, after years of a socialist government in India, this is a contentious topic, and it may be that Mr. Modi chooses to focus on other areas first.

We believe that creating the right environment to kickstart the investment cycle in the country is more important rather than loosening rules on foreign investments.

Rajendra Nair Rukhshad Shroff Mr Jaitley in his inaugural budget strongly emphasized that the Modi government would be open to foreign direct investors (FDI) in almost all areas, wherever FDI could help India to generate new jobs and opportunities.

Some FDI initiatives included in the budget were either known in advance, such as raising the FDI limits for defence firms, or were measures that the BJP had inherited, such as raising the limit for insurance companies 49%, where a bill on insurance was already in progress in the Lok Sabha. Other welcome initiatives were opening areas like construction, and social housing to FDI. Of course, the likely problem areas for FDI will be getting State legislature approvals, particularly for areas like retailing or the food wholesale chain, where India’s traditional reliance on inefficient or informal distribution chains has led to strong lobbying against change. In these areas, Mr Modi will have to use his political skills to ensure good cooperation between the central and state governments, which in many areas have a power of veto.

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BURNING ISSUES

Adrian Lim

Ajay Argal

Modi is faced with a huge task.

Asia’s third-largest economy is growing at a pace that is around half that of the years leading up to the global financial crisis; chronic inflation only recently dipped below 8% as rickety infrastructure limits the supply of even basic foodstuffs; meanwhile, the government routinely spends more than it receives in taxes and other revenue. A decade ago, people spoke of India as a serious economic rival to China.

But attempts to introduce changes to boost growth were tripped up by coalition politics dominated by caste, religion and other sectarian interests in which power was passed around a self-serving political elite.

The biggest issues facing India’s economy include the need to develop the country’s infrastructure and tax regulation. These are related, and we think we will see progress in these two critical areas soon.

The ghost of the ‘licence Raj’ still haunts this nation as a bloated bureaucracy and restrictive rules help feed corruption while stifling innovation. For example, it can take up to 12 years to open a new coal mine. A 1947 labour law requires any company with more than 100 employees to secure government approval before shedding workers. Modi knows all this. His reputation as a pro-business reformer was forged during the dozen years he spent as chief minister of Gujarat.

Question 2: What would you say is the single biggest challenge facing the Indian financial markets?

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Mr. Modi is likely to take a pragmatic, long-term view with his plans for reform.

He continually employed the slogan “Give me 60 months!” throughout the recent election campaign, and, now in power, he may even be thinking longer term than this.

We are very encouraged by the election result and believe that it supports India’s economic growth story.

After a period of exuberance surrounding the election, we may see consolidation in the Indian equity market over the short term as investors adjust to the post-election landscape.

The immediate reaction of the market was to rise on the news of the result, followed by a degree of profit taking.

Regardless of such shortterm movements, it is our view that the economy and financial markets will benefit from an economic upturn over the next 18 to 24 months.

Rajendra Nair Rukhshad Shroff The biggest challenge to India is whether the severe supply-side bottlenecks that derailed India’s fast-growth path in 2011, resulting in three years of stagflation, can be eased in a sufficiently timely fashion by the new policies of Mr Modi. This will be vital if the expected increase in domestic demand due to the “animal spirits” being unleashed by Modinomics can be accommodated without the early return of strong cost pressures and high inflation.

Historically, India’s elections and change of government have only had a limited impact on the stock market. But if the NDAcoalition and Mr Modi focus on the key policy objectives in the BJP manifesto, this should be enough to trigger a cyclical improvement in the economy beginning early 2015 that in turn leads to better trend performance. This will feed through to company profits, margins and earnings, holding out the prospect of significant upgrades to 2015 Sensex earnings over a multi-year period. A brighter mediumterm outlook for the Indian economy that should start to become visible by 2016.

In the near term, we are forecasting a cyclical rebound in India’s GDP growth rising to 7% by FY17 (a figure close to potential output growth) and CPI inflation falling to 6%, accompanied by a moderate widening in the CAC deficit.

It is unlikely that all the positives have been priced into the market. Investors in Asian equities should employ any summer dip in Sensex to add to their India exposure; a significant structural O/W is strongly recommended.

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September 2014

Adrian Lim Land acquisition and environmental concerns represent two of the biggest obstacles to infrastructure development and a complete overhaul is likely to take time given the complexity of the issues and the multiple stakeholders involved. While infrastructure projects were approved by the previous administration, few proceeded as planned amid protests by environmental groups. It will be hard for Modi to ‘win’ regarding infrastructure policies, and he must resist the temptation to pander to the more populist elements of his own supporters.

Question 3:

Ajay Argal

How do the plans for infrastructure development look to you?

Rajendra Nair Rukhshad Shroff The new government has hit the ground running, with the first budget containing quite detailed proposals in some areas, including infrastructure, whereas the expectation had been more for a general indication of direction. There are some areas of infrastructure where the challenges facing India are quite daunting and easy solutions or quick fixes are not an option. The logjam in the power sector, for example, is one problem which will take a good while to resolve, as will the substantial recapitalisation of State-owned banks. The new land acquisition law will also be key in reviving capex and infrastructure spending.

There are actually few differences in economic philosophy or ideology between the previous UPA administration and the

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They look very encouraging, but the key thing will be the execution of these plans. The market is keenly watching and waiting for evidence that Modi has started to take the bold steps that India needs.

new BJP-led government.

“Modinomics” as much as anything is about a government with more energy, better focus and greater efficiency than its predecessor.

Mr Modi is keen to speed up some of the many stalled road, power, and other infrastructure investment projects proposed by the outgoing Congress administration. This would also benefit the many private sector companies caught up in the bidding for these projects, reducing their cash flow problems. Priority infrastructure areas include (i) developing industrial and freight corridors, (ii) improving urban infrastructure, (iii) provision of low-cost housing (iv) agricultural infrastructure, including electricity supply, irrigation and water management and (v) transport, such as new Diamond Quadrilateral high-speed rail system.

There are certain things that Mr. Modi can do in the shorter term to kick start the investment cycle because India’s GDP growth has come down quite significantly – primarily because of the lack of infrastructure investments.

Mr. Modi is known for better and faster decision making – this is what he has shown in the past – so we’re expecting stronger decisionmaking which will catalyse a new investment cycle.

The other thing which is a likely to happen over the next year or so is the reform of indirect taxes; specifically, those on goods and services taxation. This reform has been on the agenda for quite some time, even with the previous government, but they didn’t have the political mandate.

This government has that.

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September 2014

COMPLIANCE DOCTOR

What To Tell The Regulator Lee Werrell, CEO of ComplianceConsultant.Org, concludes his Practical Guide To Managing A Regulatory Crisis (for part I, see our July issue)

In the last issue of IFA Magazine we looked at how your first responses to the discovery of an error ought to shape up. In this article we’re going to consider how you should take the situation forward. And yes, there’s no option but to...

Tell the Regulator How to go about it? Well, initial contact is best made by telephone, because in this way the regulator’s immediate reactions can be assessed. You may have a preference as to who makes the call. However, consider establishing the Head of Compliance, accompanied with a representative of senior management (company secretary, risk director etc.) as the firm’s supervisory contact.

This is the person with whom the regulator will have a relationship. If the matter is exceptionally serious or complex, contact might be better executed at a director or even executive committee level. If the firm does not have a relationship manager, the call should be directed to the most appropriate area - and not through the general call centre.

The follow-up letter can also come from Compliance – but, depending on the nature of the crisis, the form which a written report should take may be prescribed by SUP 15.

The regulator can then decide if it needs to take further action and that could be:

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1 Investigation This will normally be for the purposes of gathering information, and the regulator is certainly empowered to do so. The regulator may decide to appoint investigators, or to require the compilation of a report by a skilled person.

An investigation might arise in situations where the firm is unable to give it the full story, or where it appears unwilling to be open.

Alternatively it could be where the regulator’s confidence in management is lacking and where it does not consider it capable of adequately resolving the situation.

Then again, it could be that there is some evidence of significant actual or potential investor loss or even evidence of financial crime - or that the regulator considers that there may have been a breach of rules or principles.

Ultimately, the regulator will investigate if the issue reported to it is relevant to a regulatory strategic priority.

2 Requiring risk mitigation or remedial actions The regulator rarely uses its powers of require firms to pay redress, because the FCA is usually able to get firms to agree voluntarily to offer customers redress often as part of the negotiations surrounding a disciplinary enforcement case – or, sometimes, through its

supervisory contact. In extreme and uncooperative cases, the FCA could seek to enforce the redress it considers to be due a number of ways.

3 Taking disciplinary action Ultimately, the FCA is committed to achieving its ‘credible deterrence’ through the exercise of its enforcement powers. The regulator will not merely take action to punish a firm or an individual approved person, but may also seek to make the punishment a deterrent for others by publicising its action. A further objective may be to eliminate any financial gain or benefit from non-compliance and where appropriate, to remedy the harm caused by the non-compliance.

Both regulators place considerable weight on senior management responsibilities, and they believe that action against these individuals of significant influence functions is a greater deterrent than action against firms alone.

This is part of the change to competence as a responsibility in management, as well as compliance of the rules.

Regulator’s Investigation Both regulators (the FCA or the PRA) can commence an enforcement investigation if they consider that there are good reasons, or if they believe that an offence has been committed. These are often

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September 2014

“The FCA is committed to achieving its ‘credible deterrence’ through the exercise of its enforcement powers.

They will not merely take action to punish a firm or an individual approved person, but may conduct issues and, therefore it’s the FCA that is the more likely to issue a Notice of Investigation - a formal letter of appointment of investigators, detailing the powers invoked and the scope of the investigation.

However, no letter may be issued if it is considered to frustrate the investigation.

The regulator will normally hold a scoping meeting with the firm and the investigators.

The FCA will typically explain its concerns, the expected timetable, and the process involved, along with interviews and documents that are pertinent to the investigation.

This is an opportunity for firms to ask questions, as well as to emphasise their commitment to co-operation and to confirm the enhancements and remedial actions that they have already taken.

The FCA (or PRA) may require the appointment of a Skilled Person under S166 of the FSMA. ‘Skilled Persons’ are typically specialist firms that perform a specialist investigation role, completing a report for the regulator on their evidencebased findings. Typically, these will always involve systems and controls, governance and management information, and capital adequacy.

The regulators may rely on the Skilled Person’s Report before deciding any further enforcement or disciplinary action.

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also seek to make the punishment a deterrent for others by publicising its action”

of the scope of the interview; however, sometimes surprises are introduced. Coaching and advice is available from selected sources, and there are a number of points that should be borne in mind as well as actions to be taken in your favour.

What Is The Best Way To Respond To A Continuing Investigation?

Documentation The regulators will often call for documentation under S165 of the FSMA. Documentation may also be required for the investigators as well as any previously requested.

It is important that you issue a “Non-Destruction Order” to your staff, to the effect that that no documentation is destroyed or deleted from files. Not only could this help to mitigate any allegations; conversely, deletion might be seen as indicating a secretive and poor culture.

Interviews: Who Is Likely To Be Called Forward?

Interview attendance is compulsory - and the regulator, to ensure fairness and transparency, will enforce its powers of compulsion, applying to both witnesses and suspects. This means that the interviewees have to answer all questions asked - and it effectively means that they have no right to silence.

Preparation time is provided in advance, and typically so are the documents and details

If the regulator believes there is sufficient evidence, it will normally issue a PIR (Preliminary Investigation Report) which will include draft charges - although this may have been preceded by a settlement approach inviting a discount for any fine levied.

The firm should prepare a response in a succinct and effective way, challenging any areas of factual error or unsubstantiated judgement or assumption. Interpretation here is key - and remember, a shock response ‘fired from the hip’ can be catastrophic in situations where a legitimate extension to any response timetable could be argued.

If Offered, Should You Settle?

Tempting as it may be to settle, firms would do well to remember that the regulator will not enter into commercial negotiations simply in order to put a case to bed.

Any firm would be advised to settle where it accepts that the case against it is essentially correct. Several advantages exist for settlement from a

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September 2014

COMPLIANCE DOCTOR

“Not only does a quick resolution end the uncertainty, but perhaps more importantly it can lead to the capping of costs and the restoration of positive relations with the regulator.

Not to mention, of course, that the firm firm’s perspective – not only does a quick resolution end the uncertainty, but perhaps more importantly it can lead to the capping of costs and the restoration of positive relations with the regulator.

Not to mention, of course, that the firm gains some influence over the content and timing of the public announcement.

There is also a potential financial advantage – the regulator will lower the proposed fine, dependent upon the stage of the process where agreement is reached.

You also have the option of bringing in the Regulatory Decision Committee (RDC).

Who Are the Regulatory Decision Committee?

The RDC is an FCA Board committee that ultimately takes important enforcement decisions.

It decides whether to issue the Warning Notice that commences the formal disciplinary process against firms. The RDC is made up of a Chairman (who is an FCA employee but is independent of the management structure and with no other responsibilities) and who is a senior and respected legal practitioner; plus a number of experienced industry and public interest representatives.

As such, they will take some collective persuading that they should withdraw or reduce the warning notice or reduce the proposed fine. That said, any document that you may choose to send to the RDC

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gains some influence over the content and timing of the public announcement”

should be concise and setting out logical and well-articulated arguments supported by fresh or re-interpreted evidence.

Repeating points that have already been made and argued against will honestly fail to make much impact.

Alternatively, any firm or an individual facing disciplinary proceedings, who does not settle, can meet with the RDC to make an oral representations in response to an FCA Warning Notice.

Do I Have To Do This?

You don’t have to make oral representations if you think that your point of view can be adequately expressed in writing. But many firms have found it advantageous to meet the RDC in person to put across their case.

Does The PRA Follow The Same Procedure?

The PRA follows the Warning Notice, Decision Notice and Final Decision Notice procedure provided for under FSMA, in the same way as the FCA does. However, the PRA has

established four decision making committees (“DMC”) to issue these statutory notices.

The DMC members are all PRA employees and are part of its executive management structure, apart from nonexecutive members of the PRA Board. The PRA will ensure that the level of seniority of the DMC is appropriate to the importance, complexity and urgency of the decision. Essentially the DMC is selected for the correct level of seniority of the firm in question. Ultimately the PRA will decide itself into which category a decision falls.

Just as with the FCA, any recipient of a Warning Notice has the right to make oral and written representations to a Warning Notice and to refer a Decision Notice to the Tribunal.

In Conclusion This two-part article has been a précis of the best ways to deal with a regulatory crisis based on experience and recent enforcement rule changes.

Having been appointed as Skilled Persons, this provides valuable insights into the process and procedures of the disciplinary process. My team at Compliance Consultant has published documents on the enforcement process as well as S166 and how to respond to them as well as given talks on the subject.

See also the listings of the latest FCA Publications on Page 56

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INVESTMENT DOCTOR

September 2014

Understanding Basis Risk Understanding basis

fund managers

illiquid. That means a manager would probably choose a UK larger-companies futures contract, which is very liquid but is also an imperfect fit when managing exposure to smaller companies.

seek to manage

How is Basis Risk Worked Out?

risk gives valuable insights into how

the exposure of their investments, says Nick Samouilhan, multi asset manager at Aviva Investors

What is Basis Risk?

This is an expression that describes the mismatch between one type of asset, exposure to which is being managed, or hedged, and the asset bought in order to achieve this goal. The extent to which the two assets do not mirror each other is the “basis risk”.

Sometimes there is no basis risk at all. Thus a fund manager may be holding all the shares in the equity Index and can limit his exposure by buying a futures contract to sell the equity index. For the relatively small cost involved, the exposure has been hedged.

Much the same is true of a broad range of blue-chip equity indices in the US, Europe and elsewhere. But many types of exposure cannot be hedged in this straightforward way.

One example is exposure to smaller UK companies. Yes, there is a futures contract in these shares, but it is very

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Basis risk can be measured as the extent to which the hedge assets do not perform in the same way as the original assets. This is known as “correlation”.

Suppose a fund manager has a position in Chinese equities. There isn’t really a futures contract available in Chinese equities, so they are going to have to look for a substitute - and that means, inevitably, taking on some basis risk.

Let us suppose the fund manager buys a futures contract in largecap UK companies. The

“After the 2007-2008 financial crisis, a lot of investors wanted to know how they could guard against that sort of shock event in future”

correlation there is about 60 per cent, meaning basis risk is 40 per cent.

No Such Thing as a Free Lunch Here is another example. After the 2007-2008 financial crisis, a lot of investors wanted to know how they could guard against that sort of shock event in future. One way, of course, is simply to buy a “put” contract on the stock market. But the trouble here is that, if you assume that markets tend to rise over time, you end up leaking money.

So a different solution was hit upon – to hedge against market volatility, either up or down. Contracts were sold that were tied to the Volatility Index (VIX), which measures volatility in the Standard & Poor’s 500. VIX futures are much cheaper to buy than “puts”, but the fund manager would be taking on quite significant basis risk.

That is because the correlation between volatility and market losses is far from being one-to-one. It is possible to lose money without markets being especially volatile.

Major investment banks will put together “mirror” hedge positions in which there is no basis risk, for the simple reason that they have taken the risk on their own books.

Whatever the client wants hedging – whether North London property or more exotic investments – will be hedged.

But the catch is that the price is high and only the wealthiest investors can afford to pay it. For the great majority of investors, basis risk is a fact of financial life.

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

FCA Publications

OUR MONTHLY SUMMARY OF THE LATEST OFFICIAL PUBLICATIONS Social Media and Customer Communications: The FCA’s Supervisory Approach to Financial Promotions in Social Media

A New Capital Framework for Self-Invested Personal Pension (SIPP) Operators

Guidance Consultation

62 Pages

Ref: GC14/6

The FCA is consulting on proposed rules that will require the providers of workplace personal pension schemes to set up and maintain independent governance committees (IGCs).

Having been working with the Department for Work and Pensions (DWP) and the Pensions Regulator (TPR) to design a package of reform measures that will help ensure that all workplace pension schemes are high quality and offer value for money, the consultation paper sets out proposed rules for IGCs.

6 August 2014 15 Pages The FCA acknowledges that digital and social media are now becoming the media of choice in many cases for customer communications and specifically for financial promotions. Yet, despite positive benefits, social media creates challenges for compliance.

This Guidance Consultation aims to: n Clarify and confirm the FCA’s approach to the supervision of financial promotions (as defined in the legislation) in social media n Help firms understand how they can use these media and comply with our rules n Remind firms that the rules are intended to be media-neutral to ensure that consumers are presented with certain minimum information, in a fair and balanced way, at the outset of firms’ interaction with them n Set out specific areas that firms need to consider, and provide some solutions and illustrative examples.

Consultation period ends 6 November 2014

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Consultation Paper Ref: CP14/9 11 June 2014

The new bodies will provide governance oversight of defined contribution workplace personal pensions, such as group personal pensions.

They will act in the interests of scheme members by providing credible and effective challenge to providers on the value for money of their pension schemes.

Consultation period ends 10 October 2014 Guidance on the Financial Policy Committee’s Recommendation on Loan to Income Ratios in Mortgage Lending Guidance Consultation Ref: GC14/4 5 August 2014 15 Pages The FCA invites views on the proposed guidance on the loan to income (LTI) ratio for residential mortgages. The PRA and the

FCA are required to ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at loan to income ratios at or greater than 4.5. (For lenders which extend residential mortgage lending in excess of £100 million per annum.)

The proposed guidance sets out: n How the FCA expects firms to act in light of the FPC’s recommendation. n How it will determine which firms should apply the LTI limit when the guidance comes into effect. n How it will determine which firms should apply the LTI limit on an ongoing basis. n How it will monitor if a firm’s mortgage lending is consistent with our expectations on the LTI limit and what supervisory action may be taken.

Consultation period ends 7 September 2014 Recovery and Resolution Directive Consultation Paper Ref: CP14/15 1 August 2014 105 Pages This CP sets out the proposed changes to the Handbook that are required to transpose the Recovery and Resolution Directive (RRD) into the UK regulatory regime for the investment firms and certain group entities that we regulate prudentially and that fall within the scope of the RRD. Consultation period ends 1 October 2014

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Strengthening the Alignment of Risk and Reward: New Remuneration Rules Consultation Paper Ref: CP14/14 30 July 2014 146 pages This joint FCA and PRA consultation paper seeks views on proposed changes to rules in the area of Remuneration.

The paper follows both regulators’ responses in October 2013 to the final report of the Parliamentary Commission on Banking Standards (PCBS), ‘Changing Banking for Good’.

It sets out proposals for revised rules on Remuneration which would be incorporated in the PRA Rulebook and the FCA Handbook.

Consultation period ends 31 October 2014 Strengthening Accountability in Banking: A New Regulatory Framework for Individuals Consultation Paper Ref: CP14/13 30 July 2014 395 pages In partnership with the PRA, the FCA is consulting on a new way to hold individuals to account, following the recommendations of the Parliamentary Commission on Banking Standards.

Removing the Transparency Directive’s Requirement to Publish Interim Management Statements Consultation Paper Ref: CP14/12

Dates Diary for your

23 July 2014

SEPTEMBER 2014

23 pages

11

St Leger’s Day Race Doncaster, Yorkshire, UK

15

Sixth anniversary of Lehman Bros bankruptcy

18

Independence Referendum Scotland

22

Consultation period ends for Consultation Paper CP14/11 (Retirement Reforms and the Guidance Guarantee)

The FCA is consulting on removing the requirement for issuers with shares admitted to trading to publish interim management statements pursuant to the Transparency Directive Amending Directive (2013/50/EC).

Under the Transparency Directive Amending Directive (TDAD), which entered into force on 26 November 2013, each Member State is required to implement the Directive within 24 months from that date. However, HM Treasury have asked the FCA to remove the requirement to publish interim management statements early, and we are setting out that proposal.

Consultation period ends 4 September 2014 Retirement Reforms and the Guidance Guarantee Consultation Paper Ref: CP14/11 21 July 2014 45 pages

This consultation proposes changes to the way individuals working for ‘relevant firms’ – ie UK banks, building societies, credit unions and PRA-designated investment firms – are assessed and held accountable for the roles they perform. The proposals reflect the recommendations of the Parliamentary Commission on Banking Standards (PCBS) and implement changes required by the amendments which the Financial Services (Banking Reform) Act 2013 (the Act) made to the Financial Services and Markets Act 2000 (FSMA).

The pension reforms to be implemented on 6th April 2015 will change the way firms and consumers interact in this market. The Government has recently published a response to the FCA’s consultation, Freedom and Choice in Pensions, giving more detail on the Guidance Service that will help people make retirement income decisions. This consultation paper, then, should be read alongside the Government response.

Consultation period ends 31 October 2014

Consultation period ends 22 September 2014

26-28 Ryder Cup Gleneagles Hotel, Perthshire, Scotland

OCTOBER 2014 1

Consultation period ends for Consultation Paper CP14/15 (Recovery and Resolution Directive)

6-8

Institute of Financial Planning annual conference Newport, Wales

10

Consultation period ends for Consultation Paper CP14/16 (Strengthening the Alignment of Risk and Reward) and Discussion Paper DP14/3 (The Use of Dealing Commission Regime)

Continues overleaf

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Dates Diary for your

18

Champions Day Ascot, UK

23-24 European Council Meeting Brussels, Belgium 31

31

Consultation period ends for Consultation Paper CP14/14 (Proposed Rules for Independent Governance Committees) and CP14/13 (Strengthening Accountability in Banking) Deadline for selfassessment tax returns 2013/2014 (paper only)

NOVEMBER 2014

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

Proposals for a Price Cap on High-Cost Short-Term Credit

Clarifying the Boundaries and Exploring the Barriers to Market Development

Consultation Paper

Guidance Consultation

Ref: CP14/10

Ref: GC14/3

15 July 2014

11 July 2014

141 pages

The FCA is publishing guidance to help clarify the different types of retail investment sales models, the boundaries between them and the associated regulatory requirements.

Through this guidance consultation the regulator also discusses some of the barriers to the market developing further.

The consultation proposes to:

The FCA’s regulation of high cost short term lenders (“payday lenders”) began on 1st April 2014, with a remit to tackle poor conduct in the market and ensure that there is an appropriate degree of protection for consumers.

January 2015 brings the introduction of a cap on the total amount that high-cost short-term credit lenders can charge. The FCA is doing this to meet a duty given to it by the Government to secure an appropriate degree of protection for borrowers against excessive charges in this market.

This paper discusses the regulator’s cap proposals and the detailed research and analysis that it carried out to inform its proposals.

Consultation period ends 1 September 2014 The Use of Dealing Commission Regime Discussion Paper Ref: DP14/3 10 July 2014 141 pages

8

England v New Zealand Twickenham, UK

9-11 World Economic Forum Summit on the Global Agenda Dubai, UAE HAVE WE FORGOTTEN ANYTHING? Email editor@ifamagazine.com

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The FCA has recently made clarifications and enhancements to its use of dealing commission rules that address its concerns over investment managers’ controls and judgements following its 2012 supervisory work.

This paper reports on the recent supervisory findings and a series of roundtable and bilateral discussions with stakeholders that examined how the use of dealing commission, specifically for the purchase of research, currently functions.

Consultation period ends 10 October 2014

n Clarify the regulatory framework in respect of different types of investment sales models n Provide detailed examples and our view on whether they amount to personal recommendations or not n Explore specific issues in this area which our stakeholders have raised with us n Summarise the results of thematic work carried out on firms using new technology to interact with customers n Report on research on how customers use services that do not provide a personal recommendation.

Consultation period ends 10 October 2014 Annuity Comparison Websites: Promotions Review and Guidance Finalised Guidance Ref: FG14/6 20 June 2014 This incorporates responses to the FCA’s February guidance consultation. The responses indicated a general support for the guidance and welcomed the regulator making clearer its expectations of what constitutes a fair, clear and not misleading annuity comparison website.

Accordingly, the regulator does not intend to make any significant changes to the guidance.

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September 2014

INDEPENDENCE

Understand, Quantify, Control Gill Cardy wants a more universal understanding of risk May the heavens bless the FCA for continuing to focus attention on risk profiling - even if the regulator is being oblique about its expectations, and annoyingly opaque about which tools are acceptable, appropriate, suitable, accurate, valid, or any of these.

But even if we did know what the FCA finds agreeable

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in the world of risk-profiling, I humbly suggest that we first need a clear understanding of what we mean by risk.

While I’m doing clarifications, by ‘we’ I mean not only advisers and investment managers, but also other key stakeholders in this discussion: clients, the FCA, and those other judges and juries of our advice, the Financial Ombudsman Service.

So What is Risk?

Now, I know there are concerns about the general levels of understanding of investment risk in the adviser community, and this is one good reason why we should agree an intelligent approach which can work for all of us.

None of you need a lesson from me on risk. There is a ‘risk’ attached to just everything, and the important thing, therefore,

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September 2014

is to understand it and then quantify and control it.

When considering attitude towards investment risk, investment advisers and clients often have different definitions of risk, let alone approaches to risk, which can cause confusion and investment in inappropriate portfolios.

Types of Risk: • Systemic risk (war, taxation, natural disaster) • Capital risk • Non-systemic risk (incompetent fund management) • Income risk • Risk of loss • Time risk • Underperformance • Failure to achieve objectives • Likelihood of an event • Impact of that event • Volatility • Inflation

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Of course, it’s any or all of the above, and some of them are the same thing expressed differently depending on whether you are an investment manager or a client.

It’s In the Charts There’s one chart in our core study text that’s been around for years. It’s the one where risk is mapped across the bottom and return is mapped up the side of the chart.

You draw a line from bottom left to top right and write along that line all the main investment categories in order of risk. You start with cash in that bottom left hand corner. In the study text venture capital is at the top right, curiously above Enterprise Investment Schemes which I would personally assess as higher risk than VCTs. Below these (curiously) is ‘property’ without any further distinction between residential or commercial.

Then we find ‘unlisted shares’ followed by ‘listed equities’.

This type of chart usually refers to other countries, distinguishing between the differing risks of UK, developed or emerging market investments. In addition, individual shares are described as higher risk than collective investment funds. They have no investor protection. They lack diversification by most measures (number, sector, market, economy) and have little or no asset class diversification.

But when FOS asserts in an adjudication that FTSE-100 shares are low risk investments we must all agree that there is an urgent need for ‘clarification’: a common understanding, one to which all stakeholders in the financial services community could subscribe, and one with which they (we) could all abide, in the short, medium and long term.

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Financial Services Recruitment Specialists

True IFA

Expat Financial Adviser

Private Client Consultant

Cardiff, Birmingham, Basingstoke, Manchester and London

Qatar (UAE)

Inverness and St Albans

£35k - £45k plus bonus

Average earnings £80 - £100k tax free

£45k with car allowance and bonus

Recruit UK are working for a leading and secure firm who are actively seeking a True IFA to deliver full holistic financial planning to medical professionals.

Recruit UK are representing a reputable offshore wealth management firm who are seeking experienced Level 4 financial advisers to join their team across Qatar to deliver quality advice to the expat communities based there.

Recruit UK are working on behalf of a top IFA firm that due to business growth plans are looking to appoint a new Private client consultant.

Working within a mature and supportive environment, the IFA will receive the benefits and structure of an employed position without the need to bring their own client bank. 100% of quality leads will be provided and there is full support through a dedicated administration and paraplanning team.

Our client has an exclusive partnership in place with a Trade Union who has 150,000+ members ranging from junior to senior doctors and medical professionals. They have a successful marketing strategy in place and many leads are generated via email campaigns, media exposure and seminars.

Experience of working within the medical profession is not required for this role, however our client is seeking level 4 , SPS and CAS qualified IFA’s, Wealth managers or Bancassurers who have the right attitude, who are hungry and driven to go out and write business and who hold a proven track record in exceeding targets (Junior Advisers will be considered if you have level 4, SPS and strong track record) In return, our client offers a basic salary c40k for year 1 and 2, down to 18k (40% of all business written) in year 3. Bonus validation is 1.7x year 1 and 2.4x year 2.

There is a car allowance and also a structured career path that can lead to an exit strategy upon your retirement.

Our client is a highly secure company who are recession proof, as is the market you will be working in, so this is an extremely desirable role.

Contact Sam Oakes at Recruit UK on 0844 3714031

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Our client has been providing lifestyle financial planning to clients around the globe for almost 20 years, with their Qatar office being at the top of the billing list out of all their offshore offices.

Our client is looking to double the amount of advisers in their Qatar office within the next 2 years due to the number of ex pats needing quality advice and are ideally seeking hungry, career driven individuals who are not shy to get stuck in and who can demonstrate their desire to succeed in another country.

Qatar has a large percentage of expatriates which is continuing to expand, so there is plenty of potential to develop relationships and write high levels of business. They have a good reputation in Qatar with connections to The Gold clubs and Sports personalities who hold talks for the firm, generating a lot of leads.

Advisers will in the first instance be offered a small client book to work from however they expect to see natural hunters who have the entrepreneurial spirit to self generate business. Average earnings are 80-100k tax free, and the top earner this year is set to earn around £350k!!

Applicants for this role must be level 4 diploma qualified, have the passion to work in offshore financial advice and be aware of the differences of adapting to Living outside of the UK. This is a desirable role exclusive to Recruit UK and there is a fast turnaround between interview and starting the role.

Contact Frankie at Recruit UK for a confidential discussion

Our client is an award winning highly established firm and they have an envious amount of Private clients across the UK, including many large successful companies.

They have excellent Paraplanner support in place from their centralised office and provide all necessary facilities to work efficiently from a home and field based role.

The Private Client Consultant will provide profitable, effective and compliant independent financial planning advice to an existing client bank and new clients, identifying and developing new business opportunities through the relationships in place with clients, introducer’s and referrals.

Applicants will ideally have experience in corporate advice and be familiar in working closely with introducer’s and working in a bank background. Having a client bank to bring without restrictive covenants would be preferable but is not imperative.

To join this company you will need to be Diploma level 4 qualified and already be achieving high levels of business preferably in the IFA market. Individuals who demonstrate their desire to work towards level 6 and maintain a CPD will be preferred.

In return, the Private Client Consultant will receive a basic salary c£45k with Car Allowance of up to £4k, discretionary bonus and a generous benefits package.

As this is a home based role, you will also be in line to receive a home allowance to cover Monthly costs.

Contact Recruit UK on 0844 3714031 to discuss this opportunity in confidence.

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Contact us to discuss our latest opportunities:

T 0844 371 4031

Home Based Financial Adviser Kent, Surrey, East Sussex, London, Herts, Bucks, Inverness, the North East and the Midlands

Employed Wealth Manager

E HR@ifamagazine.com

Wealth Manager

Birmingham

Manchester and various UK locations

£60k - £125k basic plus bonuses

Basic up to £75k plus bonuses

We are currently representing a prestigious wealth advice and investment management business, winners of numerous industry awards and recognised for their impeccable training and coaching towards chartered and other specialist advice exams has earned them a high retention rate with employees and admiration from clients.

Our client is the market leader in PI and Clinical Negligence.

OTE of £75k plus monthly bonus Recruit UK is representing a successful and reputable Financial Planning Firm who has a national presence and a unique investment proposition. They are one of the best consumer brands in the market and have the financial strength as a global player.

They have a Financial Adviser proposition that will provide you with the security of a salaried career and give you the freedom to pursue your goals. There will be no need to bring your own client bank as there is great support in this role and 75% of the business you write will come from quality leads, however you will need to demonstrate strong business development skills to generate the remaining 25%.

This role would benefit an adviser who wants the loyal client bank to get you started, but who has the autonomy to drive business without being micromanaged.

It is a home based employed proposition where you will service clients across the local and surrounding areas.

On offer is a generous basic salary, OTE of £75K, Monthly bonus and there are a number of advisers at the firm who are earning £100K+. In addition to the large earnings, benefits include company car, flexible benefits package, home working costs covered, a generous pension contribution, dedicated support team offering paraplanning and administration at no extra cost and all risk and compliance management provided. You will also receive development resources, including support to become Chartered.

Contact Stuart Leaney or Frankie Pailing at Recruit UK on 0844 3714031 to discuss this opportunity.

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Due to growth through acquisitions and an increase in client referrals through professional relationships that include prestigious Law and accountancy firms, the company is looking to attract new advisers to work out of their modern offices based in major cities across the UK. The client has always operated on a fee basis, have an in-house investment management team, and full support in the way of highly qualified paraplanners and administrators. They also remunerate their advisers in line with other professionals such as solicitors and accountants, being considered a professional adviser is more important than ever just look up the recent FSA document titled ‘Risks to customer from financial incentives’ a clear indicator that higher basics are the way forward.

Shares are also offered to all employees.

You must be driven towards achieving Chartered and ideally have experience of fee based advice and knowledge of IHT, tax, Pensions and investments and used to working with professional introducer’s and clients preferably with investable assets to bring without restrictive covenants.

You need to be highly presentable and able to evidence previous success. It is essential that you have strong business development skills and can evidence experience on this side of financial services.

They are currently looking to expand their financial advice team with 2 experienced Wealth Managers.

Ideally our client is seeking chartered individuals who have experience of working within an accountancy practice or similar and who hold good technical skills. Due to the nature of the role, advisers can often work with families in sometimes distressing situations, so it is important to have the softer skills to manage these clients.

Our client has in place a number of professional introducer’s who pass leads to the Financial Consultants, so there is a good level of support towards building your business.

However an element of the role will be to build robust relationships with Solicitors and to maintain and generate clients, so it is essential that you have the exceptional communication and business development skills across a wide range of groups.

On offer is a Basic salary up to £75k plus discretionary bonus and car allowance of up to £6k.

This is a home and field based role, so only candidates who are flexible to work effectively from their own home will be considered. Head office is based in Manchester with opportunities across the UK due to the home based nature of the role.

To discuss this role in confidence, please contact John Anderson at Recruit UK on 0844 371 4031.

To discuss this role in confidence, please contact John at Recruit UK on 0844 3714031.

19/09/2014 14:57

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THINKERS

September 2014

Not Mother Teresa Amartya Kumar Sen Development Economist Born 1933 in West Bengal ‘The Mother Teresa of Economics’ – a title which he still says makes him feel uncomfortable – has unquestionably been the greatest of all India’s economic thinkers. The recipient of the 1998 Nobel Prize for Economic Sciences has been influential in shaping international development programmes that have built upon his often shockingly innovative perceptions about human and political rights in the developing world.

What Sort of Rights?

The right to vote, for a start.

And, underlying that, the right to have one’s existence recognised at all. Sen’s 1990 report, “More Than 100 Million Women Are Missing” was an examination of the role that male dominance played in Indian and Chinese societies: on the one hand, he noted, boys got an education which girls lacked, while on the other, hidden rates of genderspecific abortion were making it impossible to measure the population, let alone secure human and civil rights.

What’s That Got To Do With Economics?

Well, to answer that you’d have to go back to his influential monograph Collective Choice and Social Welfare (1970), which declared that the mechanisms for measuring and recognising poverty would amount to nothing unless the underlying social information was accurate. Sen devised methods of measuring that information that still form

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Currently teaching at Harvard

“You need an educated, healthy workforce to sustain economic development”

the basis of the techniques used by development researchers throughout the world.

They were also instrumental in establishing the UN Development Programme’s annual Human Development Report, which ranks the countries of the world on various economic and social indicators and enables comparisons to be made.

Famine and Politics Sen’s Poverty and Famines: An Essay on Entitlement and Deprivation (1981) broke new ground in development circles by arguing that famine can occur not just because of a shortage of food, but because sections of the population are barred by social inequalities from being

involved in the process. Sen’s study of the devastating 1947 Bengal famine showed that there had been plenty of food that year, but that hoarding, price gouging and manipulation of the supply system had effectively disenfranchised millions of workers who had no political influence and no way of raising their wages in line with higher prices. They had starved.

Is Sen a Socialist?

Does that sound like the sort of socialist politics that would later turn India into a creaking, inflexible, near-communist state? Sen didn’t think of it that way. Unlike Marx, who saw the economy in mainly revolutionary terms, he said that even a constitutional right to vote would mean little unless the people had the “functionings” that would give them the right to use that vote.

These “functionings”, he said, could include the universal availability of education, or simply a transport system that would get people to the polls in the first place. Only when such barriers had been removed, he said, could people be properly said to be acting out of personal choice.

It’s also no good having Western-style supermarkets in the remoter areas if bad roads mean that the trucks can’t get through to supply them with goods. As India’s new government sets out its plans for developing and liberating the nation’s infrastructure, these issues are coming very much to the fore.

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T H E OT H E R S I D E

September 2014

Watch Your Pockets Richard Harvey says that advisers are being charged so that somebody else can be paid to do their job

We all remember incidents from our infant years, such as when Grandma got pickled on brandy and Babycham, or the day you trapped your head in the park railings.

In my case, it was at a kids’ party, when a chap who could lay claim to being the world’s clumsiest magician fumbled his attempt to pick my pocket and dropped my marbles all over the floor. (If he tried that today, he’d probably be arrested under Operation Yewtree).

Anyway, cue a chorus of derision from the assembled sprogs.

Hunt The £50 Note My IFA mate Martin is now accusing the government of equivalent ineptitude in its endeavours to filch money from the financial services industry to part-pay for the new ‘free’ pensions advice schemes that are being set up to ensure newly-liberated pensioners don’t blow all their savings in one go after next April.

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“The way I see it”, he says “the government is intending to offer unqualified advice to pensioners - which means that IFAs like me, who have spent 30 years learning all the pitfalls and glitches, are paying someone else to pinch our work.”

Jumping Jacks And Jills But it may be that the predicted stampede for government advice is likely to be more of a zimmerassisted limp, if the latest data on the over-50s is to be believed.

According to the splendid Ros Altmann, the government’s recently-appointed Minister for Wrinklies (I’m not sure that’s her exact title, but she’s been given the job of looking after the interests of older citizens), more of us are working longer, living more healthily and starting new careers, so we don’t necessarily need to access our life savings straight away.

In an article in The Times, illustrated by a picture of a youthful-looking couple

strolling along the beach (why is it always the beach?), Ms Altmann says that so-called ‘Superboomers’ are rewriting the rules of retirement.

She quotes a report from The Future Laboratory consultancy stating that pensioners have “fitter bodies, more active minds, higher levels of self-entrepreneurship…. and are increasingly the face of fashion, design and beauty”.

Fitter bodies? You better believe it – a Nuffield Health study states that 66 is the peak age for gym bunnies, who work out 20 times more per year than teenagers.

So fear not, Martin. We ‘Superboomers’ are more likely than ever before to stay invested – indeed, to keep saving – which holds out the prospect of an extended relationship between IFAs and their ageing, but fighting fit, clients.

Providing, of course, we don’t keel over on the exercise bike at the gym.

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19/09/2014 14:58

IFA Magazine’s highly successful series of Adviser Roadshows rumbles on

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