IFA Magazine May 2014 by Alex Sullivan

M AY 2 01 4 ■ I S S U E 3 0

For today’s discerning financial and investment professional

SHIPPING INDICES UK EQUITY INCOME ETHICAL FUNDS

SHARI’A INVESTMENT

WHAT IT IS, HOW IT WORKS

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regulars

C O N T R I B U TO R S

This month’s contributors Brian Tora a Communications Associate with investment managers JM Finn & Co. Abbie Tanner leading marketing consultancy for financial services companies. Steve Bee founder of JargonFree Pensions, and of JargonFreeBenefits. Lee Werrell a senior compliance consultant and industry adviser. Richard Harvey a distinguished independent PR and media consultant.

Nick Sudbury known for his regular columns in many leading financial magazines. Gillian Cardy Network Development Director at ValidPath.

Stephen Spurdon an experienced writer for the national, consumer and trade press.

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

THE FRONTLINE: Ten thousand muslim millionaires with firm ethical principles

News

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

Editor’s Soapbox

The Baltic Dry Shipping index has sunk a lot of investors’ yachts, says Michael Wilson

Pensions and Auto-Enrolment

Steve Bee on everything you ever wanted to know about West Ham’s chances of Wembley

Bonds Go Berserk

There’s more to this year’s squeeze on bond yields than meets the eye, says Brian Tora

Pick of the Funds

What’s the difference between an ethical fund and an SRI? Nick Sudbury explains

Compliance Doctor

The latest pronouncements on disclosure don’t shed any new light, says Lee Werrell

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FCA Publications

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

How Long Have I Got, Doc? Gill Cardy says it might actually be an advantage to know your own use-by date

Recruitment

Sam Oakes outlines a revolutionary new venture in recruitment agency brokerage

Thinkers: Ayn Rand

A novelist, an economist, a political theorist? An icon, that’s for sure

The Other Side

Editor: Michael Wilson

Storming down the freeway on a Harley? Hmmm, it’s tempting, says Richard Harvey

editor@ifamagazine.com

Art Director: Tony Merlini

tony.merlini@thewowfactory.co.uk

Publishing Director: Alex Sullivan alex.sullivan@ifamagazine.com

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

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CONTENTS

features 21

GUEST INSIGHT

Currencies

Laura Parsons from Tor FX takes a look at the coming quarter

UK Equity Income

Is this the optimum moment to move in, we ask?

Two Way Communications

Don’t let up for a moment, says Abbie Tanner. It’s the best way to make your clients feel special

COVER STORY

Islamic Finance

It’s one of the most important trends of the moment, says Stephen Spurdon. But do you really know what’s involved?

INSIDE TRACK

Structured Products

Risk is replacing capital protected products, says Ian Lowes, and here’s why

INSIDE TRACK

Smaller Company Investment Trusts

F&C’s Simon Cordery explains why ITs have the structural edge when it comes to backing tomorrow’s giants

It’s taken a long time for the UK shari’a scene to take shape, but the opportunities are boundless. Especially if you look outside UK-domiciled funds IFA Magazine is published by IFA Magazine Publications Limited The Old Wheelwrights, Ham, Berkeley, Gloucestershire GL13 9QH Telephone: +44 (0) 1179 089686 ©2014. All rights reserved.

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

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WORDS OF WILSON

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

LOOKING FOR LOGIC NOW DON’T GET ME WRONG. I LIKE A BIT OF UNPREDICTABILITY AS MUCH AS THE NEXT MAN

Show me a long sweeping upward curve, and I’ll probably start fretting that Mr Market must surely be over-simplifying things and that it’ll all end in tears. Show me a long, slippery descent, and I’ll be out there with my resistance lines and my theory books, trying to spot the crucial turning point that will make me rich. Life isn’t easy for us fidgety contrarians. But this year has got me properly foxed. Sure, it doesn’t surprise us very much at IFA Magazine that the equity bull run has flagged this year. (We said last November that there wasn’t enough substance to support any further rises in company valuations. Tadaaa, thank you.) But the recent tightening of bond yields? What does that mean? I wish somebody would tell me. Yes, I can see that Russia’s threats toward Ukraine will have been giving equity investors some sleepless nights. And yes, it’s rather disconcerting to see Japan’s QE-fuelled rocket plane burying itself into the tarmac so soon after its launch. But why bonds? Weren’t we being assured only a few months ago that investors were staying in cash, and to heck with the dismal deposit returns? What’s changed? Whatever it is, it’s getting beyond a joke. Bad boy Greece is currently yielding only 6.3% on ten year paper; Spain, Portugal and Ireland are on 3.1%, 3.7% and 2.7% respectively. Meanwhile Germany is down below 0.2% on two year bonds. And the market’s appetite for junk bonds is positively frightening. One of the more depressing explanations is that Europe might be flirting with deflation. The logic goes that, when consumer prices are falling, even a wafer-thin yield is suddenly worth having. The fact that you’re locking into that tiny yield for five or ten years doesn’t seem to bother other people as much as it worries me. But whoopee, here comes the European Central Bank with glad tidings. European banks have been making superhuman efforts to repay the vast volumes of cheap rescue loans that they got back in 2011. That would be excellent news, were it not for the fact that they’re doing it for a one-off reason. Namely, that they need to improve their ratios before the next round of stress testing, later this year. What’s that got to do with the price of fish? I’ll tell you. It’ll swamp the bond markets, drive up the bond yield, send up the bank rates, and then we’ll all be happy. Except, that is, for businesses, which will struggle to afford new capacity at the exact moment when deflationminded consumers are already disinclined to buy. How, exactly, is that going to help?

M ik e

Michael Wilson, Editor IFA magazine

May 2014

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Write to Michael at editor@ifamagazine.com

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IFA_T

Equity in the UK We’ve been building it since 1979 Ever since we launched our first UK equities fund we’ve strived to build a strong team, who work closely together, over many years. In fact, on average, our team members have been with us for at least 9 years.1 This allows us to consistently apply the same investment philosophy and use our past to shape our future. Over the years, we’ve taken the view that continuity leads to success. A good example of this is Mark Barnett, our new Head of UK Equities, who has been a key member of our team since 1996. He exemplifies our aim of delivering excellent long-term results for investors. Explore our past, present and future at invescoperpetual.co.uk/uk or call 0800 028 2121

This ad is for Professional Clients only and is not for consumer use. 1 Source: Invesco Perpetual, as at 31 March 2014. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Telephone calls may be recorded. Where Invesco Perpetual has expressed views and opinions, these may change. Invesco Perpetual is a business name of Invesco Asset Management Limited. Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH. Authorised and regulated by the Financial Conduct Authority. IFAM 05.14

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magazine

Ukraine

continued to dominate the front pages, as pro-Russian separatists in the east came into violent conflict with the Kiev authorities. But weak sentiment in the financial markets did not result in the expected dash toward gold – rather, investors seemed to be turning toward bonds.

THE FIGHTING TURNS UGLY With only four months left to go before the Scottish independence vote on 18 September, the gap between the Yes and No camps narrowed as Scottish Nationalist leader Alex Salmond stepped up his emotional rhetoric Much to the dismay of the No camp, which continued to insist that Edinburgh would be swanning its way blissfully to fiscal disaster if Salmond’s nationalists should win the day. The naysayers have an array of sober arguments, mainly centred on the prospect that Scotland’s thinning export revenues would look pretty thin against the weight of the debt burden that Scotland must surely take on after independence (about 8.5% of the UK’s debts, to be precise.) And that foreigners were unlikely to trust a Scottish government that had no recent track record of managing its own debts – meaning that its servicing costs would be much higher than the combined UK is paying.

Donald, Where’s Your Troosers?

Yet the dry, lacklustre performance of the No campaigners was attracting criticism from within its own ranks. Why should it be, some asked, that the unionists had only rational arguments to offer while Salmond’s nationalists

This The v Wher Cond Trust Auth

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IFA_T

1996 saw a new arrival Mark Barnett joined our UK equities team Our UK equities team continued to grow in the 90s. And not long after joining, Mark Barnett became lead manager of the Perpetual Income and Growth Investment Trust plc. Over the next ten years, Markâ&#x20AC;&#x2122;s reputation continued to rise and he is now one of our most experienced fund managers. As our newly appointed Head of UK Equities, heâ&#x20AC;&#x2122;ll continue to help drive the team forward. Explore our past, present and future at invescoperpetual.co.uk/uk or call 0800 028 2121

This ad is for Professional Clients only and is not for consumer use. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Telephone calls may be recorded. Where Invesco Perpetual has expressed views and opinions, these may change. For more information on our products, please refer to the Investment Trust ISA and Savings Scheme Key Features and Terms & Conditions and the latest Annual or Half-Yearly Financial Reports. This information is available using the contact details shown. Issued on behalf of the board of the Perpetual Income and Growth Investment Trust plc by Invesco Asset Management Limited. Invesco Perpetual is a business name of Invesco Asset Management Limited. Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH. Authorised and regulated by the Financial Conduct Authority. IFAM 05.14

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NEWS

France’s

socialist government won an important victory as the French parliament cleared a painful budgetary plan that included welfare freezes, spending cutbacks, and a major squeeze on the public sector deficit. Finance Minister Manuel Valls (right) has already raised taxes substantially: this time, he was taunted by the liberal press for having turned against the working class. But is his pledge to cut the deficit below 3% by 2015 realistic?

could draw on an emotional appeal that runs all the way from Rabbie Burns back to the proud warriors who even the Romans couldn’t subdue? It was, as one of IFA Magazine’s friends observed, a bit like the badger cull. You could advance as many sensible arguments as you wanted in favour of reducing badger numbers, but you’d never get past the fact that we all grew up with cuddly badgers who populated our bedtime stories. You’d lose every time.

The Heavyweights Move In Enter, then, the heavyweights. Moody’s rattled the bars of Salmond’s fiscal cage on 1 May with the shock announcement that an independent Scotland would only merit a measly A grade credit rating – a long way below the UK’s current Aa1, and really pretty far down the line from the AAA ratings that a top performer might expect.

As the BBC rather cattily noted, Poland, the Czech Republic and Mexico are three other countries that make a straight A rating. And they’re all paying over the odds for their debts even though A is still an ‘investment grade’ rating. (A sub-investment grade would very likely cause an implosion of a highly indebted economy.) They were, in effect, But Salmond’s team had, in traditional fighting style, got their retaliation in first with a quick resort to the nuclear option. How would it look, they asked the Scots, if their country simply abrogated its share of the UK’s debts when it turned independent? Or at least some part of them? Wouldn’t that make it look a lot more attractive to the outside world? Indeed it would. If you don’t count the fact that defaulting on a debt obligation is never a

Lloyds Banking Group

reported an underlying quarterly profit of £1.8 billion, 22% ahead, when adjusted to strip out one-off costs and provisions. At the same time, it said, there had been a major reduction in its bad loans. Net adjusted profit for the quarter was £1.15 billion, down from £1.53 billion in the same quarter of 2013 when there had been a one-off gain from a sale of gilts.

particularly sensible thing to have on your credit record, and very likely to put people off the idea of advancing you any more money. But the shock of the proposal rang out like a blast bomb – more a matter of smoke and noise than anything else. And suddenly we were in chaos and confusion, a situation which Mr Salmond is well skilled in exploiting.

Just Walk Away But what really put the cat among the pigeons was a report published by the Glasgow-based Centre for Public Policy for Regions think-tank, which said that Scotland could save itself £5.5bn in servicing costs in 2016-17 - twice the sum expected from North Sea tax revenues. – if it simply walked away from its share of the UK’s debts. Well, that was the headline. What it actually said was that Scotland’s ministers were crazy to be discussing such an idea, even though its fiscal attractions were undeniable. The bigger point, though, was that it had become politically possible to raise the subject at all. “This report shows exactly how strong a hand Scotland will have in negotiations following a vote for independence”, said Scottish Finance Secretary John Swinney. Not so, said the CPPR. “Any benefit arising to an independent Scotland from starting with zero historic debt would be heavily influenced by whether this was achieved via amicable negotiations or through Scotland’s refusal to accept what the remainder of the UK (rUK) consider to be an appropriate share” Quite so.

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IFA_T

We’ll approach the future of UK equities the same way Differently Our UK equities team has been established in Henley for almost 35 years and recently Mark Barnett took over as our Head of UK Equities. Whilst some things have changed, one thing that won’t is our investment approach. We’ll continue to make conviction-led decisions with long-term success in mind. The results of this are reflected in our latest awards. This year has already seen the Invesco Perpetual UK Strategic Income Fund, managed by Mark, receive the Morningstar Best UK Fund Award. What’s more, the Invesco Perpetual UK Growth Fund, managed by Martin Walker, was voted the Morningstar Best UK Large-Cap Equity Fund. Explore our past, present and future at invescoperpetual.co.uk/uk or call 0800 028 2121

This ad is for Professional Clients only and is not for consumer use. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Past performance is not a guide to future returns. Telephone calls may be recorded. Where Invesco Perpetual has expressed views and opinions, these may change. The Invesco Perpetual UK Strategic Income and UK Growth Funds may use derivatives (complex instruments) in an attempt to reduce the overall risk of their investments, reduce the costs of investing or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of the funds. The Manager, however, will ensure that the use of derivatives within the funds does not materially alter the overall risk profile of the funds. For more information on our funds, please refer to the most up to date relevant fund and share class-specific Key Investor Information Documents and the Supplementary Information Document, the ICVC ISA Key Features and Terms & Conditions, the latest Annual or Interim Short Reports and the latest Prospectus. This information is available using the contact details shown. Invesco Perpetual is a business name of Invesco Fund Managers Limited. Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH. Authorised and regulated by the IFAM 05.14 Financial Conduct Authority. IFA_TRADE_PAGE_AD3_05.14.indd 1 News.indd 9

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NEWS

Twitter

fared little better, reporting a $132 million net loss in the first quarter of 2014 despite increasing its user base by 6% to 255 million. Analysts fretted that the growth rate was below expectations, and that this might be a sign that social media use was peaking.

Bitcoins

continued their tumble, as continuing doubts about the fundamental stability of the alternative currency continued to dampen sentiment. By the first week of March a bitcoin was trading at $436, down from $1,147 on 4 December. Meanwhile, a plan was revealed to relaunch the disgraced Mt Gox bitcoin exchange in Japan, whose slack programming had allowed the disappearance of around 80,000 bitcoins. You have to wonder why anyone would want to try,

Get Me To An Adviser Who wants a proper face to face interview with a proper adviser when it comes to the Chancellor’s promise of planned guidance on retirement pension options? Nearly seven out of ten pension savers, according to a new survey by market research firm. And what are the chances of their getting one, given the proposed annual budget of £20 million for this outlay? Not too great, it would seem. £20 million would be about £50 a head. Consumer Intelligence interviewed 1,016 private pension holders, aged 40 or over, in the week ended 2 April. And it found that only 3% would be happy to rely solely on internet services for their information they might require, while 24% would be willing to use online services as long as there was some human help available too. 69% of the retirement savers questioned said that they want their income options explained face-to-face. Although they also said that they’d be willing to travel only an average 11.4 miles to attend such an interview, which narrows down the options a bit.

The bad news, for the annuity companies, is that only 9% say they intend to rely solely on annuities for their retirement income. That’s a ratio that chimes chillingly with the forecasts that annuities business will drop by 90% after next April. And actually, the additional 26% who said they intend to use a mixture of annuities, drawdowns and cashing in to fund their retirements wasn’t exactly encouraging either. Although the 14% who also said that they’d rely on both an annuity and a cash-in brought the presumed level up to some sort of saner level. The good news is that only 5% intend to blow the lot and rely on the State Pension. And of those with funds of less than £30,000, 44% say they’ll use all of it for a retirement income, compared with 14% of those with funds of £250,000. Clearly at least some of the sensible messages we’ve all been putting across have been sinking home.

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became a possibility for the first time, as the new Paym system allowed consumers to transmit up to £250 a day on their phones, effectively through their phone numbers. Paym was a “safe and easy option”, said Adrian Kamellard, the chief executive of the Payments Council. But only about one in four users was said to trust ita quarter of all senior board positions by 2015.

The US economy

NEWS

Payment by mobile phone

stumbled, announcing a firstquarter year-on-year GDP growth figure of just 2.3%. Which, in annualised terms, represented just a 0.1% advance.

We’re Still Optimistic But if you think all that means pensioners are wary of their future prospects, you might be in for a surprise 85% of UK investors are confident of having enough money to retire in the eventual style they desire. Not bad. That’s more than Japan (53%), Chile (62%), Italy (66%) or France (68%) – all of which, we should note, have big state budgetary worries on their minds at the moment. But it pales somewhat compared with optimistic savers in Brazil (86%), the US (88%) and China (91%). Now, we could probably agree that old folk in China and Brazil have fewer material expectations of their twilight years, so perhaps we’re not really comparing like with like. And we can also console ourselves that the mood of Britain’s savers lies broadly in line with the international average. The data comes from a recent survey of 4,320 medium-affluent people in 20 countries, conducted by Legg Mason Global Asset Management*, which found UK investors to be “significantly more bullish” than those at the bottom of the scale.

What scares British pension investors? Low interest rates and ‘catastrophic events’ are top of the list of worries. And there are concerns that the UK government “will not follow up on obligations” – a caution which is, perhaps, rooted in the successive about-turns on pension policy. Sensibly, they fret that they will outlive their retirement savings. But they were broadly agreed that the next generation will have it harder than themselves. That sentiment is more worldwide than you might suppose. Legg Mason’s Global Investment Survey for 2014 (which interviewed 4,320 investors worldwide with non-home assets of at least $200,000), also found that 46% agreed that the young-uns would have a tough time: and while the respondents gave their portfolios a confidence vote of 6.8 out of ten for the coming year, Japan gave it just 5.5 and France only 5.7. And the British? It seems we rate UK stocks more highly than anybody else’s. You can’t be too sure these days.

* You can read the Global Investment Survey, with its extensive statistical section, at http://tinyurl.com/l66dlal

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NEWS

The UK economy grew by 0.8% in the first

UK-domiciled funds

with RDR-compliant share classes and with European equity holdings are 10 basis points cheaper than funds domiciled in Luxembourg, a report from Fitz Partners claimed. The report said that although Luxembourg could still undercut London on management fees, its administrative costs were higher, leaving London with a significant edge.

quarter of 2014, according to new figures from the ONS. It marked the fifth consecutive period of GDP growth, and compared with 0.7% in the final quarter of 2013. Manufacturing output grew by 1.3%.

Home A Loan Nobody can say they weren’t warned The final implementation of the Mortgage Market Review, Britain’s response to the mortgage over-lending crisis of the last decade, finally came into effect on 26 April, almost a year later than originally planned. And with it went most people’s hopes of being able to borrow more money than they could realistically afford to repay if things went wrong and mortgage interest rates rose unexpectedly. That has to be a good thing – as even Shelter, the charity for homeless people, had agreed – because nobody wants to see houses being forfeited

and seized the way that so many were in the midnoughties. But not everybody sees it that way. The self-employed, for instance, are unhappy about the effective ending of ‘selfcertification’, whereby they were allowed to sidestep detailed questions about the source and the size of their incomes. Buy-to-let owners and interest-only borrowers have been hit with a welter of new requirements that now force them to say how they’ll settle their debts if house prices don’t rise as expected. But for even the most straightforward employee borrowers, the detailed interviews are likely to prove unpopular because of their extensive detail – which can legitimately include questions about their private lives, their credit card activity, how much they spend on leisure activities, and even their plans to raise a family. The FCA has produced a guide for consumers, available in branches of high street lenders and estate agents, which explains what sort of details borrowers will need to provide. This is all part of the necessary stresstesting mechanism, says the FCA. And that in turn is a mandatory part of that mortgage advisors are expected to do. But there are now worries that the new, extended process may slow house sales, deter buyers or even give committed purchasers a lever with which to try and gazunder their vendors. “In the past,” said FCA CEO Martin Wheatley, “too many people got a mortgage by simply telling their lender they would have no problem repaying their debt, and that was that…Our new rules will hardwire common sense into mortgage lending.” For more on the FCA’s changes, see http://tinyurl.com/meghchw For more comment and related articles visit...

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For financial advisers only. Not to be viewed by or used with retail clients. The value of an investment can go down as well as up. Investors may not get back the original amount invested. Issued by Aviva Investors UK Fund Services Limited. Registered in England No. 1973412. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119310. Registered address: No. 1 Poultry, London EC2R 8EJ. An Aviva company. www.avivainvestors.co.uk MC2917-V006-296372-CI062715

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NEWS

Pensions Minister

Steve Webb (right) shocked some observers by announcing that pensioners should be given an individual estimate of how long they might expect to live after their retirement date. People often under-estimated their life expectancy, he said, and having some proper planning numbers would enable them to avoid their savings from running out prematurely. It would also help them to make sure they got the right deals from annuity providers and life assurers.

Recovering, But Slowly Royal Bank of Scotland, whose annus horribilis in 2013 was so spectacularly well publicised, has announced pre-tax profits of £1.6bn for the first three months of this year - almost doubling the year-earlier figures and lending at least a little wellneeded relief to investors Investors, did we say? Forgive us our sins of omission, because of course 80% of the bank is still owned by the government in the aftermath of the 2008 bailout. But even so, this is the first time since last summer that there’s been much cause for celebration. Even so, the bank has warned that it faces a “tough year” as it grapples with the mammoth task of restructuring the business while also facing the prospect of regulatory fines and damages claims from the USA for mortgage mis-selling.

Standard Life

called upon the government to overhaul the 55% tax charge payable on pensions at death, because it was too high to fit properly with the inheritance tax (IHT) regime. A “clearer, simpler and fairer” regime was required in the aftermath of the sweeping changes to pensions announced in the Budget.

And it says that the outlook for the whole year is still pointing toward an overall loss. Make of that what you will, but the stock market decided that it liked it. RBS shares took off by around 10% as the news reached the financial markets. Analysts had been expecting an underlying quarterly profit in the region of £200-300 million, so four to six times that figure was more than welcome. To be fair, RBS has been getting properly on top of its costs recently: its cost to income ratio was down to 66%, from 73% in the spring of 2013, and it’s looking to get it down to 55% by 2017 and 50% by 2020. One major worry is that the claims and fines in respect of US mortgage sales andmarket manipulation charges may exceed the £1.9bn provision that the bank has already made. Meanwhile, over at Co-operative Bank the loss of £1.3 billion in 2013 was finally confirmed, as an investigative report by Sir Christopher Kelly reported failings in management and governance “on many levels”. The bank had entered into an all-advised merger with the Britannia Building Society at a time when its own approach to customer lending risk was already causing problems, and when it was mid-way through a problematic IT overhaul that had made the merger “vastly complicated”. Co-operative Bank CEO Niall Booker said that he broadly accepted the critical findings of the report. (Indeed, could he have done otherwise?) But he insisted that people still weren’t seeing the best of the bank. “We do believe there are many more positive aspects of the Co-operative Bank’s culture that are not reflected in the report,” he said. “For example, not enough credit is given to the service ethic and empathy of our employees.” For more comment and related articles visit...

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

The Shipping Forecast ‘TIS A PERFECT STORM COMING, ME HEARTIES. MICHAEL WILSON CHECKS OUT THE DODGY MACRO-ECONOMIC OMENS FROM BULK CARRIER RATES I can tell you whether it’s going to be a long hot summer. Honestly I can. All I have to do is look up into the trees where the rooks and crows are nesting, and if the nests are in the very topmost branches I know it’s time to get the sun-loungers out. A few feet further down into the tree, and maybe that fortnight in southern Spain would be a better idea? The crows just know this stuff instinctively. Nobody knows for sure whether this piece of old English folklore has any factual basis, but the fact that it’s survived this long says something about the human brain’s willingness to believe in it anyway. We’ve known for centuries that our minds are constantly looking for clues as to which way the world is going. And we darkly suspect that some predictors are more reliable than others. Although exactly why they should work is often a matter of some uncertainty.

A Good Idea, In Theory

So, to my point. (Finally.) Somewhere just north of the Fibonacci numbers in the futurologist’s toolkit is something that they call the Baltic Dry Index (BDI). It’s a set of numbers that are issued every morning by a panel at the Baltic Exchange in London, and essentially, it’s a weighted average of the prices that the world’s shipping fleets are charging for international bulk cargo, especially raw materials. According to some, it’s a sensitive and reliable indicator of the mood in world trade. Which in turn is bound to give us a pretty good hint as to the direction of the world economy. Isn’t it?

May 2014

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Well, you can at least see the logic there. When there are ships sitting idly in port, or when they return from a delivery run with nothing in their holds, that’s not just bad for their owners, it’s also a sign that something is terribly wrong somewhere. Shipping is a ferociously competitive business at the best of times, so the last thing a ship owner ever wants to do is go anywhere unladen. Like an unsold airline seat, an empty cargo hold is a missed opportunity that means it’s sometimes cheaper to do the job for a tenth of your normal fee than not to make any money at all. Except, I suppose, that, unlike a scheduled airliner, the captain does have the option of staying put and doing nothing until business improves. Of course, that won’t make the company’s accountants happy because it still costs a fortune to keep an expensive, rapidly

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ED ’S SOAPBOX

Even the Koreans aren’t getting any shipbuilding orders this year

actually available for hire. (A number which has been declining in recent decades, by the way. Even the Koreans aren’t getting any shipbuilding orders this year.) And on the willingness of assorted banks to write the credit notes required for any transhipment. And so on, and so on...

So What’s All This Got to Do with Investors?

depreciating vessel in harbour. But you get my point. The pressure always going to be on the shipping company to pitch its bids as low as necessary to get the business. Sometimes, as we’ll see, that might be very low indeed.

A Storm-Tossed Sea But the volatility that results can be downright shocking. It isn’t just a macro-economic matter of whether or not China has decided to hold back on steel imports until August, or whether Russia is driving up the price of gas and making us Europeans worry about getting in enough supplies of LPG for next winter. It isn’t even the question of shrinking consumer demand, deflation and all the rest of it, as the apologists would have you believe. No, it also comes down to the geographical distribution of those ships, their age and type – and, of course, the number of boats that are

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Eds Soapbox.indd 17

A good question. You can’t buy the Baltic Shipping Index, because it doesn’t have any assets. It’s just a number, remember. But if you’re that way inclined you can certainly buy a derivative or synthetic product that will reflect the outturn of this highly mobile index. The question is, would you really want to? For many investors, the answer is yes. People with large positions in commodity providers may wish to use the Baltic Dry, or some inverse variant of it, as a hedge against any future catastrophic downturn in global shipping demand. But a fair number of individuals – including some hedge fund managers, alas – have seen it as an instrument for what amounts to out-and-out gambling. It makes spread betting look positively tame.

For Those in Peril On the Sea The following chart ought to make the point. What it shows is that the supposed long-term BDI average of around 1,000 is anything but stable. Between 2002 and 2008 the index soared by a ridiculous

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ED ’S SOAPBOX

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1,000% to nearly 11,000 – only to drop back by nearly 50%, and then to re-take the heights with an all-time record of 11,793 in May 2008. After which, the only way was down. 94% down, in fact, to just 663 points in December 2008 – the lowest since 1986. And at those rates, no bulk shipping company in the world was making any money at all. Yes, it quickly quadrupled to a shade over 4,000, but that didn’t last either. By the start of last year it was down around 700 (ouch), then up to 2,340 last December, only to collapse back to 1,000 at the start of May 2014. What, as Adrian Mole would have asked, can it all mean? None of this corresponds to the real-world state of the global economy in any obvious way. The downturn in Chinese trade has been marked, to be sure, and the 30% slump in raw materials has certainly been a factor. But there’s nothing there that really ought to justify these gargantuan leaps. Is there?

estimates, the global shipping industry is having to turn instead to private equity. That’s an expensive option, and it also takes a while to get it under way. The companies are said to have raised around $30 billion in private equity so far, but there’s still a $70 billion shortfall on what they’d really like to have. There’s a big move going on toward stepping up the issue of shipping bonds – which have traditionally supplied about 15% of the industry’s needs – but progress is still fairly slow. One thought that the optimists favour is that there’s a two year time lag between commissioning a ship and getting it out to sea. On that basis, they say, the present cargo pricing situation is unrepresentative of the real medium-term situation. So you should get in now while the illusion of gloom persists. But then again, you might argue, it’s surely no bad thing if the ageing pool of tanker and cargo capacity isn’t getting any bigger? Won’t that help

Baltic Dry Index 12000 10000 8000 6000 4000 2000 0 1985

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(Source: Wikimedia Commons)

We can probably argue about that until the cows come home, and even then we’ll still be trying to figure it out in the pub afterwards. Some say that it’s down to the uncertainty over Ukraine, and others that China’s new focus on its domestic market threatens to screen out a lot of foreign business. Some even blame America’s own ‘onshoring’ of manufacturing tasks that used to be done cheaply in the Far East.

Blame The Banks? But my money is on the reluctance of cashstrapped banks to lend on shipping projects. Over the last few years, the traditional source of finance for shipping companies has been going deaf to the industry’s pleas for new investment. So that’s 70% of the financing market that’s really not very certain any more. And, according to industry

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ED ’S SOAPBOX

An EIS Solution? Just in case you think all this pessimism is a complete load of seagull droppings, there’s one new way of smoothing out the volatility, and of getting a 30% tax payback on the side. A firm called Enterprise Investment Partners led the way back in March with the launch of an EIS company London Shipping Limited (“London Shipping”), which it said was “set up to acquire and operate a mid-size dry cargo bulk carrier, and to take advantage of the improvement in the shipping market.” Yes, the offer closed for subscriptions at the end of March. But as an experiment in capital raising, with the added bonus of the tax credit, its advantages seem apparent. Not for your maiden aunt, but definitely worth watching out for similar products in the future. God bless all who sail in her.

to shore up flagging shipping rates by reducing the level of competition? Well, that, as they say, is above my pay grade. If some contrarian soul can explain it to the rest of us, I’m sure we’ll all be grateful.

The View From the Crow’s Nest Considering all these interference pressures, it somehow seems a little trite for the BDI’s apologists to describe the index as a solid leading indicator that will give us a decent heads-up on the state of the equity markets as well as the economy itself. And yet there’s no doubt that many do regard it as exactly that. What they’re less keen to admit is that an awful lot of private investors saw their finances smashed in the mid-noughties by that appalling gyration that we saw in our chart. Whether it’s shipping rates or bitcoins, credit default swaps or the Grand National, there’ll always be somebody who reckons he’s got the inside track. And if, by any chance, the Baltic Dry Index theory has any substance to it, then we’re doomed, me hearties. The index is close to its all-time floor, and this year’s economic recovery has left it totally untouched. ‘Tis a perfect storm that’s coming. Time to double up on the doubloons.

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

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GUEST INSIGHT

POUND APPEAL WHATâ&#x20AC;&#x2122;S BEEN DRIVING THE RECENT STRENGTHENING OF STERLING? LAURA PARSONS FROM TOR FX EXPLAINS In comparison with the turbulent market conditions experienced throughout 2012 and for much of 2013, the first quarter of 2014 was calm, with currencies like the Pound and the Euro experiencing fairly static trading. While the Ukraine situation sparked a bout of risk aversion in March, and while it still remains a cause for concern, only emerging-market currencies like the Rand experienced any notable fallout from the stand-off with Russia. So what factors have been driving currencies like the Pound, Euro and US Dollar, and how will they perform in the months ahead?

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May 2014

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GUEST INSIGHT

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

Sterling Reawakens

After rallying against its currency counterparts last year, thanks to a run of impressive UK data, Sterling’s upward momentum faltered in the first quarter. Because positive UK developments were largely priced into the market, and because the Bank of England revised its forward guidance policy to reduce speculation regarding the prospect of an interest-rate increase, the Pound headed into the second quarter trading in a narrow range against the Euro and US Dollar. Yet the appeal of the Pound rose in April as UK employment figures revealed that the nation’s unemployment rate fell to 6.9% in the threemonths to February – below the BoE’s 7% threshold. Although the BoE attempted to sever the tie it created between hiking borrowing costs and sub 7% unemployment, this result may encourage the central bank to revise fiscal policy in the near

future. If the BoE hints at the prospect of increasing interest rates or reducing the level of asset purchases, Sterling could surge and could actually achieve yearly highs against its most traded counterparts.

Meanwhile, the Euro is also likely to be affected by central bank policy. In this instance, it will be the European Central Bank drawing the attention of investors. While the Eurozone’s economic stability has improved dramatically since the dark summer of 2012, inflation concerns persist and the high Euro exchange rate has been an issue with policy makers. During the second quarter signs of deflation in the 18-nation currency bloc could see the ECB introducing additional stimulus. If the central bank does take action in the months ahead, extensive Euro losses may occur.

strengthened since the Federal Reserve began reigning in stimulus in December of last year, the question of whether the central bank will leave interest rates at record lows for the medium-term has limited the Greenback’s allure. US economic reports were patchy for the first three months of the year and the Fed will be waiting for data to show consistent improvement in housing, employment and consumer consumption before it makes policy less accommodative. Over the next few months US Dollar gains could be triggered by positive US non-farm payrolls and domestic confidence reports. Conversely, if the knock-on effect of the unseasonably bad winter continues and US figures fail to impress, the US Dollar could retrace the advances made during 2014.

And In the States?

A Tumble for the Yen?

Meanwhile, Over in Euroland

Let’s turn now to the US Dollar. Although the North American currency has broadly

The Yen is another interesting case. As a safe-haven currency the Yen has advanced with

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13/05/2014 22:12

central bank does indeed add to the existing stimulus, the Yen may tumble as the second quarter comes to a close. All in all, we could be in for a dramatic

GUEST INSIGHT

every worrying development in the Ukraine and has also benefited from Chinese slowdown concerns. However, the majority of economists are expecting that the Bank of Japan will introduce additional stimulus by June at the latest. After the BOJ launched an unprecedented run of easing in April 1023, the Yen had broadly softened, hitting historic lows against peers like the US Dollar. If the

summer of currency-market movement. Other global economic factors will also be having an impact on foreign exchange trading in the months ahead, so keeping a keen eye on the latest developments is essential for any investors hoping to make a lucrative trade.

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MIND THE GAP A couple of months ago, it was all so simple. Yes, we’d have agreed, UK equity income funds were doing reasonably well, but they weren’t really keeping up with global equity income in the important area of, ahem, income. Low UK growth and tight lending rates had reduced both the pressure and the scope for yields below the standards of the wider world. Britain’s funds were nice, we’d have said, but they didn’t stack up so well against the competition. But that was before George Osborne stood up and did what he did to the life assurance companies. The Chancellor’s shock announcement that defined contribution pensioners will be

May 2014

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THE BUDGET MIGHT HAVE CREATED A BUY MOMENT, SAYS MICHAEL WILSON

free, from next April, to ditch the hated annuities has transformed the situation for Britain’s biggest income payers - and not necessarily for the better. The prospect of a fall of up to 90% in annuities business has sent a chill through some of the income funds that we used to regard as rock-safe.

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13/05/2014 22:14

UK EQUITY INCOME

The Opportunity

The Record

Which is where it gets interesting. Yes, we won’t deny that insurers and life assurers have been hit by the steep price plunges at Resolution, Aviva, Legal & General, Prudential, Phoenix and the rest. But maybe it won’t be quite as bad as that? For a start, we can be sure that pensioners won’t be taking all their cash as lump sums next April. Because the drawdowns are taxed at their marginal rates for the year, they’d have to be crazy to take it all in one go. Instead, a staged multi-year withdrawal is essential. And then again, we’re expecting that the bigger players – and some of the smaller players too – will be developing new high-income funds in the coming year. In short, it might well be that insurerheavy UK income funds are becoming underpriced. And this might just be a good moment to consider a buy-in. Just a thought.

Let’s remember, too, that not everyone who goes in for equity income is in it for the income. Especially in America, they’re finding that high-yielding companies are outpacing their less generous rivals on share price criteria as well. It’s becoming cool to distribute.

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We also need to bear in mind, as both our correspondents this month have reminded us, that the UK is a surprisingly global place. Recent research by Capital Group estimates that 77% of the earnings of FTSE 100 companies are derived from outside of the UK - with 30% earned in the emerging markets where GDP growth rates have been decelerating. And where concerns now linger over the Chinese economy. So let’s not run away with the idea that Britain is just an island, fund-wise. Or that there aren’t some quite dark clouds hovering over those rival attractions. Just think of the last quarter’s feeble growth in the US economy. Does that matter to the UK’s prospects? Only if it drives foreign money into London. Which it probably will.

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UK EQUITY INCOME

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

Our Expert Views We asked James Henderson, Divisional Director - UK Investment at Henderson Global Investors, and Jason Hollands, MD of wealth manager BestInvest, for their views on where things are going at the moment. As you’ll see, there’s always an alternative view to be found. Very many thanks to everyone who’s helped us to compile this atrticle.

The International Monetary Fund says that Britain has the fastest-growing economy in the western world. Do you think it’s likely that this will result in faster profits growth for UK companies - and if so, will that translate into bigger dividends in 2014/15?

James Henderson, Henderson Global Investors: As most are aware, a great proportion of FTSE 100 companies derive a significant proportion of their profits from overseas. So it is often international demand which is key to their profitability. My own fund tends to focus on smaller/medium size UK companies, where we are certainly seeing evidence of a pick up in profits growth, especially within the industrial and engineering sectors. These UK companies are benefiting from growing domestic demand but are also offering overseas clients a standard of quality and service which is

perceived as ‘value added’ and lends them a competitive edge when competing for business. As to whether this profits growth will translate into bigger dividends – some of this increased cash generation will be reinvested in delayed capital spending, but on the whole I expect dividends to continue growing, particularly within the UK’s engineering sector. Larger companies whose dividends are denominated in dollars (e.g. BP, Glaxo) may be slightly disadvantaged by sterling’s recent gains in this respect.

Jason Hollands, BestInvest: The pace of the UK recovery was one of the surprise stories of 2013, and if this proves to be durable, this should support dividend growth over the coming year at many domestically-biased companies. However, it is also important to recognise that domestically biased companies only make up a minor proportion of UK stock market capitalisation. So to play out this angle you need to be very selective. Furthermore, the UK stock market has a high weighting to oil and gas and other commodity companies where the outlook is more sluggish. Another dampener is the sizeable insurance sector give life offices have been hit by radical changes to the pension rules in the recent

Budget which are expected to materially hurt annuities sales while general insurers are going be wrestling with the impact of the floods. Another factor to bear in mind is that, last year, market yields were boosted by some large special dividends which were one-off in nature. We therefore expect overall dividend growth to be modest at best, and certainly not reflective of the GDP numbers. The strongest potential will be in the more domestically-skewed mid-cap and smaller companies space. In this environment there is a case for investors supplementing traditional UK equity income funds with those focused further down the market-cap spectrum, such as Unicorn UK Income.

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UK EQUITY INCOME

The last 12 months have brought uncertainties not just for emerging markets, but also for some larger developed markets. Are we likely to see renewed enthusiasm for UK equity income as the appetite for global income falters?

James Henderson: With 65-70% of FTSE 100 company profits derived from overseas, those uncertainties are highly relevant to their profitability, so that connectivity has implications for all UK equity funds. However, with

Jason Hollands: While the headlines about the UK economy are undoubtedly cheery, we question how sustainable the recovery really is. Firstly, 2013 saw the economy benefit from the tailwinds of the last round of Quantitative Easing in 2012, and from the additional support of almost £20 billion of Payment Protection Insurance claims being injected into the economy. These factors will now subside as a source of support. Secondly, the policies to fuel the recovery, ultra-low interest rates, Help to Buy and - until recently - Funding for Lending, have been heavily predicated around support for the residential property market. This is encouraging gross capital misallocation in our view, arguably starving credit supply from other parts of the economy with corporate lending remaining muted.

The improved outlook and earnings growth are playing their part, but what this asset class offers, unlike property or bonds, for example, is the potential

Jason Hollands: Clearly, underlying earnings growth. But funds yields have been squeezed over the last year by the sharp rise in share prices. Consequently, while UK

And so, for our concluding words, to James Henderson’s advice on the search for the ideal income-generating companies. And it’s as simple as this: “Follow the Cashflow”. When pursuing sustainable equity yields,

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What these policies have done is to stoke soaring house prices, with worrying bubble-like characteristic in the London market. This has encouraged individuals to take on excessive levels of debt, and there has been a sharp deterioration in household savings. With interest rates expected to rise next year, that is going to be very problematic for many households who have simply got used to five years of record low interest rates. With UK share valuations looking quite expensive, and with the strong Pound providing investors with international purchasing power, arguably there are better income opportunities elsewhere. Investors might consider funds such as the Standard Life European Equity Income fund (yielding 3.9%) or Newton Global Higher Income (4.1%) - both of which are yielding more than the typical UK equity income fund.

What would you say are the main drivers behind equity yield developments at the moment?

James Henderson:

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dividends set to increase and given the intense demand for income-generative investments, I don’t anticipate any lessening in demand while interest rates and bond yields remain subdued.

for growth of income over time. The power of compounded growth is its real attraction, and with dividend growth currently at around 7-8%, this means that equity yields could double over 10 years.

equity income funds should remain a core choice for investors looking for a growing income, the disparity in headline yields between equity income funds and corporate bond funds has narrowed.

he says, you are much less likely to go wrong if you stay focused on those cashflow statements. Not something that all of us are in the habit of doing, I suspect, but a point that’s very much worth bearing in mind

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

PART SEVEN OF ABBIE TANNER’S MARKETING INNOVATION ENGINE™ PROGRAMME: PERFECTING YOUR CLIENT COMMUNICATIONS STRATEGY

Two-Way

Communications How often do you communicate with your existing clients, prospects or professional connections? And do you have a structured communications strategy that will ensure that they remain informed, engaged and an advocate over time? In today’s dynamic environment, it’s imperative that you maintain regular contact with your clients, prospects and wider business network. The best way to achieve this is to undertake a Client Experience Audit (more on this later), then formulate an action plan to maximise the frequency and effectiveness of each ‘touch point’ thereby increasing overall engagement.

Get in Touch More and more evidence suggests that there is a link between client engagement (overall client experience) and the financial success of

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a company. When was the last time you looked at the touch points within your business? What if you could re-engineer and refine your process to positively enhance all client interactions? So what exactly do I mean by a ‘touch point’? A touch point is any interaction or encounter that can influence a client’s perception of your product, service or brand. Touch points may be intentional (a letter or email) or unintentional (a review posted in an online discussion forum). They can occur long before a client actually decides to work with you. Successful financial planning businesses engineer their client experience to reinforce value at every touch point - viewing it as a competitive advantage and key point of differentiation.

Where Should You Begin?

My recommendation is to start with a Client Experience Audit. This involves identifying www.IFAmagazine.com

13/05/2014 22:15

STEP 7

“In today’s dynamic environment, it’s imperative that you maintain regular contact with your clients”

all of the touch points you currently have with your clients or prospects and mapping the overall experience from the very first interaction with your business or brand. Consider the following: how do prospects or professional connections find out about you? What do they see if they search for you online? Who answers the phone when they call to make an appointment? What is sent in advance of a first meeting? Write it all down and consider the positive changes you can make to maximise the impact of each interaction. In a traditional financial advisory business, the focus would have been on making a ‘sale’ with little thought or planning for ongoing communications or service. Conversely, the modern day financial planning firm will create a long-term contact strategy, keeping the individual informed and engaged over time. www.IFAmagazine.com

Marketing.indd 29

Aim for 12 Touch Points per Year My rule of thumb is to plan at least twelve proactive touch points per year, per client. This does not simply mean sending a monthly printed or email newsletter. It involves looking across all mediums and creating meaningful interactions that reinforce your value proposition. Engaged clients not only lead to repeat business (via increased share of wallet) but also increased referrals. As with every initiative you undertake, first understand the wants and needs of your target audience. If you’re starting with a blank piece of paper and preparing a client communications strategy from scratch, ask your clients about the interactions they most value and what they’d like to hear from you. Conduct a survey to understand your clients preferred communication channels. Ask May 2014

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STEP 7

magazine... for today ’s discerning financial and investment professional questions like: What is your usage of email and Social Media? Do you prefer to receive information through the post? How frequent is too frequent? Often financial planners assume an older client base is less likely to want to communicate over email. In actual fact, research indicates the fastest growing demographic for Facebook and other Social Media channels are those aged 50 and over.

Look at Touch Points Across All Channels and Mediums Consider in-person interactions (review meetings, seminars and events), client service (surveys, telephone based support), PR, mail shots (newsletters, statements, reports) and online interactions (email, website, blog, Social Media). Make sure that you are consistent in your messaging, branding and style/design. Before you commit to creating any form of regular communication and having researched your client’s needs, prepare a mock-up (taking note of the best sources of content and the time involved to create the final material) and then gather feedback from a small selection of your best clients. Use this to refine your communication and put a plan in place to ensure you can deliver it on an ongoing basis. I can assure you that you will not get momentum behind your communications strategy if it is onerous and time consuming to develop each piece.

Don’t Reinvent the Wheel Leverage available content wherever possible. There are a myriad of articles, forums and commentary available online and through the providers you work with. Look at how you can refine and repackage this content to meet your needs (compliantly and without falling foul of copyright laws, of course). A word of warning: if you are using third party content, make sure that you personalise it by topping and tailing it with your own messaging. If you simply cut and paste from another resource you are at risk of looking lazy.

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Don’t think that you only need to communicate on financial services-related issues. Consider the interests and passions of your clients and how can you tap into what they enjoy. Topics I’ve used in newsletters for our financial planners’ clients include ‘how to spend it’, ‘where to travel to this month’ and ‘our favourite foodie websites and blogs’. Perhaps include a case study to illustrate the positive outcome you’ve achieved for a client, reinforcing the comprehensive services you provide. The client will feel valued that you

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STEP 7

asked them to contribute, further increasing engagement (and the likelihood they’ll refer) and those who receive the communication will see the breadth of your service offering.

Get Them Talking About You What about your activity in the community? Clients like to see a personal, approachable side to your business. Is anyone on your team raising money for charity? Are you training for an event? Do you sponsor a local sporting club? If you create a content structure and process for developing regular communications, you can prepare articles in advance. A project plan, with deadlines, will ensure you maintain a standard frequency (and expectation) for when communications will be delivered. Be mindful of how it will be perceived if you commit to an initiative and then abandon it when you find you can’t deliver.

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Your Step-by-Step Communications Plan Once you have researched the topics of most interest to your intended audiences (clients, prospects and professional connections) and established how many communications you intend to create over the next twelve months, compile a succinct list. For example, you might decide that you will create twelve communications which you will ‘publish’ (on your blog, social media channels, in a local publication or printed newsletter) on the tenth business day of each month. Without a content plan, the following is likely to occur: you will sit down at your computer on the ninth business day (because you’ve been too busy to look at it until then) and open a blank word document. The curser

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Marketing.indd 31

will flash, in anticipation of your first few words.

3. Diarise dates and times

Your mind goes blank. You don’t have a clue what to write. You get up, possibly make a cup of tea, then come back. The cursor continues to flash. You decide to surf the web in search of inspiration. Before long you’ve wasted an inordinate amount of time and are still no further ahead. You’re tempted to give up. Sound familiar?

4. During the course of

A content plan will keep you focused and make the creative process easy, so easy in fact you might start to enjoy it. All you need to do is:

5. On the allocated day, at

1. Create your master list

of topics you will cover;

2. Create a series of folders on your computer, each one with the name of the individual topic you will write about;

in your calendar (no more than a two hour slot per piece), with each ‘appointment’ carrying the name of the topic you will be addressing; any typical business day keep your topics in mind. Whenever you find a relevant resource (article, website link, eNewsletter) add it to the respective folder; the allotted time, open the relevant folder and re-read the content your have captured. Use this for inspiration, and get writing.

Using this approach you will never struggle to find the topic or words for your communications piece. Best of luck!

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

SHARI’A IN THERE ARE 10,000 MUSLIM MILLIONAIRES IN BRITAIN, SAYS STEPHEN SPURDON. BUT THEIR NEEDS HAVE BEEN MET RATHER PATCHILY. UNTIL NOW, THAT IS

It seems a little surprising that Shari’acompliant investment should have started in the UK only as recently as the 1980s, when the first UK Islamic bank was launched. But then, the growth of the Islamic investment market. These days we’re seeing seen a steady number of Shari’a-compliant offshore fund launches from UK based managers; the launch in 2008 of an Islamic insurance company and a pre-paid MasterCard (no interest, to keep it halal); a new Islamic index in London; and this year’s launch of a Sukuk bond (the Shari’acompliant equivalent of fixed interest corporate bonds). All of these things have helped to place the UK at the forefront of Muslim investment. Well, that’s the theory. But in practice, offshore centres in Europe have also been moving quickly to snaffle their share of a global Shari’a-compliant investment business that The Economist magazine estimates at $820 billion. It’s probably an advance on the days when UK Muslims sent most of their savings to Pakistan or Bahrain, but there’s still work to do.

Careful With Those Stereotypes But how is the UK influenced by developments in the global Shari’a-compliant investments scene? Let’s start by getting a few misconceptions and confusions out of the way.

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13/05/2014 22:17

ISLAMIC FINANCE

VESTMENT For a start, it’s a mistake to assume that all Muslims have the same priorities or the same needs, and by no means all insist on Shari’a compliance in financial matters. Communities from Bangladesh or Indonesia may see the world quite differently from Arabs or Iranians. And while some national governments, including Pakistan, insist on full Shari’a finance, others such as Bahrain or Dubai may adopt a less stringent approach. The estimable (and sometimes fallible) Wikipedia has a useful checklist of Shari’a practices at http://tinyurl. com/mm8drfn. Well worth a look. “It is important to remember that there is a distinction between Arab and Islamic,” echoes Dr Mehmet Asutay, Director of Durham Centre for Islamic Economics and Finance at Durham Business School. “Not all Arab finance is Shari’a-compliant.” Asutay says, for instance, that some parts of the Arab world are now placing a strong and increasing emphasis on investment in small and medium enterprises (SMEs) and start-ups. “The drive to provide capital for start-up businesses goes back to the Arab spring,” he says, “where a lot of the dissatisfaction over high levels of unemployment meant that people took to the streets.” But for others, start-up investment is still something that’s kept within the family. Crowdfunding, Asutay says, is becoming increasingly acceptable in the Arab world as a key means to raise capital for start-ups. And yes, that does raise a few questions for Shari’a investors, because of the forms that many crowdfunding vehicles assume. At present there is still no Shari’a-compliant crowdfunding platform in existence, although one is believed to be in development.

No Leverage Dr Asutay adds that, while Shari’a-compliant investment is growing, the fact that it spurns financialization (leverage of assets) means it may be more robust but that it lacks the pace of modern investment. He adds, “There is little demand [for leveraged investments] in the Middle Eastern centres, because the economies there are so oilbased. But there has been significant investment in real estate - and that can also be seen in London, for instance, where there is substantial Muslim investment in real estate in prime areas.”

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Priya Oberoi, managing partner at Oberoi Capital Partners, has deep experience in Shari’a-compliant investment - having previously worked as the head of Islamic derivatives and structured products at a major City law firm in multi –jurisdictions. She agrees that the market in Shari’acompliant investment had a lull, post-Lehman, but she says that since January things have been picking up considerably. While the Sukuk bond market did not collapse, she says that returns of around 4% left investors wanting more. “There is a lot of Shari’a money out there that is completely untapped,” she says. “It’s lying around in cash accounts. But conventional products cannot access that money.”

How Much Debt Is Too Much? Seeking to advise some of that money is Simply Sharia – which claims to be the only FCA-recognised financial adviser in the UK that is dedicated to the provision of Shari’a-compliant advisory services. Founder and CEO Faizal Karbani recognises the difficulties involved in adapting what is available to meet the demands of Shari’a. “There are few companies that have no involvement in interest - which is not allowed under Shari’a, of course” he says. “As such, Shari’a-compliant investment is very much a work in progress, and scholars have had to arrive at an understanding whereby a certain ratio of impurity is tolerated. According to their understanding of scripture, companies with up to one third of the capital financed by debt are acceptable.”

Ten Thousand Millionaires Economies of scale can be a problem for Shari’acompliant investment. For one thing, the marketplace is relatively small, with a UK Muslim population of only about 2.7 million, out of a UK total of 65 million. And for another there’s the fact that, having a youthful profile, the Muslim community tends to have a lower than average wealth level. But the Muslim Council of Britain estimates there are 10,000 Muslim millionaires and a growing professional class which is more likely to opt for Shari’a-compliant investment as their disposable income gives them that choice. At present, however, we’d have to say that the obstacles are still there. One problem so

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magazine... for today ’s discerning financial and investment professional far has been the extra layer of fund management cost that results from the need for the essential Shari’a Advisory Board – a factor which Karbani believes will diminish proportionately as the products gain scale. More concerning, perhaps, is the gap in knowledge amongst the scholars themselves, who might be expert in Shari’a but who still need to equip themselves with a knowledge of the financial system, and to apply it to their understanding of modern finance. “The reason there are so few Shari’acompliant products on the market,” says Oberoi, “is because so few people have the skillset of understanding both conventional and Shari’a products.” There may be only 10 to 15 true experts in the world, she suggests. But Karbani is more reassuring on this point. “This problem has been recognised,”, he says, “and the IFC (Islamic Financial Council UK) now has programmes available for scholars to learn about the financial system.”

Onshore, Offshore Another problem is the relative anonymity of Shari’a-compliant funds, because they are largely domiciled offshore. This, coupled with problems that UK advisers may have in terms of how to define the investments, tends to depress demand. The Bank of London and the Middle East (BLME) addresses some of these important issues in a study of adviser attitudes, entitled ‘Are Advisers Open to Alternative Investments?’ The report, which is obtainable from http:// tinyurl.com/mkjnxnn, concludes that: “Compartmentalising new products helps advisers sift through them in a disciplined fashion and therefore, uncertainty around how to classify a certain product or product type could be mean that it is overlooked in favour of something more familiar. “A considerable portion of advisers are unsure of whether Islamic products are alternative investments or not. The fact that almost 40% say they are not sure of their answer to this question indicates the level uncertainty over how Islamic products fit into their existing asset allocation models. One can argue that until advisers decide how they are to classify Islamic investments, they will be less keen to recommend these products to their clients.” It gets more daunting. Even if there were any such investments domiciled in the UK, neither the Association of Investment Companies (AIC) nor the Investment Management Association (IMA) have no plans at present to categorise them. A search amongst fund data aggregators proves to be more fruitful, however, as all of these include offshore fund sectors.

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Where To Find Them However, even here, Shari’a-compliant funds are placed in sectors with other types of funds that cover the same subject areas. This means, in effect, that assessing the case for a more robust nature for Shari’a-compliant investment is more difficult than it might be. Fortunately, Morningstar flags all Shari’a compliant funds, meaning that we can conduct a search for a data set. Tellingly, we find that only 19 out of the 483 funds listed are domiciled in the UK. They include SWIP’s Islamic Global Equity Fund (now part of Aberdeen Asset Management), which was launched as a Luxembourg domiciled sicav in 2005. Or a handful of trackers and ETFs from dbx and iShares. (See below.) Not forgetting the Children’s Mutual, which launched a Shari’a baby bond for child trust funds in the same year. Details from http://tinyurl.com/mksvtez Look abroad, and the range of available funds increases significantly. BNP Paribas runs a series of funds from Luxembourg; CIMB operates a sizeable range from Dublin; and dbx, unsurprisingly, from Frankfurt. Advisors will need to satisfy themselves that these funds do indeed meet Shari’a conditions – it might not always be enough to assume that a fund made up of ‘Islamic World Titans’, or whatever, will necessarily meet religious criteria

Property Funds A good reason for looking at offshore funds is to gain access to assets that may be unavailable onshore. Such as the residential property funds from London Central Portfolio. It has launched four closed-ended Jersey domiciled funds two of which, London Central Apartments (LCA) I and II are Shari’a-complaint. LCP chief executive Naomi Heaton says that the new fund’s portfolio includes rental properties in postcodes surrounding Hyde Park. Heaton adds that, while there are obvious tax advantages of domiciling in Jersey, “property investment companies as funds cannot be done in the UK. They are not FCA recognised, as the FCA does not regulate property investment companies.” [Editor’s note: the FCA has certain powers to launch legal actions if it thinks property portfolios are being used as pseudo-banks.]

And Back to ETFs Of course, anywhere in the world that you find an index, there’s likely to be an ETF. Since December 2007 iShares has run two Shari’acompliant ETFs in London, although domiciled in Ireland - tracking the MSCI World Islamic and Emerging Markets Islamic indices. Both of these funds cost more than their non-Islamic equivalents. The World Islamic ETF has a TER of 0.60%, against 0.50% for the World ETF’s TER, and the Emerging

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ISLAMIC FINANCE

Markets Islamic ETF TER is 0.85% against 0.75% for the Emerging Markets ETF. It appears that the difference is down to the fact that that one set of funds has a Shari’a Advisory Board and the other set does not. To those investors who require Shari’a compliance, this is likely to be a price they are prepared to pay. As an adviser, you will be more interested in whether the purportedly better performance of sharia-compliant investments during the downturn has compensated for the extra charge. Sadly, comparing the performance of the underlying MSCI indices suggests that is not the case. The World Islamic beat the World by 5.90% to 4.63% over the 10 years to 18 April 2014, but lost out over five and three years with 12.87% to 13.65%, and 6.48% to 8.25%, respectively. There are many reasons why this might have happened, but one of the key possibilities is that Shari’a funds tend to be more heavily committed to technology than their counterparts elsewhere, and it’s been a tough decade for these firms. (Conversely, of course, Islamic investors avoid western banks, which have had a torrid time. You win some, you lose some.)

What’s New in the UK? Last October the Prime Minister surprised the World Islamic Investment Forum by announcing the creation of a new Islamic index on the London Stock Exchange.

“I don’t just want London to be a great capital of Islamic finance in the Western world,” he said. “I want London to stand alongside Dubai as one of the great capitals of Islamic finance anywhere in the world”

Accordingly, this year sees the release of an Islamic government bond - called a sukuk - worth £200 million, which is being structured so as to bring in a fixed return from a tangible asset or service, rather than paying interest. This will keep it in line with Islamic financial principles. There’s a Shari’a NEST fund, which invests in the HSBC Life Amanah Pension Fund, and which mirrors the Dow Jones Islamic Titans 100 index. Details from http://tinyurl.com/mzcgzsg

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magazine...

Synthetic Replication? Given the Shari’a insistence on real assets, you might suppose that physical replication ETFs would be the only option. But in practice this not is the case. For instance, db X-trackers’ three Shari’a-compliant ETFs that track S&P Islamic indices are all synthetic - using swaps to replicate the underlying indices. The difference is that, instead of using a standard swap, they use ‘Wa’d’ agreements Shari’a-compliant contracts. Interestingly, there are differences between the Islamic indices that are tracked. With the FTSE Islamic indices, weapons manufacturers are deemed non-compliant; however, the Shari’a Board for S&P Shari’a Indices deems that weapons for self-defence are halal. As Nick Sudbury notes in this month’s Ethical Funds feature on page 48, transatlantic opinions will often diverge on what meets ethical criteria and what doesn’t.

No Shorts, No Hedges

“It is important to remember that there is a distinction between Arab and Islamic. Not all Arab finance is Shari’a-compliant.” Dr Mehmet Asutay, Director of Durham Centre for Islamic Economics and Finance at Durham Business School

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A final feature to note about Shari’acompliant investment is that you are not allowed to sell what you do not own - so short-selling is prohibited. That makes hedge funds basically a no-go area for devout Muslims. It also points up one of the basic attractions of Shari’acompliant investment – an emphasis on the real. And that, of course, is where the world headed after the credit crunch. Ironic that something 1,400 years old should be ahead of the pack just by standing still, isn’t it.

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A bank with

Ethical Banking Real assets. Real relationships. Real banking. BLME is built on the traditional banking values of trust, sustainability and integrity. We provide Asset Management, Corporate and Private Banking and Capital Markets services to individuals and businesses across the UK and the GCC. Bank of London and The Middle East plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Bank of London and The Middle East plc is a company registered in England & Wales, company number 5897786. Registered Office Sherborne House, 119 Cannon Street, London EC4N 5AT.

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IS RISK BACK IN FASHION? IT SOUNDS COUNTERINTUITIVE, SAYS IAN LOWES, MD OF LOWES FINANCIAL MANAGEMENT AND FOUNDER OF STRUCTUREDPRODUCT REVIEW.COM. BUT THERE ARE GOOD REASONS WHY IT’S HAPPENING Financial Services is an ever-changing landscape, constantly shifting with the socio-economic conditions of the time. Taking the ‘glass half empty’ approach, many of these changes can be a source of frustration - and to be honest, there are few of them that we have any real individual control over. I’m sure most of us have experienced more than a little disruption over the previous years as markets have crashed and recovered. However, not all of these changes are bad, and even in the worst environments there have been some fantastic opportunities for investors.

So, for the purposes of this article, I would like to take a much more neutral view, and just take a snapshot of where the UK retail structured product market currently sits in relation to five years ago. And also to think about how those products that have matured in the first quarter of this year (that is, were launched as far back as 2008) have performed.

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Structured products are a relatively late entrant to the UK retail investment market, so you could say that a five-year period represents a significant portion of their ‘lives’ to date. And in that time, as you would expect, based at least in part on investor demand, the market has been shaped and moulded. At the same time, the pricing of structured products themselves is based on a variety of factors - notably the volatility in the underlying measurement and the financial strength of the counterparty to the investment.

STRUCTURED PRODUCTS

Underlying Trends

And of course, the position and movement of the underlying index can also change what investors consider to be ‘good value’. Given that structured products have a limited offer period, and that new products coming to market will inevitably reflect the historic conditions at that time, it is possible to trace strong themes and trends, both in respect of the general terms on offer and in respect of the most prevalent product types and payoff shapes.

‘Capital Protected’ Products in Decline The first, and probably most obvious, shift in focus of the structured product market between 2009 and today is the significant reduction in the numbers of capital ‘protected’ products and the increase in capital-at-risk. Back in 2009, almost 23% of the structured products launched in the IFA distributed UK retail space were capital ‘protected’ products. By 2013, this figure had fallen to just 2.5%, and so far in 2014 they only represent around 1.6% of the products that have been offered.

Fewer Structured Deposits The proportion of products that are structured deposits has also fallen, albeit not quite so dramatically, from 28.5% in 2009 to 17.75% in 2013 and 14.06% so far in 2014. In contrast, just under

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STRUCTURED P R O D U C T S

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

half of the products that were launched in 2009 were capital at risk products, a figure that is over 84% to date in 2014.

Does that Mean Risk is Being Accepted? Does this mean that investors are becoming increasingly comfortable with risk? Maybe. But, perhaps more pertinently, pricing conditions have changed dramatically during that period - and recently it simply has not been possible for capital ‘protected’ products and structured deposits to offer the same level of potential returns that they did back in 2009. Consequently, these sorts of products are less likely to garner interest from investors, so the natural balance of ‘supply and demand’ has shifted the focus away from this end of the risk spectrum.

It’s All In The Returns The balance of risk and reward comes across very clearly in the returns that IFA-distributed structured products generated in the first quarter of 2014. Somewhat surprisingly, overall structured deposits outperformed capital ‘protected’ products, returning an average annualized gain of 4.94% against 4.50%.

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The pattern was, however, reversed in the best 25% of maturities of each product type, with the capital ‘protected’ products generating an average annualized gain of 8.95% against the 8.38% of the structured deposits. More expectedly, although nevertheless impressive, the average annualised return of capital-at-risk products was almost double those of the capital ‘protected’ products and structured deposits, standing at 9.01%, and the best 25% produced a notable 14.58% on an annualised basis. So where are we now? Well, structured products certainly seem to be here to stay and, with the returns that they have been generating, alongside their varying elements of capital protection, I can only envisage an increasing number of investors viewing them as an important and beneficial element of their overall investment portfolio. Undoubtedly the UK retail structured product market will continue to develop and adapt to changing circumstances – and I for one am excited about being part of its evolution. For more comment and related articles visit...

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Small Is Beautiful

THE JOY OF INVESTING IN SMALLER COMPANY FUNDS ISN’T JUST ABOUT BETTER RETURNS, SAYS SIMON CORDERY, HEAD OF INVESTOR RELATIONS FOR INVESTMENT TRUSTS AT F&C ASSET MANAGEMENT Investing in large, established, so-called ‘blue chip’ companies is a staple for most investors. Whether the goal is growth or income, the ‘big is beautiful’ argument would appear difficult to beat. But while owning a stake in companies that are part of our every day (think Tesco, BP, Microsoft etc) makes sense to most people, investing in less well known entities at the smaller end of the scale is somehow seen as being a more risky proposition. There are, nevertheless, some excellent investment opportunities to be found outside the blue chip realm - and there is good evidence that smaller companies outperform large companies over time (see graph below). What is more, the global nature of the pool of talent enables investors to build a highly diverse portfolio.

Spoiled for Choice

The small company universe is both broad and deep. The global benchmark comprises

over 4000 companies that operate in a diverse range of industries offering a wide choice of stocks from which skilled, active investors can profit, even in difficult markets. So what’s the magic formula and why should investors consider smaller companies as part of their portfolio?

Turning On A Sixpence It boils down to the fact that well run, successful smaller companies exhibit faster growth potential than their larger peers. These are typically focused businesses, operated by nimble management teams who can steer the company through the economic cycle with great flexibility, deploying capital efficiently and shaping the enterprise to suit the prevailing conditions. By being able to adapt quickly to the changing economic environment, skilled management teams can protect their business when things are not going so well but then respond more rapidly when the recovery begins.

350.00 300.00 250.00 200.00 150.00 100.00 50.00 0.00 1998

1999

2000

2001

2002

2003

2004

2005

MSCI Small Cap World Index

Source: Bloomberg 09.04.14

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2006

2007

2008

MSCI World Index

2009

2010

2011

2012

2013

Smaller companies are able to exploit market niches that are just not available to larger companies. The managers of blue chips often pass on these opportunities, because there is not the scale to make it worthwhile for them to participate. This is one of the reasons that large companies outsource to smaller specialists. Having a unique product or specialist service, one that is hard to replicate or one that can be adapted to find new markets, the ‘niche’ is often at the core of a smaller company - which is why its management team is so important.

Watching the Management At F&C our smaller companies managers spent a lot of time meeting the management teams of companies that they are invested in or might invest in. Gaining a good understanding of their philosophy and plans for taking the business forward is a key part of the research process. We keep a close eye on cash flows and balance sheets and how effective the management is at deploying capital. These are some of the main drivers of earnings growth and hence the potential value of the business which helps protect the investments we make in this area. In recent years we have noted a healthy demand for smaller companies, helped by rising stock markets following the financial crisis of 2008/09, increased fund flows www.IFAmagazine.com

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Defining Your Terms What do F&C mean by smaller companies? Across the board, we have a market capitalisation range of between $200m and $9b at the point of investment, with a lower maximum size range for companies in the UK than the US reflecting the relative size of the economies. So in effect these are “smaller” rather than “small” companies, indeed some are substantial organisations that may employ thousands of people. We tend to be more cautious in investing at the very smallest end of the listed market capitalisation range as in microcaps our ability to move in and out of positions can be compromised. Ideally when we invest in a smaller company, we are doing so on the basis that it possesses the ability to become a much larger one – and, as you’d expect, there will be cases when investments move up the market cap spectrum to a level above our normal small cap definition. If we still see strong investment upside at this point, we will not be compelled to sell,. But we do aim to ensure that our smaller company funds do not contain too many companies that have become too large. www.IFAmagazine.com

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Smaller company investing requires time, effort and focus, and arguably from the private investor’s point of view it makes sense to gain exposure via a specialist fund structure. This is because individual smaller companies will tend to have a higher level of stock specific risk than would be found in a typical blue chip. The investment trust structure lends itself well to smaller companies for a number of reasons. The usual advantages of investment trusts, i.e. using gearing to enhance returns (although clearly this is not a one-way street), the potential to buy the portfolio at a discount to its current value (admittedly, discounts are narrower than for some time at the moment), the ability to “smooth” income by squirrelling away dividends and pay them out at a later stage and the fact that the independent board have a responsibility to investors are perhaps well known. The key advantage of the investment trust vehicle, though, is its closed-ended nature.

Freedom From The Liquidity Issue As already mentioned, the fact that shares in smaller companies can be illiquid, or certainly less liquid than large cap stocks, can be an issue for the fund manager. However, because an investment trust has (outside of buy backs and share issuance) a fixed pool of capital to deploy, the manager can build a portfolio in the knowledge that they will not have to unpick it in order to meet redemptions – or, conversely, invest new capital - potentially at the wrong time. The manager can build a long-term portfolio, have the confidence to hold illiquid stocks and invest in companies that

INSIDE TRACK

into equities and a pick-up in investors’ appetite for risk. There has also been an increase in companies coming to the market via initial public offerings and an upturn in old fashioned merger and acquisitions activity. Bigger companies have been snapping up smaller ones and even smaller ones have been picking off weaker rivals or bolting on accretive and strategically sensitive deals. Our fund managers don’t invest in smaller companies purely for their M&A potential, however - preferring to focus on the ability of each investment to develop organically. But it’s good to see that other investors see the same opportunities and the resulting bid premium created by M&A speculation is useful to fund managers.

perhaps the manager of an open-ended fund manager would not be able to hold. The closed-ended structure really comes in to its own during difficult markets. The manager is not forced to sell down the portfolio to meet redemptions as markets fall and investors withdraw their funds. With illiquid stock, the manager of an open-ended fund has to sell what can be sold. Often the best holdings have to go first, which leaves a far from optimal portfolio once this process is over. By contrast, the investment trust manager retains control over the portfolio, being able to hang on to the good stocks and even borrow money to buy more as prices are driven down, once the market turns and prices begin to rise. This can lead to an outperformance of many open-ended funds. To summarise, investing in well managed, suitably financed smaller companies can generate attractive longterm capital gains. There is good evidence that they can outperform large companies over time and investing in them via an investment trust can enhance investors’ returns.

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CLA R ET

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CAPACITY STEVE BEE HAMMERS HOME THE FACTS ABOUT AUTO-ENROLMENT The three millionth person to be autoenrolled was an employee of West Ham United football club. There was a big thing about it before one of the recent home games; photos, speeches, presentations that kind of stuff. I remember thinking that three million was a good start and that in our own little way at Jargonfree Benefits, my new auto-enrolment business, we hadn’t done too badly so far either. We set the Jargonfree business up to bring automated auto-enrolment and workplace benefits management to small firms using a commoditised version of the same software that large employers use. By using the same sophisticated software, we can then have an opportunity to bring a wider range of workplace benefits to employees of smaller firms in time too. We’ve managed to get just over 30,000 people onto our benefits platform in the last few months, and that means we’ve got 1% of the AE market thus far. It doesn’t sound much, I know, but a 3% share of the AE market would be enormous - and anyway, we entered the market to bring compliance to SME firms and to the so-called micro employers who reach their staging dates

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next year. To have picked up 1% of the middlesized employer market is a pretty good start.

Going For Glory

The guy who has the seat next to me at West Ham said he thought 30,000 was a lot of people. It’s about the same number that go to most home matches at the Boleyn Ground – and, looking around, that seems like a lot of people when you’re there. I said I thought it would be a good idea to find out just what that many people thought about things. I mean, that’s a big sample for opinion polls and stuff, so you’d get a real insight into what people have on their minds if you could ask that many. He said he thought most of the people in the ground were thinking it would be a relief if the team could just scrape enough points to stay in the premier league so that we’d have at least half a chance of filling the Olympic stadium when we finally get there in a couple of seasons’ time. Obviously I agree with that, but actually I was thinking instead about what the 30,000 people thought who we’ve helped with auto-enrolment. I don’t know what they think, actually, but I do know how they act - and maybe you’d be interested in that?

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BLU E

CROWD

They Think It’s All Over...

Before the whole auto-enrolment thing kicked off, the naysayers were busy trying to convince everybody that most people would opt-out of their pension schemes, particularly young people. The argument they used to put forward was that young people these days are different to young people from the past. Today’s 30-somethings are up to their eyes in student debt, renting at exorbitant rates, and unlikely to ever be able to buy their own home. And by and large they are out of work because all the old people these days can’t afford to retire and they’re clogging up all the jobs. That’s a compelling story, and it’s one that’s been given acres of newsprint in the doom-andgloom section of our national press. But guess what? 30,000 people told me that that’s just not true - that’s what. Our experience at Jargonfree Benefits tells me that young people are no more likely to optout than people of any other age. And that, anyway, very few people are opting-out in the first place.

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It Isn’t Now

I hate to be the harbinger of good news, I know bad news sells papers, but the auto-enrolment reforms look like they’re going to work. Sure, it makes me feel sorry for journalists - I mean what else can they write about if pensions are good news? But real life’s always been like that; you don’t read about it in the newspapers - you live it. Steve Bee is CEO and founder of Jargonfree Benefits, which supplies auto-enrolment and workplace benefits solutions for smaller businesses. For more comment and related articles visit...

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GI LT

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MY WORD, LOOK AT MY BONDS The last few weeks have proved interesting for investors. Geo-political issues, most notably the problems between Russia and Ukraine, have led to something of a rollercoaster ride for equity investors. But no real selloff had yet transpired by the time we got into the closing days of April, and it has become clear that, once shares fall sufficiently far, buyers will emerge.

De-Risking

But there has been a degree of de-risking, as the fall in government bond yields attests. With all the economic indicators suggesting that the prolonged period of very low interest rates may be coming to an end, it is hard to see why investors should be piling back into bonds, other than for the purpose of adding more secure assets to their portfolios at a time of international uncertainty. In the UK, unemployment has actually fallen below the 7% level that the new Governor of the Bank of England once said would be the trigger for a rate rise. (Of course, when the possibility that jobless numbers would soon fall sufficiently, he was quick to change the rules. So much for forward guidance.) Sterling is also telling us that the market is anticipating an interest rate increase. The pound has been on the up, supported by an apparently improving economic position. Even our borrowing is coming down, although we do remain the second

IT WASNâ&#x20AC;&#x2122;T SUPPOSED TO BE LIKE THIS, SAYS BRIAN TORA. WHY HAVE GILT YIELDS BEEN FALLING?

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A Puzzle

But if foreign exchange markets are factoring in dearer money, the gilt edged market certainly isn’t. UK gilts outperformed domestic equities during the first quarter of this year, rising modestly, compared with a small fall in the FTSE 100 Share Index. Why was that? Perhaps investors feel able to take comfort from the continuing decline in the rate at which our cost of living is going up. Wage rises may now have risen faster than inflation – just – but there is little evidence of any real upward pressure on the country’s pay packets. Despite a brighter economic future emerging, few forecasters are expecting interest rates here to go up ahead of next year’s general election. Not only is the global financial picture remaining fragile, but there continues to be a lack of trust in the sustainability of our own progress. Europe remains in the doldrums, while any disruption to energy and fuel supplies brought about by Russian action is hardly conducive to further GDP growth. But I remain a glass half full merchant, so I find it hard to whip up enthusiasm for gilts, even if interest rates may take some time to approach the levels that we used to see. For rates to shift above 3%, we would need to be seeing

I N N OCEN CE

either more robust growth or else some signs that inflation is lifting off again. It is hard to see either event taking place in the foreseeable future- although it is wise to remember that forecasting likely outcomes is never easy.

most highly geared nation amongst the world’s richest. Only Japan has succeeded in pushing debt levels up higher.

Your Move, Mr Carney

Still, the longer the news on the economic front remains positive, the closer a rate rise comes. With luck (don’t forget, there are those for whom an increase in interest rates will prove good news) the Bank of England may feel able to start what is likely to be a prolonged period of lifting rates to a more realistic level by the middle of next year. What effect this might have on house prices is hard to gauge. At the end of last month the government brought in new measures to curb indiscriminate lending, making it harder for some people to borrow. It is too early to determine whether this alone will slow the rise in the value of residential property, but it is looking increasingly likely that next year could prove an important inflexion point for a number of investment asset classes. Brian Tora is an associate with investment managers JM Finn & Co For more comment and related articles visit...

www.IFAmagazine.com

An individual approach At JM Finn & Co, we understand the importance of treating you and your client as an individual. This is why our Tailored Platform Solution is a discretionary service that can integrate seamlessly into your proposition. Mike Mount T 02920 558800 E mike.mount@jmﬁnn.com

www.jmﬁnn.com LONDON BRISTOL

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JM Finn & Co is a trading name of J. M. Finn & Co. Ltd which is registered in England with number 05772581. Registered Ofﬁce: 4 Coleman Street, London EC2R 5TA. Authorised and regulated by the Financial Conduct Authority.

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13/05/2014 22:36 27/02/2014 12:44

PRODUCT REVIEWS

ANGELS& EMONS D magazine... for today ’s discerning financial and investment professional

SOME ETHICAL FUNDS SIMPLY SCREEN OUT THE BAD, WHILE OTHERS ACTIVELY SUPPORT THE GOOD. BUT DOES IT MAKE ANY DIFFERENCE TO THE PERFORMANCE? NICK SUDBURY REPORTS Standard Life Investments UK Ethical Fund TYPE: OEIC SECTOR: UK All Companies FUND SIZE: £213m LAUNCH: September 1998 YIELD: 2% Ongoing Charges: 1.6% MANAGER: Standard Life Investments WEBSITE: standardlifeinvestments.com

Positive Discrimination Standard Life Investments UK Ethical Fund There are around 50 UK based funds that have an ethical bias to their investing – and with every passing year, their attraction for investors and

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PRODUCT REVIEWS

especially pension funds seems to grow. Most of these funds, of course, apply traditional negative screening to weed out companies that are considered to have a harmful influence; but those with an SRI mandate will often adopt a Rigorous Approach different approach, deliberately targeting more ‘socially responsible’ businesses. Kames Ethical Cautious Managed Some will argue that the SRI type Kames Capital is celebrating its 25th of approach is not only worthwhile but can year of ethical investing, which makes also result in better performance - although it one of the longest serving groups in the evidence is sometimes patchy. When the the sector, and it has three products first of these products was launched in the targeted at this segment of the market. UK back in the 1980s, it was mischievously Like all the others, the Cautious Managed dubbed the Brazil fund because you fund uses a rigorous screening process to identify would have to be nuts to invest in it. which companies it should avoid. For Kames, Thankfully things have moved on since then these include businesses that supply the military and some have delivered some decent returns. or that operate in the nuclear power industry, as The Standard Life Investments UK well as those that damage the environment or Ethical fund is one of the more outstanding are involved with gambling, tobacco or alcohol. success stories. Aiming to provide capital The fund aims to provide both income and growth, it’s ranked 29th out of the 270 capital growth by investing in UK equities, bonds funds in the UK All Companies sector and cash, with all the holdings having to meet over 5 years, with an impressive gain its strict ethical criteria. These are designed to of 151.3%. What’s more, it has done prevent it from buying shares in companies that equally well over shorter time periods. harm people, society, animals or the environment. Lesley Duncan, the manager, invests It has built up an impressive track record, in companies whose business activities she and it is ranked second out of the 144 funds regards as making a positive contribution to operating in the IMA Mixed 20%-60% Shares society, in terms of preserving the environment sector over the last 5 years. Despite this the or improving the quality and safety of human cumulative return since it was launched in life. She also aims to avoid those that fail March 2007 has been limited to just over 50% to meet a strict set of ethical guidelines. by the impact of the 2008 financial crisis. The underlying criteria are approved Around 54% of the fund is invested in by the Standard Life Ethical Committee equities, almost all of which are listed in the UK. and may be amended from time to time if It’s a diversified portfolio of 86 separate holdings, appropriate. The Committee’s meetings are with the top 10 accounting for just 13.7%. Most are chaired by the company’s chief operating mid-caps, because blue chips don’t tend to meet the officer, and they include both investors and ethical criteria – and, in order to control the extra the managers themselves. Normally the risk that results, the manager keeps them down committee will sit four times a year, with to less than 3% each. The fixed income allocation the aim of ensuring that the company’s makes up a further 38% of the fund and comprises ethical policy is correctly applied. 123 holdings, the majority of which are sterling According to the latest data, the £213 investment-grade bonds. There is also 8% in cash. million fund is currently invested in 64 Using an ethical screen is likely to affect different UK shares. The top 10 represent the short-term performance, relative to its more 26.6% of the portfolio and include businesses mainstream sector peer group. such as ASOS, DS Smith, To accommodate this, the fund Whitbread and Barclays. Just aims to be in the second quartile over a third is invested in the Kames Ethical over rolling 12-month periods blue chips of the FTSE 100, with Cautious Managed and in the top quartile over a further 56.5% in the mid-caps. rolling 3 years. The managers TYPE: OEIC The remaining 10% is in the have certainly achieved the smaller end of the spectrum. SECTOR: Mixed Investment latter - and they have also 20% to 60% Shares accomplished their other objective of beating the 50% FUND SIZE: £153m FTSE All-Share/50% iBoxx LAUNCH: March 2007 sterling non-gilts benchmark. YIELD: 1.9 % These sorts of returns suggest that it’s a decent option for Ongoing Charges: 1.33% ethical clients MANAGER: Kames Capital looking for a multiasset exposure. WEBSITE: kamescapital.com www.IFAmagazine.com

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PRODUCT REVIEWS

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

Accentuate the Positive F&C Stewardship Growth It would be logical to think that an ethical screening process would ensure that the fund’s returns differ significantly from a mainstream benchmark - but in fact, history suggests that many socially responsible investments tend to perform in line with the wider market. One such strong performer is F&C Stewardship Growth, which is currently ranked just below the middle of the UK All companies sector over a five year period. During that period it has been up around 100% - very similar to the gain on its FTSE All-Share benchmark, with which it has a high correlation. And this despite the fact that the positive screening means that some of the country’s largest companies are off-limits. Catherine Stanley, the manager, aims to achieve capital growth and increasing income by holding a portfolio of UK companies whose products and operations are considered to be of long-term benefit to the community. She works closely with F&C’s Governance and Sustainable Investments desk and an independent Committee of Reference to ensure that each holding meets the ethical code that underpins the fund’s mandate. Wherever possible, Stanley and her team try to meet the company management before making an investment in their business. This enables them to gain a better insight into their operations and to open a constructive dialogue on a range of environmental, social and governance issues. It’s perfectly possible for stocks to fail the ethical screen and then change some aspect of their business so as to become acceptable. This was the case last year with AstraZeneca, GlaxoSmithKline and BHP Billiton, the last two of which are now among the fund’s top 10 holdings. The other major weightings include the likes of HSBC, Vodafone, BG and Legal & General. In many ways it is surprising that the fund is so closely correlated with its FTSE All-Share benchmark, but the fact that it is could be reassuring for clients who want an ethically screened F&C Stewardship exposure to the UK stock Growth market. Those that also need a decent yield may prefer the TYPE: OEIC F&C Stewardship Income fund, SECTOR: UK All Companies which is run on similar lines but is paying out 3.5% a year. FUND SIZE: £661.5m LAUNCH: June 1984 YIELD: 1.2% AMC: 1.5% MANAGER: F&C Investments WEBSITE: fandc.com

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PRODUCT REVIEWS

Jupiter Green Investment Trust (JGC)

technology-based products for the rail and freight industries; the engineering and TYPE: Investment Company environmental consultancy SECTOR: Sector Specialist: Ricardo; and Cranswick, a Environmental UK food producer with green credentials. FUND SIZE: ÂŁ39.1m JGC has had a strong LAUNCH: June 2006 12 months, with the share price rising around 27%, YIELD: 0.8 % but the longer term return TER: 1.76 % has not been as impressive. MANAGER: After some decent initial Jupiter Asset Management performance, the financial crisis of 2008 left it trading WEBSITE: jupiteronline.com well below the June 2006 issue price - and as a result the cumulative return over its first 8 years is not much more than 40%. By comparison the MSCI World Small Cap benchmark is up in excess of 150%. The environmental sector hit a low point in early 2013, but since then it has bounced back strongly. This has been mainly due to improvements in the supply and demand dynamics in important areas like renewable energy, as well as the new raft of environmental policies announced by China and the broader economic recovery in the West. Around 34% of the JGC portfolio is invested in the US, with a further 26% in the UK, and with most of the rest being divided between Europe and Japan. There have been times when the Brighter Future shares have traded on a 20% discount to NAV, but Jupiter Green Investment Trust the recent strong performance coupled with an Clients who want to actively change things active share buyback program has narrowed it to for the better might favour the more proactive less than 2%. The management fee is 0.85% and approach taken by the Jupiter Green there is also a performance related fee, with the Investment Trust. The fund aims to generate combined total capped at 1.75%. long-term growth by investing in a global There is no doubt that the areas the fund portfolio of companies with a significant invests in will attract a lot of attention in the emphasis on environmental solutions. coming years, but the onus is on the manager to Manager Charlie Thomas find robust companies that can outperform the concentrates on what he sees as the core wider market. This is no easy task - although the economic drivers such as the growing recent performance suggests that with the right investment in renewable energy and tailwind he is perfectly capable of delivering a greener infrastructure. Thomas has satisfactory return. a strong bias towards small and medium cap companies, which can be seen from the top 10 holdings that make up around 30% of the fund. These include the USlisted Wabtec, which makes

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I N V E S T M E N T D O C TO R

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

UNDERSTANDING HOW BUSINESS AND RISK CYCLES INTERACT CAN PLAY A VALUABLE ROLE IN SETTING APPROPRIATE ASSET ALLOCATION FOR MULTI-ASSET PORTFOLIOS, SAYS NICK SAMOUILHAN, MULTI-ASSET MANAGER AT AVIVA INVESTORS Many people are familiar with the business cycle - the evolving behaviour of the economy over time between recession, recovery, trend growth, overheating/ booms and then recession. These cycles vary in length, usually lasting anywhere from a few years to a decade. Their turning points are also unpredictable, although not their process. A recession, for example, is always followed by recovery; it’s just the timing that is unknown. In investing, the business cycle finds its counter in the ‘risk cycle’, the fluctuating evolution of markets over time. This is where equities and other risk assets go through up and down cycles just like economic growth. The typical cycle would be: market sell-off, undervaluation, recovery, overvaluation and market sell-off again.

Linked Cycles

While both the above cycles are related, the risk cycle is not directly (or at least wholly) dependent on the business cycle. Valuations, for instance, also matter. When related to the business cycle, risk cycles tend to lead the business cycle rather than follow or be simultaneous with it. This is due to either markets pricing in economic expectations (such as market falls leading into recessions) or acting as the cause of the recovery and/ or recession. For example, large falls in equity market valuations leading consumers to cut spending, causing recession. The other main relationship occurs through business and risk cycles being unpredictable in timing, but not in general process. Just as recessions follow booms, so large losses on risk assets always follow excessive valuations

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when markets enter ‘bubble’ territory, it is just the timing that is unpredictable.

Asset Allocation Implications

For investing, understanding and appreciating the risk cycle assists asset-allocation decisions. For instance, even a broad understanding of where you are in the risk cycle helps decide whether to add, keep or decrease your allocations to risk assets. This point is often forgotten when making investment decisions based on some historical measure of value, such as long-term credit spreads or price/earnings multiples. Markets are not stock environments, they are flow environments. This means momentum matters. Just like an economy tends to go from trend growth to recession, market valuations can go well into bubble territory before correcting. Getting out of the market too early ahead of a correction, means you miss some of the returns on offer.

Conclusion

The key is to understand where the risk cycle is going. Even if risk assets are at their longterm average valuations, they can still go much further if you are still in the appropriate part of the risk cycle. Our view to this is to understand where, given the risk cycle, these valuations could ultimately go and then fade out of the investment as the asset class approaches this optimal level. Finally, remember that just like business cycles, all risk cycles are different in timing and nature. Today’s exceptionally low cash returns and government bond valuations, for example, mean valuing equities on the basis of long-term averages could flag the need to exit the asset class too early.

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

The FCA’s latest review into disclosure doesn’t shed any new light, says Compliance Consultant Lee Werrell. Surely enough is enough? You’d think that, after over 25 years, advisers would know how to provide the most fundamental of information in the client’s buying cycle - the cost of doing business with that firm, now and in the future. Well, it seems nobody has told the regulator.

How We Got to This Point Many advisers may remember the 4th July 1988, the day the Financial Services Act 1986 was made effective. All of the old guard cried that they would never sell anything if they had to disclose their commissions to clients. A prophecy that proved false over time. 1994 saw “Reason Why” Letters introduced and advisors claimed that business would collapse if they had to spend time writing to explain to clients exactly why they had recommended the products which they had. Another prophecy that proved false over time. In 2007 the first incarnation of MiFID was introduced, radically removing a lot of ambiguity from the handbooks and implementing new and clearer rules, including COBS 6 and the introduction of commissions in “cash terms” and providing this in a “durable medium” at “as close as practicable to the time that it sells, personally recommends or arranges the sale of a packaged product.”

Are We No Further Forward? The FCA’s latest review into disclosure by financial advisers has found that a massive 73% of firms fail to provide the required information on the cost of advice to clients, either in the right way or in some cases, in any way at all. The failings identified in the FCA’s review suggest that some consumers could be unaware of, or even mis-led, in relation to:

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n The cost of initial and/or ongoing advice; n The type of service offered by a firm (i.e. independent or restricted); n The nature of a firm’s restriction (if applicable); or n The service they can expect to receive in return for the on-going fee. “RDR has involved a major change to the investment advice landscape,” Clive Adamson, Director of Supervision at the FCA, said recently. “While we have seen a lot of positive progress and willingness by advisors to adapt to the new environment, I am disappointed with the results of our latest review looking at whether advisors are clear with their customers on costs and services provided.” “We will be helping the industry again to understand our requirements with the release of a video guide, but these results are a wake-up call and we expect the industry to respond.” This recent review is the second of a threepart assessment of how firms have implemented the disclosure elements of the Retail Distribution Review (RDR). The RDR, which came into force on 1 January 2013, introduced new disclosure requirements to improve transparency for consumers. The aim was to improve competition in the market by ensuring that consumers have the information needed to make informed decisions, as well as being clear on the costs and services of advisory firms. The first part of research, published in July 2013, found that progress had been made and that there was a general willingness to adapt to new rules. However, common issues were uncovered, and further examples of good and poor practice were produced to help firms. These firms seem to have decided to ignore TR13/5 and the FCA Factsheet 007 on “Disclosing your firm’s charges and services” entirely.

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

Questions, Questions On a number of articles, advisers seem to be making their point that they don’t know what size of assets/funds etc the client holds, and so they cannot quote a charge. My question to them would be, why are you discussing specific prices without having a conceptual agreement in the first place? Surely the initial (free) interview when you present and explain the generic costing is to establish these facts? However it seems that some IFAs want to “compete on price alone” by comparing themselves against others in their area. Could part of the problem be that many advisers still think they have to get their 0.5%/3%/5% or whatever from preRDR days converted exactly into a post RDR fee? Frankly, the world has moved on. Most professional salesman understand that you need to get a conceptual agreement from the client involving a full understanding of their goals and aspirations etc before you can provide an exact cost; one which adds value to the client. Yes, a menu of charges is a good idea (typical costs) but this can be sensibly constructed without committing the adviser or firm to any specific combination until the fundamental needs have been established. If advisers who can’t get a handle on disclosure, and treat clients with some respect, or who want to advertise themselves like a Kebab Shop and fail to constructively inform the clients what the charges are and why the charge is being applied, or what benefits there are for the service, then they deserve to be referred to enforcement.

73% of firms that used an hourly rate did not provide an approximate indication of the number of hours that the provision of each service was likely to require.

z 62% of firms that used an indicative hourly rate did not provide the basis on which it may vary. z 45% of firms that offered more than one option of calculating the fee within their charging structure did not made it clear what basis would be applied and when. z 22% of firms surveyed did not appear to provide the client-specific disclosure as soon as practicable. z 40% of firms using a percentage-based charging structure for their ongoing service failed to disclose that the fee would increase as the fund grows. z 20% of firms’ documents failed to clearly disclose what service a client would receive in return for the ongoing fee. z 18% of firms’ documents failed to disclose that the client could cancel the ongoing service, or how they would go about doing so. z 11% of firms surveyed did not appear to have a robust procedure for ensuring that they deliver the ongoing service that they have agreed with their clients. And to top it all... n 31% of firms offering a ‘restricted’ service were not being clear they were restricted, or the nature of the restriction, including some who: z Did not disclose, in a durable medium and/or in a timely manner, that they were restricted.

Maybe there is an issue in the perceived lack of a robust and coherent level of leadership both within firms and across the industry or possibly that sales skills have suffered because of the importance placed on higher level qualifications? Is compliance actually being proactive or relying on the status quo and not making waves?

z Did not use the word ‘restricted’ in their disclosure.

The Findings

z Provided contradictory information on the nature of their restriction.

The findings in TR14/6 “Supervising retail investment firms: being clear about adviser charges and services” reads like a first review of an unregulated industry. The basic and straightforward nature of the requirements, remain as unaddressed issues. In particular, the regulators found that: n 58% of firms failed to give clients clear upfront generic information on how much their advice might cost: z Firms using a percentage-based charging structure did not provide examples in cash terms within their initial disclosure document (24% failed to disclose their initial fees and 30% failed to disclose their ongoing fees).

z Failed to clearly disclose the nature of the restriction.

None of these findings are rocket science and most, with the right compliance support, can easily be avoided. Yes, the industry has been pushing for better qualifications to provide a better service to client’s as well as raising the barriers for entry as advisers are dealing with the Great British public. Overall, advisers and firms today are better equipped to deal with the hard earned money of client’s than they were even 5 years ago. The public as a whole needs to have greater confidence in those that advise and manage their money, but, there seems to be a lot of aiming at one’s own feet and pulling the trigger. Surely, enough is enough.

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Of firms in the UK failed to provide the required information on the cost of advice to clients in the right way or, in some cases, any way at all.

58%

Failed to give clients clear upfront generic information on how much their advice might cost.

31%

Firms offering a ‘restricted’ service were not being clear they were restricted, or the nature of the restriction.

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

73%

Initial Disclosure documents

73%

Firms that used an hourly rate did not provide an approximate indication of the number of hours that the provision of each service was likely to require.

62%

Failed to give clients clear upfront generic information on how much their advice might cost.

45%

Firms offering a ‘restricted’ service were not being clear they were restricted, or the nature of the restriction.

Client-specific disclosure

32%

Firms using a percentage-based charging structure did not disclose the fee in cash terms.

22%

Firms surveyed did not appear to provide the clientspecific disclosure as soon as practicable.

Firms did not disclose the client-specific charge in a durable medium.

‘Other’ charging issues

40%

Firms using a percentage-based charging structure for their ongoing service failed to disclose that the fee would increase.

16%

Firms surveyed did not make it clear when the client would start to incur charges. See also the listings of FCA publications on Page 56

Compliance Doctor.indd 55

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

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

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

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

New Mortgage Rules Come into Force Press Release Ref: PN/50/2014 26 April 2014 The FCA reminds consumers that the mortgage marketing rules in the MMR reforms have now come into place, and in particular that self-certification is no longer generally acceptable. It also reminds the public that those looking to take out interest-only mortgages will see immediate changes. The new rules, it says, will mean that lenders will ask to see plans for repaying the full loan once the interest-only period ends, instead of relying on increased house prices as the only repayment plan.

Call For An End to Premium Rate Calls for Consumers Press Release Ref: PN/45/2014 14 April 2014 says it is concerned that customers are being charged high rates to contact financial services firms, and that it will consult with industry, consumer organisations and consumers to ensure customer calls are more affordable. “Current FCA rules require every authorised firm to have a free channel for making a complaint. While some firms do provide a Freephone number, this ‘channel’ could also be by post or online. The FCA’s consultation will propose the standardisation of the rules so that charges for consumer help, and complaint, lines are capped at the cost of a basic rate call.”

Budget 2014 – Pension Reforms: Guidance to Firms in the Interim Period Final Guidance Ref: FG14/3 9 April 2014 10 pages

to treat customers who are making a decision about their retirement income in the coming year, or who are not well informed about the changed environment. The FCA acknowledges that it would normally engage in formal consultation on this matter, but says that it considers that any delay in issuing final guidance would be prejudicial to the interests of customers. Accordingly, it requests feedback on this subject. No deadline has been set for responses.

General Guidance on the AIFM Remuneration Code (SYSC 19B) Finalised Guidance Ref: FG14/2 31 March 2014 22 pages This Guidance results from the consultation in September 2013, which closed in November 2013, and summarises the comments received, the regulator’s responses and the consequential changes to the guidance in the Handbook Notice. The Guidance explains, among other things, how an AIFM should: n Take into account proportionality. n Consider payments made to partners if

the AIFM is structured as a partnership. n Pay its relevant staff in units, shares or other instruments.

Risk Outlook 2014 News Release 31 March 2014 88 pages The document consists of two parts. Part A looks at what causes risks to arise, including changing environmental pressures, and sets the FCA’s assessment. Part B looks at the risks identified across the financial markets, and discusses the following key forward-looking areas of focus. Major points include: n Technological developments may

The Chancellor’s announcement of substantial changes to the pension legislation in the 19th March 2014 Budget has given rise to uncertainties about the correct procedure in the interim period before the final provisions come into effect in April 2015. Some of these changes are still in the consultation process.

n Poor culture and controls continue

The FCA therefore sets out its expectations of firms, with regard to making changes to their operational processes and procedures. They will also need to consider how

n Retirement income products and distribution

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outstrip firms’ investment, consumer capabilities and regulatory response to threaten market integrity n Large back-books may lead firms to act

against their customers’ best interests may deliver poor consumer outcomes

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lead to unaffordable debt n Terms and conditions may be excessively complex. n House price growth that is substantial and rapid may give rise to conduct issues.

FCA Regulated Fees and Levies: Rates Proposals 2014/15 Consultation Paper Ref: CP14/6 31 March 2014 176 pages

In October 2013 the FCA consulted on proposed changes to the underlying policy of the fee and levy regimes of the FCA, the ombudsman service, and the Money Advice Service (MAS). This paper provides feedback to the responses it received to CP13/14 (Regulatory Fees and Levies: Policy Proposals for 2014/15), published in October 2013. The FCA draws attention to two errors that occurred in the original draft of this document, both in the Appendix sections. The paper includes the report by consultants BDO on the outcome of the FCA Fees Review for 2013/14. The FCA declares, however, that this document does not consult on any proposals affecting the Financial Services Compensation Scheme (FSCS).

I FA C A L E N D A R

n The growth of consumer credit may

Dates for your diary MAY 2014 19-20 Global Tax Summit 2014 Monte Carlo, Monaco 22

Local government elections UK

European Parliament elections

JUNE 2014 4-5

G8 Summit (rescheduled from Sochi, Russia) Brussels, Belgium

Fifa World Cup begins Brazil

Response to CP12/38 â&#x20AC;&#x201C; Mutuality and With-Profits Funds: A Way Forward

European Council meeting Brussels, Belgium

Policy Statement Ref: PS14/5 28 March 2014 61 pages

Wimbledon Tennis Championship begins London, UK

Competition Commission due to have completed its investigation into the payday lending sector

Consultation period ends 30 May 2014.

In December 2012 the FSA consulted (CP12/38) on the issue of mutual with-profit life assurance providers (mutuals) which are facing declining levels of with-profits business, or which already have with-profits funds in run-off. This policy statement confirms that, taking into account comments received to CP12/38, the regulator will proceed with the proposed option of seeking a rule modification which would allow mutuals with a viable business plan to continue after their with-profits funds have run-off.

FCA and Bank of England Agree Memorandum on Supervision of Markets and Market Infrastructure Statement 17 March 2014 1 page The FCA and the Bank of England, including the Prudential Regulation Authority (PRA), declare that they have agreed a Memorandum of Understanding on how they are to co-operate in relation to the supervision of markets and market infrastructure, which includes financial market infrastructures (FMIs). The annual agreement is in fulfilment of a requirement contained in the Financial Services Act 2012, and incorporates feedback from industry. This is the first time that the review has been conducted, following the commencement of the new regulatory responsibilities in April 2013.

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JULY 2014 1

Italy assumes the EU Presidency until 31 December

Derivatives transactions must be made directly to ESMA

2-6

Royal Henley Regatta Henley-on-Thames, UK

Fifa World Cup ends Brazil

End of the AIFMD transitional period. Date by which firms already managing or marketing AIFs must have applied for authorisation

HAVE WE FORGOTTEN ANYTHING? Let us know about any forthcoming events you think ought to be in our listings. Email us at editor@ifamagazine.com and weâ&#x20AC;&#x2122;ll do the rest. May 2014

57 13/05/2014 22:40

INDEPENDENCE

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

PLAYING CARDS

THIS YEAR’S PENSION REFORM HAS BROUGHT OUT THE SUSPICIOUS ACTUARY IN GILL CARDY Steve Webb ranks as one of the better informed and effective ministers on pensions policy, which has been the poison chalice portfolio for a series of politicians. Anyone who has heard him speak is usually impressed by his grasp of the subject. His announcement that the biggest barrier to pension saving - the requirement to buy an annuity - would be removed is indicative of a radical approach to confronting the pensions crisis and the savings gap. When this bombshell hit the headlines back in March, the downside was that pension funds would be ‘wasted’ on Lamborghinis. Hmmm, perhaps if we can incentivise the British public to ‘waste’ their pension funds on Aston Martins, TVRs and Morgans, which boost UK GDP and provide British jobs, it won’t be such a bad decision?

What’s Your Sell-By Date?

More seriously, Webb proposed providing the public with information on how long this pot of money was supposed to last. Well, providing the public with yet more information is an interesting idea when we know they don’t pay attention to what we already give them. But also providing each pension investor with his or her ‘date of death’ at their retirement date was regarded by many as laughable. That’s unfair. We in financial services know that statistics lie at the heart of so much of what we do. Mortality, morbidity, postcodes, age, sex, smoker status, occupation, health, height, weight and medication all have an essential

impact on the products and services we can access - and on how much we pay for them. And yes, every statistic which takes a population and averages the results ‘ignores’ outliers: the woman who dies tragically young, the man who lives into his nineties in perfect health in spite of a 30-a-day habit. But laughing off the plans to provide the date of death completely misses the point.

A Moving Statistical Target The most significant point about human mortality is that my date of death is a moveable feast. A newborn baby boy could expect to live to 79 and a baby girl to 83, if mortality rates stay the same as they are today throughout their lives. But by 2035 life expectancy at birth is expected to reach 83 for males and 87 for females – and, if you allow for projected changes in mortality throughout life, expectancy changes to 94 and 97 respectively.

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INDEPENDENCE

WITH THE REAPER

Worse, life expectancy at age 65 increased by 40% for men in the 30 years between 1980 and 2010, and by 23% for women over the same period.

Save Early, Save Often Finding out my life expectancy at 65, or state pension age, or when I encash my pension fund is too late in the day. Yes, I could be one of those retirees who drops dead on that retirement world cruise with thousands in the bank. But what would be much, much worse, for me and for the state, is if I was one of

those people who survived long enough to witness an increase of another 23% in my life expectancy, with no adequate financial plan in place which ensured that I had sufficient resources to pay for my everlonger life.

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

GETTING YOUR EXIT STRATEGY RIGHT SELLING AN IFA BUSINESS IS A TASK IN ITS OWN RIGHT, SAYS SAM OAKES. BUT HOW TO MAKE THE BEST OF THE OPPORTUNITY? “I’m going to sell my business.” Yes, that’s fast becoming a common response to a simple but important question: “What are you going to do when you retire?” My next question, “How and to whom?” is more often than not followed by the answer: “Not sure, but to whoever pays me the most.” Doesn’t that just sound wonderful? You work hard, and you hit the ripe old age of retirement - let’s say forty five? And then make a call to the highest bidder, and as simple as that, you sell your business! A life of freedom awaits, you kick off those brogues burn the suits, slip into flip flops and shorts, grow a beard, buy that Harley and explore the world. All right maybe that’s just my idea of retirement, but you get the picture. Nothing is as perfect as that - or is it?

Rethinking the Model

We’ve been thinking this one over for a while here at Recruit UK, and we’re coming to the conclusion that it’s a task that can be better accomplished if you can bring in specialist experience from the IFA sector, add a heavyweight sales and buyout team, and then augment all this with the very best of media and presentation outfit. Which is why we are forming a new brokerage, to be called Gunner & Co. Gunner & Co is a financial services acquisition brokerage which works with the most active acquirers in the market, helping them to formulate buy-out options for business owners across the UK who may be looking to exit the industry. Gunner & Co’s team is supported by Paul Wilson, a former IFA and financial entrepreneur, who brings many years of experience in the

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sector and whose own highly successful regional IFA practice was sold in 2013. Paul’s personal insights into the specific mechanics of an adviser business have given the team a unique edge when it comes to understanding the needs of both buyers and sellers, as well as the strategy that will attract the highest price and reduce risk. My own involvement is, of course, through Recruit UK, which is one of the fastest-growing financial advice recruitment companies in the UK. As you’d expect, each of our own consultants is talking to financial advisers on a daily basis, and our network is always aware of upcoming sales or acquisition opportunities, with business of all sizes, often before they become public knowledge.

40,000 IFA Magazine Readers And then, of course, there’s Gunner & Co’s strategic relationship with IFA Magazine itself. IFA Magazine, as you probably know, has more than 40,000 unique readers who access the publication monthly via email, through the IFA Magazine website or through the print edition of the magazine. Not to mention a highly targeted database of advisers and specialists. We think that IFA Magazine’s successful series of seminars, events and other promotions gives Gunner & Co a uniquely effective platform from which to advertise the sale of your business or your acquisition offering within this medium.

The Video Dimension

And finally there’s the graphics team who will take your sale into the next media dimension. Gunner & Co also includes the BAFTA award-winning

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13/05/2014 22:42

THE HUMAN RESOURCE

skills of videographer Peter Georgi (Tomorrow’s World, The Human Body, Walking with Cavemen), whose programmes for BBC and Sky TV still set the standard for documentary excellence. And whose corporate video experience is proving to be an essential factor in helping businesses to promote themselves in a more personal and current way. Let’s remember here that 69% of internet traffic will soon be video. Maybe it’s time to start thinking about how you can up your game?.

We don’t think there’s any other company that can bring together such a tightly focused team, or which can get your sale or acquisition offer out there with such effectiveness or immediacy. If you’re looking to discuss the sale of your business, or you are looking to create an acquisition marketing strategy that works, call or email us today to arrange an appointment.

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May 2014

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T 0844 371 4031

Investment Manager Birmingham £50k-£65k with generous bonus scheme

Employed IFA Newcastle, Sheffield, Glasgow, Aberdeen and Liverpool

E HR@ifamagazine.com

Employed IFA South West, Midlands and North West £30k-£45k with realistic OTE

Circa £50k My client is a reputable private client investment/IFA firm who specialise in offering a tailored investment service to over 20,000 private clients with a total of £1,8bn of funds under management and advice. They are seeking high calibre professional IFA’s who have a sufficient transferable client bank to join their expanding organisation on an Employed basis and join them in creating a new team in the Birmingham office. The applicants will be a strong relationship developer with a track record in generating quality business. You will deliver a bespoke service to HNW private clients. Although a small amount of leads will be provided, the majority of own business will come through current clients and own leads. Ideally the applicants will have a sufficient amount of AUM to bring with them circa £10million. The successful applicants will be diploma qualified or above, with a proven record of success as an IFA with experience in educating U/HNW clients and in management of others. In return for expertise, my client are offering a competitive salary between £50k – £65k, with a generous split on all business written, a modern and professional office environment and a dedicated administration team that will allow more time to be spent on clients and less on paperwork. Contact John Anderson at Recruit UK in confidence to discuss this exciting proposition!

Recruit UK are working alongside an award winning national company who provide impartial financial advice to a wide range of private and corporate clients and as a result of continued expansion they are seeking Independent Financial Advisers to join their team across the UK. This is an excellent opportunity to join a large Corporate IFA with offices nationwide. This is an employed position paying a basic salary c£50k depending on experience. They offer the ability to earn high with bonus based on 3.2%validation and to earn 33% of all business written above that level, as well as a highly attractive benefits package that includes generous holiday allowance, company pension and Private Health Scheme. Our client will consider energetic and experienced financial advisers who possess a desire to succeed from the outset who want to secure their earnings and work for a large company that will support them. Advisers need to be Level 4 Diploma qualified, a holder of CAS and have a proven plan in place to demonstrate how you will generate your business. This highly respected company has long standing relationships in place with professional connections including Solicitor and Accountancy firms. They provide their advisers with full professional support including paraplanning and administration and first class systems that generates fantastic levels of business.

My client is a leading Financial Services Group who has a heritage dating back almost a century. They have been attracting assets through acquisition for 10 years and are now on a push to grow their numbers by recruiting experienced IFA’s/Wealth Managers across the UK. My client offers restricted whole of market advice. Their proposition gives the successful applicant the opportunity to work from home or a modern and professional office if there is one in the area. They can offer a good level of support in generating leads from their extensive and loyal client base and BDM team. Advisers will have the opportunity for buy out after some time at the company with no covenants surrounding clients that are brought with you. To be considered by my client, you will be an experienced Adviser who has the full level 4 diploma, currently or has previously held CAS and who is confident to bring with you circa £3-£5million of assets. Salary is dependent on what you can bring to the table, but will be between £30-£45k with realistic OTE. Plus the opportunity to grow a team and play a leading figure within a respected business.

There is very much a ‘team ethic’ to their business and Advisers will have access to clients, marketing and In house business development and will be working within modern offices that encourage motivation and self development. To discuss this opportunity in more detail, please contact Recruit UK.

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14/05/2014 09:59

Financial Services Recruitment Specialists

Employed IFA

Wealth Manager

Employed IFA / Branch Manager

Leeds and London

Belfast, Bristol and Bracknell

Reading

£40k basic plus benefits

Up to £75k with generous OTE

Up to £65k with high earning potential

Recruit UK are currently working on a mandate to find a successful IFA to join a leading Chartered IFA firm in London and Leeds. On offer is a basic salary circa £40k with good bonus, Real Leads and an active client bank.

My client is a fast growing and leading wealth advice and investment management business who have been identified through awards and reputation.

Recruit UK are currently working on a mandate for a long established financial planning practice who due to growth and acquisition are seeking to expand their reputable team with an employed IFA/Branch Manager.

Our client pride themselves on their streamlined services and over the past 2 decades they have acquired a very secure returning income and a desired book of HNW professional clients around both locations. They continue to expand and consequently have a warm book of business for the successful applicants to pick up. Beyond this however, they are seeking an IFA who can confidently build their own business and has a minimum of 2 years experience as an IFA. Existing transferable clients will be taken on board however is not essential. This is an employed role that offers a competitive basic of circa £40k. There is a 3.25% validation with circa 40% bonus on validation being achieved. They offer a supportive and structured environment for their IFA’s including all in house support and paraplanners, as well as attractive offices in appealing city locations. This opportunity would suit individuals who are committed to maintaining and improving their knowledge through professional qualifications and training. This is a highly sought after role and there is a level of integrity that comes from working for the firm. If you would like to discuss this opportunity in further detail, please contact Andrew Nicholson at Recruit UK.

Thinkers.indd 62

They are currently looking for experienced level 4 accredited financial service professionals across the UK to provide fee based independent financial advice to private clients with investable assets in excess of £100,000. My client has exceptional relationships in place within the industry and each IFA working at the firm is ensured a steady stream of leads through leading accountants, Lawyers and Stockbrokers who introduce HNW and UHNW clients. Our client offers a small level of leads but it is essential that you have strong business development. Individuals who have clients that can be brought with them without breaching any restrictive covenants will be advantageous. To be considered by my client, you will have a sound knowledge and background in financial advice and be conversant in providing pensions and investment advice to HNW clients. You will hold SPS and be educated to level 4. My client is acclaimed for the strong training and support they offer their advisers towards becoming chartered, and they seek professionals who have the hunger and audacity to develop and succeed. In return, you will receive an award winning total reward package, including a professional basic salary, a companywide bonus scheme and shareholding, along with the support by a central team of advice, investment management and client support experts. My client has achieved phenomenal success so far in their journey and they are well placed to continue expanding. This is a truly dynamic and visionary organisation that believes their employees and clients lie at the heart of the business.

As part of their continuing growth they are seeking to recruit IFA’s with experience, knowledge and drive to open and grow a new office in Reading. They are happy to look at individuals and teams who might wish to transplant their business or have a similar agreement over the long term. This is an employed role with long term incentives for the right person. They have a robust infrastructure with a high level of admin, paraplanning and business support. Salary is negotiable, they recognise to attract high calibre advisors salary need to be competitive, and this is also recognised by offering long term incentives. It is likely the ideal candidate will be earning from £100-200k per annum. To be considered for this role, it is essential that you have at least 3 years similar experience and have qualifications equivalent to level 4 diploma with the desire to work towards chartered. You will have a highly professional manner with the gravitas to deal with HNW clients and have a background in management of a team/ Office. It will be an advantage is you have a book of existing clients to bring with you however this is by no means essential. Contact John Anderson at Recruit UK to discuss this proposition in confidence.

14/05/2014 09:59

Heat Financial Services is a dedicated, specialist division of Heat Recruitment – one of the fastest growing independent specialist UK Recruiters. Our consultants provide specialist recruitment advice to clients and candidates, with particular focus on Financial Planning and Wealth Management markets. We can provide bespoke recruitment solutions to a host of businesses, ranging from regional independent IFA firms to large multi-nation investment companies. Employed Mortgage Advisor

Financial Adviser (Employed)

Employed Financial Consultant

Location: Cambridge

Location: London

Location: National

Salary:

Salary: £30,000 - £70,000 (attractive bonus structure)

Salary:

£21,000 - £32,000 DOE

An established whole of market mortgage brokerage based in Cambridge is seeking a Mortgage Advisor to join their expanding and ambitious team. Mortgage leads are provided as the company has their own client base. This is a great opportunity to join a growing team where full back office support is provided. Senior Paraplanner Location: Berkhamsted Salary: £30,000 - £40,000 (negotiable) Our client is a highly reputable IFA practice and seeks a Senior Paraplanner to join the business. The successful candidate will ideally be working towards level 6 Chartered Status, and will be responsible for carrying out whole of market research, writing suitability reports and producing quotations. Compliance Advisor Location: Bromsgrove Salary:

£25,000 - £30,000 (dependent on experience)

This is a superb opportunity to join a fast growing Financial Planning Firm, assisting their compliance Director reviewing Financial Services advice files (especially investment orientated). You will be operating in a busy sales environment providing compliance support for the company and 40 home based financial advisers. The company is at the forefront of Financial Planning in the Midlands area with large acquisition plans.

£30,000 - £40,000

Our client is a highly successful boutique firm of Independent Financial Advisers, who provide tailored investment advice to High Net worth individuals. The firm boasts an enviable reputation and provides advice to some very high profile individuals. Through continued growth our client actively seeking established Financial Advisers with transferable funds to join their business.

Our client is looking for an experienced financial consultant to join them as they continue to build on their reputation of delivering a first class financial planning service to its clients on a nationwide scale. You will be allowed to offer your client’s advice on a broad variety of products based on their best interests, finding the best methods to help them reach their goals purely on their lifestyle, financial goals and aspirations.

Paraplanner

Location: Henley-on-Thames

Location: Rayleigh

Salary:

£30,000 - £40,000

We are currently recruiting for an experienced Paraplanner on behalf of a firm of Independent Financial Advisors based in Henley-on-Thames. You will be Diploma qualified Paraplanner and ideally working towards Chartered Status and will be responsible for assisting a team of experienced IFA’s within the company.

£25,000 - £35,000

A fantastic opportunity has arisen for an experienced Paraplanner to join a long establish and expanding Investment Company based in South Essex. As the Paraplanner you will be responsible for supporting the IFA’s within the business to service and maintain their client portfolios. Our client is seeking a number of experienced Paraplanners.

IFA Location: High Wycombe Salary:

£self employed

This is an excellent opportunity to join a growing Financial Planning Business. This company is at the forefront of the industry in terms of the investment they have made in technology and various Financial Planning tools. The right candidate will be Diploma qualified with experience of advising public sector clients. The attractiveness of this role is that there is an orphan client bank available to the IFA

For a confidential consultation about potential opportunities in your area, or alternatively if you seek assistance in attracting top talent to your organisation please contact one of our Specialist Financial Services Consultants on 0845 375 1747.

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THINKERS

LIBERTARIAN BEACON “Achievement of your happiness is the only moral purpose of your life.” Ayn Rand Born 1905 in St Petersburg, Russia Died 1982 in New York A novelist as economist? It’s just too easy to dismiss Ayn Rand as an economic lightweight, as so many commentators have tried to do. But it’s far less easy to play down her commitment to a radical political economy which has been moving in and out of favour for the last 70 years. The recent libertarian tide in the United States has drawn much support and inspiration from a conservative writer who started out by struggling in Hollywood, and who ended up by influencing former Fed chairman Alan Greenspan, no less. Her lifelong rejection of ‘interfering’ statism, and her insistence that unfettered capitalism and small government provide the only true freedom, was never in any doubt. That, of course, has drawn Rand’s ideas into bitter criticism from the centre and from the left. Greenspan’s own mishandling of the asset bubble in the early 2000s provided plenty of ammunition for those who sought to blacken libertarianism’s reputation by association. Republican presidential candidate Mitt Romney’s failure in the 2012 elections was sometimes attributed to his deputy Paul Ryan’s ardent adherence to Rand’s theories. Russia’s outcast Alisa Zinov’yevna Rosenbaum was born at just the wrong moment to catch the two Russian revolutions of 1905 and 1917 at their terrible worst. Her Jewish family’s displacement early on, and the Bolsheviks’ seizure of her father’s business, may have owed something to their political leanings, or then again it might have been the other way round. Either way, her espousal of anti-statism ran deep, and understandably so. Having graduated in the creative arts in Petrograd - and having survived a ‘bourgeois purge’ - she moved in 1926 to New York but soon headed for Hollywood, becoming a US citizen in 1931. Her first novel, the semi-autobiographical We the Living (1936), portrayed the struggle between individuals and the state in Russia, and subsequent works also

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dealt with the waste and futility of big government. Rand opposed Roosevelt’s New Deal as a way of getting America out of the 1930s depression – something for which she was ferociously attacked. Political activism The early 40s brought a period of new activity, and involvement with an intellectual group which included Ludwig von Mises, Henry Hazlitt and other conservatives. Her first hit novel, The Fountainhead, described a young architect’s battle against “second-handers”— people who try to live through other people’s lives; instead, it was only first-hand, individualist thinkers and doers, who Rand favoured. Decried by critics as promoting selfishness, Rand eventually saw success when The Fountainhead achieved major film status. Her second big novel, Atlas Shrugged, followed in 1955, a period when she maintained a New York circle that included Greenspan. Atlas Shrugged featured a group of creative scientists and artists who declare a ‘strike’ and set up a free-living mountain community which is finally doomed to failure by its unreality. Without the efforts of industry and commerce, there was no future to be had The lecture circuit beckons Rand’s gradually failing health may have been the reason why she turned away from novels in the 1960s and 1970s to a focus on platform politics – defending her ideas of laissez-faire capitalism and ‘objectivism’, and getting involved in debates about Vietnam, abortion, gay rights (which she deplored) and US military involvement. Meanwhile, the firm defence of rational and ethical egoism (rational self-interest) continued , The individual, she said, should “exist for his own sake, neither sacrificing himself to others nor sacrificing others to himself.” Not an easy line to follow, even today. But without doubt, Rand’s legacy lives on today in libertarian hearts - though perhaps diluted just a little?

May 2014

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

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

WRINKLED REBEL

RICHARD HARVEY SAYS THE CHANCELLOR IS FINALLY TREATING US LIKE GROWN-UPS. NOW ALL WE HAVE TO DO IS ACT THAT WAY The problem with motorcycle leathers is that they’re so unforgiving. I’ve been having great trouble in trying to squeeze my 15-stone frame (at least five of which seem to have migrated waist-wards) into a brand new set of biker buckskins, complete with lime green thunder-flash stripes. Teamed with buckled boots and a cool black full-face helmet (the sort favoured by philandering French presidents), I’m now fully kitted out to board my dream purchase – seventeen grand’s worth of Harley-Davidson Heritage Classic. (Think ‘Easy Rider’ for the Phyllosan generation). At least, that’s the fantasy that fleetingly crossed my mind when Generous George announced that instead of the state telling me how to spend my pension pot, from next year he was going to let me loose with the lolly. All of it. As is the way with politicians, a fellow minister duly put his foot in it, saying it was now perfectly OK for pensioners to blow their savings by buying a Lamborghini if they so wished. Now, a Lambo is not really my style, although I’ve long harboured a fancy for headin’ down the highway on a Harley, with Steppenwolf’s “Born To Be Wild” blasting through the headphones. On the Other Hand... But that’s where commonsense kicks in. I know I’ll look like an overstuffed bratwurst in biker leathers, and if I so much as hoist a leg over a motorbike, I’ll fall off. End of fantasy. Instead, I’ll sit back and watch how insurance companies and financial providers come up with products offering better returns – and it would be difficult for them to produce worse ones – than the annuities with which pensioners have been lumbered for years. Some reckon that as many as nine out of every 10 savers who would normally have bought an annuity will now hold off. And, frankly, it’s difficult to shed too many tears for annuity providers, even though the threat of their demise

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would have wider and unwelcome ramifications. Naturally, there are doomsters forecasting that pensioners will splurge their way through their savings, frittering them on sports cars, luxury cruises and facelifts. And then throw themselves on the mercy of the state, pleading poverty and seeking means-tested benefits. Now, as a financial seer, I have a lousy track record. For instance, I forecast that most young people would ignore the opportunity to make salary contributions into the new generation of workplace pensions. Wrong – it appears that the vast majority are putting money aside, realising that a few riotous nights on the thrash are outweighed by the prospect of an impoverished old age. However, those of us of a certain vintage (i.e. who can remember Max Bygraves, penny chews and The Beano) are surely more likely to be cautious, and more conscious that it would be loopy to blow the pension pot, given the time, sweat and sacrifice taken to build it up in the first place. Which is surely good news for IFAs, who will be able to demonstrate clearly over the longer term how their fees have been justified by investment gains. While the Chancellor has even suggested that he will put £20 million aside over the next couple of years for face-to-face advice. Cheating the Grim Reaper It could also presage a boost for the property market. Financial expert Martin Lewis, for instance, believes that many will invest in a buy-to-let property to generate capital growth or income. However, he also argues that liberating pension pots might lead to confusion among less sophisticated savers – those who perhaps might have bought an annuity from their pension provider instead of shopping around - as new investment and savings plans flood onto the market. But it’s unarguable that, after decades of forcing elderly people into annuities paying lousy returns – and none at all if the Grim Reaper comes calling – George Osborne has to be applauded for treating pensioners as fully-formed adults, perfectly capable of making their own financial decisions. www.IFAmagazine.com

13/05/2014 22:45

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