Ifa 32 July

J U LY 2 01 4 ■ I S S U E 3 2

For today’s discerning financial and investment professional

WHAT’S YOUR BUSINESS WORTH? CAMERON AND THE EUROPEANS INCOME FUNDS

GO

CAREFULLY

HENDERSON ON CAUTIOUS MANAGEMENT

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

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WORDS OF WILSON

VICTORIAN VALUES

THE HOUSE WHERE I LIVE WAS ONCE OCCUPIED

BY A LATE 19TH CENTURY COUNTRY VICAR The Reverend Pinctus Bacon (no, honestly) was a respected pillar of society, a former missionary, and an intrepid saviour of souls.

And I bet he didn’t work as hard as I do. Or you, for that matter.

On Wednesday afternoons, the Reverend Pinctus would have gone duck shooting with the bishop. On Saturdays he’d have been out with the village hunt. When he got home, his fires would have been laid and his dinner would be in the oven. And when he had to go to town, he’d saddle up his horse and trap and spend a blissfully vacant couple of hours on the eight-mile return trip, probably dropping in somewhere for a glass of porter along the way

Wake Up Call

When I go to town, I get fifteen minutes in the car with my incar mobile phone keeping me permanently on the job. If I don’t respond to an email within ten minutes, I’ll probably get a call demanding to know what’s wrong? I don’t have an ecclesiastical calendar, but I bet mine is fuller than Pinctus’s. And if my work is late, there’s not much point in blaming the postman.

It’s easy to lament those lost and lingering days, when a man of professional standing had time to wax his moustache and dictate a letter. And equally easy to forget how much more efficient technology has made us. We communicate instantly, whether we like it or not.

And you rarely see an empty haulier’s lorry on the road, because they hook up to the internet and find out where to find the next load that needs shifting from B to C and then on to E. That cuts costs, reduces inventories and avoids wasting fuel. We’re all better for it.

For advisers, technology revolutionises everything. Brokers don’t sit by their phones as they used to even thirty years ago, drinking Bordeaux while they waited for batches of share certificates to arrive in the post. We don’t get weeks in which to respond to a developing conflict in Yemen Crimea – nothing much changes, does it? – just minutes. Our screens rule our lives.

And we are never, never allowed to be out of touch. Compliance and Martin Wheatley both demand it.

That’s exhausting, in a 24/7 way that the Reverend Pinctus would have struggled to comprehend. But would we willingly go back even thirty years? I doubt it.

M ik e

Michael Wilson, Editor IFA magazine

www.IFAmagazine.com

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Write to Michael at editor@ifamagazine.com

Juy 2014

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Brian Tora a Communications Associate with investment managers JM Finn & Co. 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.

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

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David Cameron is fighting a Europe that doesn’t really exist, says Michael Wilson

Pensions ought to be simple, says Steve Bee. So why has it taken till now?

The world economy isn’t great, but the markets are robust, says Brian Tora

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Nick Sudbury’s pick of a sector that’s doing just fine

Compliance Doctor

So you’ve messed up, says Lee Werrell.

What’s the correct course of action?

07.14

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56

FCA Publications

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

Gill Cardy says it’s not just the payday lender that deserves censure

THE FRONTLINE: Woodman, don’t be hasty

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Pick of the Funds

Wronga

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

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Pensions Simplicity at Last

Mixed Messages

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News

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

Editor’s Soapbox

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Thinkers: Hyman Minsky

The Night They Re-Read Minsky.

Who’d have thought it?

The Other Side

Richard Harvey gets all steamed up about transparency

Editor: Michael Wilson editor@ifamagazine.com

Art Director: Tony Merlini

tony.merlini@thewowfactory.co.uk

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

‘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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This month’s contributors

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C O N T R I B U TO R S

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

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CONTENTS

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GUEST INSIGHT

Optimising Your Client Data

Peter Welch from Equifax continues his series on making the most of your data

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GUEST INSIGHT

What’s Your Business Worth?

And how do you optimise its attractiveness? Sanlam’s Oliver Couchman advises

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COVER STORY

Chainsaw Man

IFA Magazine talks to Henderson’s Chris Burvill about cautious funds, volatility and what’s really going on in the shrubbery

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Burning Issues - DFMs

We ask six major providers about their very different feelings on current and future trends

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INSIDE TRACK

The Fee Factor

If you go down to the woods today, you’d better take a long view with you. You’re going to be there a while

Dominic Clabby from Source ETF talks to IFA Magazine about the importance of fees to total returns

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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shorts

magazine

The New ISA Accounts

(NISAs) announced in the Budget came into effect on 1 July, with the eligible annual investment now up to £15,000. Individuals can now use these accounts for any combination of cash and shares. But commentators were divided as to how much demand would come from the general public – was the increase a hidden sop to the wealthy? Around 23 million, half the UK adult population, are currently thought to hold an ISA.

COUNT ME IN Faster than a speeding skean dhu, Scottish leader Alex Salmond’s response to David Cameron’s snub in Brussels was immaculately timed to hit the headlines right where it hurt The Prime Minister wasn’t even back from the June Brussels summit, after failing to stop the ‘insider stitch-up’ election of Jean-Claude Juncker to the presidency of the European Commission, before Mr Salmond had upped his game by declaring Scotland’s wish to join the EU as a full member if the rest of the United Kingdom should vote to withdraw.

The point here being that Mr Cameron had threatened his intention to bring forward the planned UK referendum on EU membership, which is currently pencilled in for the end of 2017. And that by contrasting

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vowed to close the so-called “quoted Eurobond exemption”, which he said costs the Exchequer up to £500 million in lost revenues every year. He also lambasted the £1 billion growth in the 2012 ‘tax gap’ between tax liabilities and achievable tax revenues at a time when the government had vowed to reduce the gap. Earlier, HMRC had said it had raised a record £23.9bn in additional tax this year though its crackdown on tax avoidance.

his pro-European credentials with London’s uncertain position he could hope to get round the obstacle that is still troubling him a little less deeply than it probably ought to.

The problem is that, at present, no country can accede to the European Union without joining the euro. And that, in order to join the euro, Scotland would need to get its fiscal deficit situation – and, indeed, its long-term debt burden – below the thresholds set by Brussels – namely, a maximum 3% of GDP for the annual deficit, and 60% of GDP for overall debt. Scotland’s comparable ratios, as far as they can be calculated, are 5.5% and 84% respectively.

So when you hear Scottish politicians talking about how a newly independent Scotland would abrogate a third of its debts, the issue they’re really trying to nail is how to meet the confounded Brussels targets.

NEWS

Eurozone bank base rates

Shadow Chancellor Ed Balls

are likely to stay at their present levels for “an extended period of time”, according to European Central Bank president Mario Draghi. The base lending rate was dropped from 0.25% to 0.15% in June.

Whisky Galore

With London still threatening to refuse an independent Scotland any continued membership of the sterling zone, it’s a serious issue indeed. But a bigger problem, for Europe, might be that few on the continent are very aware of Scotland’s economy. No one country is currently getting more than about 2% of its non-oil foreign sales, and the entire EU accounts for less than 15% of non-energy exports. Scotland’s whisky sales alone outweigh its financial services.

A tough sales proposition, then. But, that said, Mr Salmond has proved himself a capable adversary for Mr Cameron. And the 18 September referendum draws ever closer...

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NEWS

The US economy shrank

by 2.9% year-on-year in the first quarter of 2014, revised figures showed. That was the worst performance since 2009, caused by a harsh winter, slow healthcare growth and only a 1% growth in consumer spending. But 288,000 new jobs were created in June, bringing unemployment down to 6.1%, the lowest since September 2008.

UK house prices beat their 2007 peak, a report from Nationwide suggested. A 1% price rise in June had left them up 11.8% on a year earlier. The company said that average property prices were now £188,903, but in London they had reached £404,404 - 30% higher than in 2007.

Don’t Ask Me Auto-enrolment? Yes, that word rings some kind of a bell, Britain’s small and medium-sized enterprises seem to be saying. Isn’t it supposed to be coming in some time soon? Maybe we ought to look it up?

A new survey of UK advisers by business software and services provider Sage, who know a thing or two about payroll records, has revealed that only 21% of the 200 IFAs it consulted agreed with the proposition that small firms are aware of autoenrolment. Which is a little disconcerting, considering that around 8,000 businesses with between 50 and 249 employees need to have their workers enrolled onto a workplace pension by next April.

But it didn’t leave the advisers themselves looking particularly good either. 25% of the IFAs surveyed said they were not currently providing any advice on auto-enrolment – of whom 17% said that the administrative burden was putting them off. And 29% said that auto-enrolment was simply ‘not a priority’ for their clients – which may suggest that there’s trouble brewing soon.

It was, of course, a good thing that fully 69% of IFAs agree that they are best placed to advise SMEs on auto-enrolment – perhaps one of the most lucrative and attractive businesses to be opening up at the moment – but a separate Sage survey among small business owners in the UK had found that

just one in five SMEs had discussed the subject with an IFA in the last twelve months.

Meanwhile, as Steve Bee reminded IFA Magazine last month, another survey of 108 firms that have passed their staging dates showed that 43% of the respondents said their HR/payroll systems had been unable to cope with autoenrolment. But that among those that have yet to reach their staging dates, an alarming 77% believe their payroll systems will cope with the new system. Keep Calm and Whistle Loudly.

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NEWS

Blackrock reasserted

its dominance over Vanguard in the US ETF markets during the second quarter, figures from Bloomberg revealed.

BlackRock Inc’s iShares range had taken an estimated $18.1 billion in net deposits during the quarter - just half a neck ahead of first-quarter leader Vanguard Group Inc., also at $18.1 billion.

Of this, $8 billion was for emerging markets funds, including $6 billion for the iShares MSCI Emerging Markets ETF.scheme comes in next April.

The government’s

promise of investment advice on decumulation for new retirees looks set to hold, a survey by the Association of Professional Financial Advisers (APFA) seemed to show. 80% of the 237 financial advisers surveyed said they would see clients regardless of the size of their pension pots. The new scheme comes in next April.

Third Time Lucky?

At long last, Japan’s “Third Arrow” has been unveiled

by Prime Minister Shinzo Abe – marking the third and hopefully final stage of the premier’s programme for restoring growth to the battered economy. But the first two arrows largely failed.

Is this one any good?

It’s an important question, considering that so many of the developed world’s hopes for a resumption of economic growth depend on the Japanese getting their country moving again. America’s economic growth is slowing, after all, and Europe’s has been stalling.

World stock markets are still bumbling along at mid-year, with no obvious drivers for growth. But one thing we can say for certain is that by the first week of July - two weeks into Abe’s latest effort - the Tokyo stock market was showing no signs whatsoever of being enthused by the Third Arrow.

The First Arrow, in the spring of 2013, was basically a pledge to double the money supply with a protracted series of quantitative easing – the main point being that Japan was being crippled by deflationary fears and that a good solid bout of reflation was in order. Sure enough, consumer prices in Japan are now rising by a pleasant 1.5% - less than the Bank of Japan’s 2% target, but still a sound achievement.

The Second Arrow was a straight-downthe-line splurge of government spending – some $110 billion of adrenaline injected directly into the country’s main arteries. And although it looks superficially as though consumer spending has grown

– by enough to boost GDP by a massive 6.7% year-onyear in the first quarter, that was probably a one-off caused by April’s long-anticipated hike in sales taxes from 5% to 8%. The second quarter’s GDP growth is quite likely to be low or even negative. And three weeks after the Third Arrow, the Nikkei 225 was still skulking around at 5% below last December’s levels.

The Golden Shot

The Third Arrow has always been intended to do what the Second Arrow was likely to fail at. It was all very well pumping liquidity into Japanese businesses, but that would achieve nothing unless they could be persuaded to pass some, or most, of the money on to their workers. And to their shareholders too. At a time when businesses were fretting about their debts and keeping up their capital ratios, it wasn’t too inevitable that they’d open their chequebooks so easily.

The Third Arrow was described by the Financial Times the other week as looking more like a thousand small needles. There are provisions that demand changes to the corporate governance code; there are new rules that tighten up the way that listed companies treat their shareholders and open up their boardroom affairs for inspection; and there are labour reforms which should help to make it easier for companies to shed surplus jobs when required.

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India’s stock

listings by wealth management groups continued, as Bromsgrove-based AFH Financial achieved a £28 million listing on the Alternative Investment Market. AFH, which intends to use the money for adviser acquisitions, says it offers a more diverse and differentiated set of exit programmes than rivals such as St James’s Place. In May, wealth manager European Wealth had also achieved a £13 million listing.

Capping it all is a multi-year plan to reduce Japan’s very high corporation tax from 36% to 30% still half as high again as America’s, but then, what can you do when your government debt mountain is more than twice as big as your national output? Not much room for fiscal latitude there, it would seem.

But, as we’ve said, the Japanese stock market doesn’t like it yet. Maybe that’s because Mr Abe hasn’t quite shaken off the mistrust that grew around him the last time he was Japan’s premier.

(He was forced out of office by a corruption scandal

market was knocked out by a network outage, just as investors were speculating on the outcome of the 10 July Budget. It was the second outage in a month, and came as the Sensex approached a record level.

NEWS

The trend toward stock market

after barely a year.) Maybe it’s just that the proposed scale of Abe’s changes is so big that the market is quite properly taking its time to assess it. Maybe it’s the power shortages that are still in evidence after Japan’s last nuclear shutdown in 2011.

Or maybe they’re just waiting on the sidelines to see what everybody else does?

Either way, Mr Abe deserves credit for having attempted to shift a fiscal logjam that his For morehad comment predecessors spentand two related decadesarticles tryingvisit... to avoid.www.IFAmagazine.com Whether he’ll get it is another matter.

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NEWS

Bitcoins resumed

Old Mutual Wealth

, which consists of Skandia and Old Mutual Global Investors, completed its acquisition of adviser firm Intrinsic after getting regulatory approval for the deal. Intrinsic has some 3,000 advisers who will shortly be getting access to the Skandia platform. Old Mutual Wealth chief executive Paul Feeney (right) said, “Wealth management is not just for the wealthy. We believe passionately in this and want to improve access to wealth management services for people right across the UK.”

a h c t go As payday lender Wonga resigns itself to a £2.6 million bill for reimbursing around 45,000 customers who it had overcharged and hounded with unfair and misleading debt collection practices, there are reports that the industry is in retreat

their journey back to respectability as the auction of the Silk Road bitcoin hoard resulted in prices of $640, regaining their levels of early June.

Silk Road had been closed for facilitating illegal transactions.

Tightening regulatory practices – most recently, the April transfer of regulatory responsibility from the Office of Fair Trading to the Financial Conduct Authority – are making life unprofitable for many, according to a recent Financial Times investigation which declared that as many as half of the estimated 240 UK operators have left the industry since the start of 2013. In America, where many had their origins, new laws at state level are reining in the lenders’ ability to operate: only 37 states now allow their existence even under tight controls.

And from 2 July, payday lenders in Britain have been barred from rolling over clients’ loans more than twice, or from accessing their bank accounts directly, via a continuous payment authority (CPA). From now on the lenders will also lose the right to take partial payment if full payment is refused.

Tighter, Clearer, Safer

Meanwhile the FCA is setting out the outline of a proposed new cap on the cost of credit – with the intention of tightening the knot still further. Lenders are being required to place risk warnings on television advertisements to highlight the dangers of late payments, and we may soon see their removal from daytime television, where children are often watching.

Above all, perhaps, the government is anxious to stop multi-account borrowing, where consumers juggle their debts uselessly between lenders just to keep up payments and stop penalties.

"We believe that payday lending has a place; many people make use of these loans and pay off their debt without a hitch, so we don't want to stop that happening," says FCA chairman Martin Wheatley. "But this type of credit must only be offered to those that can afford it and payday lenders must not be allowed to drain money from a borrower's account. That is why we're imposing tighter affordability checks, and limiting the use of rollovers and continuous payment authorities."

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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

The Dubai stock market

Jihadist attacks in Iraq and Syria boosted the prices of oil and gold slightly, as fears grew about the implications for Iraq’s oil production and export capacity.

But there was no sign of a major rush toward volatile commodities.

rallied a little in July after losing a quarter of its value during May and June. The panic had been caused by worries about property developers who account for more than 30% of the market.

Normal Service Is Resumed More reassuring news is still coming in for Chancellor George Osborne As he savours the International Monetary Fund’s grudging concession that yes, it was rather beastly to him over his austerity package in the past, and that things do seem to have worked out better than its worst fears had indicated..

Retail sales, employment and even inflation all seem to be going in the right direction.

Stable oil prices have been a boon to productivity, even though nobody is feeling particularly confident about next winter’s gas supplies. Sterling has appreciated rapidly in the last month - which is either good or bad news depending whether you’re exporting or importing. Though it all seems to denote confidence.

The latest good news comes from the Markit/ CIPS services purchasing managers' index (PMI), released on 3 July, which shows a healthy reading of 57.7 where 50 would denote straight ahead.

Admittedly, June’s figure was slightly down from May's level of 58.6, but it’s still quite gloriously strong in comparison to the situation

of two or three years ago. And the services survey's employment index meanwhile rose to a record high of 58.8 in June, from 56.2 in May. What was also undoubtedly rather satisfying for Mr Osborne was that Britain’s European rivals continued to flag. The final Markit Eurozone manufacturing PMI was revised down to just 51.8, down from a flash estimate of 51.9 and the 52.2 the month before.

Markit chief economist Chris Williamson didn’t mince his words. "Alongside an ongoing surge in construction and the largest quarterly rise in manufacturing output for 20 years, the services PMI confirms that the economy is firing on all cylinders."

Mr Williamson added that the PMI data pointed toward UK economic growth of 0.8% in the second quarter of 2014, which would come on top of another 0.8% growth in the first quarter. And said that this made it more likely than not that an interest rate rise would occur late in 2014 rather than in 2015.

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

Backstabbers ‘BILLY NO-MATES’ CAMERON HAS MORE OF A COMMON INTEREST WITH BRUSSELS THAN HE LIKES TO ADMIT, SAYS MICHAEL WILSON

“A bad day for Europe.” As David Cameron declared it last month when Jean-Claude Juncker, Luxembourg’s very own Grey Suit, was finally elected to Europe’s top job - in open defiance of Britain’s demand that the president of the European Commission should have been appointed by the people, or at least by the European Parliament. And not by the combined Snouts of the Round Trough that he seemed to think Brussels had turned into.

Unfortunately, the fact that Cameron’s “cowardly” allies had deserted him almost to a man – leaving him facing a 26-2 defeat with only Hungary’s rather dodgy prime minister Viktor Orban for company – only made the humiliation worse. Instead of the campaigning, imaginative outsider who Britain really wanted in the job, we got a long-time Brussels insider who knew not just the corridors of power, but also the shady back staircases where the real dirty dealing was conducted.

Nearly Bounced by the Euro Club

So did Cameron have a point? Well, you can understand any paranoid tendencies that he might have displayed. It isn’t so very long since Britain faced the very real possibility of being bounced into another dastardly eurozone conspiracy, in the form of the uniform European financial transaction tax (EU FTT), which would have punished London with levies on just about every securities transaction that took place in the city - all share trades, all derivatives transactions and, goodness, practically everything other kind of transactions too.

I mean, if the sprawling legislative reach of off-topic Euro Club interests could go that far in setting the European agenda, what else might the evil swines have in store for any nation plucky enough to stay outside the euro? The Prime Minister was within his rights to ask.

The FTT Mess As it happened, it was hard to disagree with Britain’s view that the ill-fated FTT would have been a bad thing – if only because so much of London’s business is with non-EU nations that it would simply have ended up scooping up money from all around the world and funnelling it back into the EU coffers.

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MiFID II There wasn’t very much more encouragement to be drawn from the tortuous process that had

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ED ’S SOAPBOX

The levy would have cheesed off the Americans and the Japanese, and it might have crippled London’s standing in the derivatives market.

That would have made an envious Paris and an underrated Frankfurt very happy, but it wouldn’t have done much for cross-Channel harmony.

Fortunately for Mr Cameron, the FTT task was made easier by the fact that the dastardly eurozone conspirators couldn’t agree between themselves on how much to charge and who to charge it to. So the project was swiftly supplanted by a private eleven-nation deal that was supposed to have gone into action last January but probably won’t happen now until 2016. Phew, we can breathe again.

finally led to the delayed decision on implementing the Markets in Financial Instruments Directive (MiFID) – a sort of pan-European answer to RDR that aimed to establish uniform standards of consumer protection in all parts of the European Union, but with various bells and whistles attached, and with more regulatory grunt behind it. (MiFID II outranks RDR and might have made it redundant, were it not for the fact that the two projects concur on many subjects.)

But not, scarily, all of them. For an anxious two years, Mr Cameron was forced to deal with the very real possibility that the MiFID monster in Europe’s basement might decide to ban execution-only trading for anyone who didn’t happen to be a sophisticated investor.

Forget about minor matters like Ucis - this would have practically outlawed quite a lot of what we Brits regard as our sovereign liberties.

July 2014

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ED ’S SOAPBOX

magazine...

But fortunately, that idea too was destined for the big round filing cabinet. When the European regulators finally drew up the final version exactly a year ago, there was nothing much in it apart from some commonsense rulings on marketing and consumer guarantees, plus some controls on ‘dark pools’ and high frequency trading.

Don’t imagine, though, that MiFID II has seen the light of day yet. Last year’s agreement on the final draft might have been two years overdue, but it still won’t be ready for rubberstamping for another couple of years yet. That’s Brussels’s preferred way of working, and on this occasion it didn’t work out so badly for Mr Cameron, who would rather the whole thing had carried on slumbering in its squalid basement for as long as it took to win the next UK election.

Better News On the Banking Front Meanwhile, whether we appreciate it or not, the European elite – including, yes, Mr Juncker himself – have not made a bad job at all of rescuing the eurozone from its self-imposed crisis.

It’s become customary to slate the European Central Bank’s performance, but it stands up to closer inspection surprisingly well.

You won’t need reminding that the 2008 financial crisis left Europe in somewhat more of a mess than almost anywhere in the developed world. From Portugal to Cyprus, from Dublin to Athens, the plight of the PIIGs came horribly close to government-guaranteed meltdown. And although the specific causes were various, what it came down to in most cases was that an awful lot of government debt was parked with the same countries’ banking institutions which hadn’t wanted to buy the bonds but had had no option, because that was what banks were supposed to do, dammit. There were other complications, such as the fact that French institutions seemed to be carrying a scary amount of Greek and Cypriot debt, but that seems a mere quibble.)

And that the impact of what might well have become non-performing loans had been enough to put the skids under the very adequacy of the aforementioned banks. And that the ECB had been technically powerless to intervene because, unlike any other central bank you can name, it did not have the mandate to issue bonds.

If that seemed like a dangerous anomaly at the time, it might have been a useful factor in retrospect because it forced Germany’s bankers into a hard-headed reassessment of how they viewed their spendthrift southern counterparts.

Greece’s urgent need for aid clashed with Germany’s folk-memory of hyperinflation in the 1920s and 1930s - resulting in a flat refusal to sanction the issue of eurozone bonds in the name of what Germans saw as their role as the locomotive of Europe – sober, unadventurous, risk-averse and

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generally everything that Greece and Portugal wasn’t. For a while, deadlock threatened.

PIIGs Can Fly Looking back, it’s rather hard to say exactly why all this should have been sorted out by ECB president Mario Droghi’s declaration in July 2012 that he would do “whatever it takes” to rescue the euro. Perhaps it was the threatening tone of voice that Mr Droghi adopted, or maybe it was his dark and vaguely threatening addition – “and believe me it will be enough” – to convey that he meant business, and that anyone who doubted him might as well have been wearing concrete boots.

Whatever it was that Mr Draghi did right, he did it very right indeed. The ferocious undertone of his statement was enough to send petulant Greece’s government whimpering back to the grindstone where it needed to be. Portugal, Ireland and eventually Cyprus whipped their bankers – and, in some cases, their bondholders – into a more serious frame and mind, and somehow things started to work again. By last year, the PIIGs were starting to return to the bond markets without fear of being humbled by sky-high coupons. By the start of July 2014, ten year Greek bonds were delivering yields of 5.9%, Portuguese paper was worth a paltry 3.6% and Ireland was running at 2.35% - actually slightly less than gilts. And if that isn’t a wake-up call, I don’t know what is.

Either way, the European fiscal situation has stabilised massively. And without the need for Draghi to come good on his plan to raise Eurozone bonds through the ECB. That in itself would have been a monster task, because it would have required enabling legislation from

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07/07/2014 17:19

And So toward Banking Union

Freed in this way from the need to actually do any bailing out – and hence, by extension, to find the legal wherewithal for issuing Eurozone debt – the ECB has been able to focus on the more worthy task of sorting out the banks themselves. And this year Europe has come one step closer to making a difference.

April brought approval from the European Parliament for three key planks of banking union, which collectively amount to a substantial shift of power toward the EU – and, conversely, away from the various national governments and financial supervisors. And the new legislation, which is scheduled for a phased introduction beginning in 2015, will change things not just for the euro zone countries but also for any other EU members who might wish to join.

(Hmmm, that’s Britain ruled out, then.) n Between now and 2025 (good grief), the grand project that will unfold in Europe will force governments to set up proper deposit guarantee schemes that will ensure you get your money back within seven days if your bank goes belly up. About €44bn in new deposits will be required. n Another provision takes the task of folding an insolvent bank out of the national government’s hands and places it with a new EU body. The so-called Single Resolution Mechanism was deemed necessary because

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ED ’S SOAPBOX

every single Eurozone nation, and it would have taken longer than the world could afford to wait. A first-class job, then, and well done.

some member governments behaved irresponsibly in 2008, or because they favoured their own citizens above foreigners. n A third provision finally settles the question of how much of the pain shareholders and bondholders should carry before public funds are employed in a bank bailout. The innovation in this Bank Recovery and Resolution Directive won’t change things for shareholders, because they’re already in line for the losses; but bondholders won’t be so happy.

Now, about those bank bailouts. They’ll only be allowed if the EU approves. When a bank fails, the first 8% of the firm’s liabilities must be carried by shareholders and bondholders. And where a country has opted out of the banking union, it must build up its own resolution funds.

Will it work? Not at first. It’s estimated that the total resolution funds required will still be as low as €55bn after eight years have passed – although they’ll carry on growing till 2025.

Now, compare that to the €600bn that European governments spent on rescues in the financial crisis of 2008-09, and you’ll observe a gap. A big one...

Back to Cameron

There isn’t much doubt that part of Mr Cameron’s discomfiture is down to the dislike he gets from his own, more hard-line Tory grassroots. If he doesn’t stand up and strut his noisy stuff about taking Britain out of the EU, he might as well resign his post now, because someone more right-wing will move into Number 10 to take the job forward.

But the welcome that the outwardly prickly Mr Cameron got from some of his fellow European leaders after the summit was notable for its warmth. No, of course we don’t want to lose Europe’s third biggest economy, gushed Angela Merkel. Well, indeed so. And in an age when Washington looks increasingly uninterested in its European allies, where would Britain turn if the bloc that buys 60% of its exports ended up behind a trade and tariff wall?

But my guess is that a subtler game is being played. Europe’s leaders are old hands at public fallings-out and private solidarity.

A ‘hypocritical’ tendency which enraged Mrs Thatcher, certainly - but which has also helped to create a more robust and shocktolerant European system than the European rejectionists appear to recognise. The prime minister would do well not to underestimate its slightly squishy durability.

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!

July 2014

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07/07/2014 22:21

U S I N G D ATA

WHAT DOES SUCCESS LOOK LIKE? PETER WELCH FROM DATA PROVIDER EQUIFAX SAYS IT’S ALL ABOUT HAVING A DATA STRATEGY If you’re reading this article, you’re probably already quite serious about running your business. What I hope to be able to do is provide some insight that will help you improve – at least in some small part – your business strategy to achieve success.

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U S I N G D ATA

magazine... for today ’s discerning financial and investment professional But first, it might be helpful if you ask yourself a fundamental question which is: why are you in business? I’m pretty sure I can guess many answers: to make a profit; become a national brand; serve my customers and staff; make a difference.

But these goals alone don’t quite provide the clarity that truly guides a business to achieve its potential.

Start With the End in Mind In order to gain absolute clarity about where to steer the direction of a business, it’s worth applying a simple root cause technique to extract the pure essence of why the enterprise exists.

This involves using five ‘whys’, with each answer prompting the next question.

For example: Question 1: Why are you in business?

Answer: To make a profit

Question 3: Why do you need to build up value?

Answer: To sell it as a going concern

Question 2: Why do you need to make a profit?

Answer: To build up value in the business

Question 4: Why do you want to sell the business?

Answer: To retire early

Question 5: Why do you want to retire early?

Answer: I saw my parents work hard all their lives and retire late when they were too old to enjoy the fruits of their labours For many, if not the majority, of business owners, the real reason to be in business is to build up value in the firm, so as to enable either an exit at a fixed point in the future or an income from the business while not directly employed within it. The strategy for a business must, therefore, facilitate the full

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For more information on the services we can offer you and your clients, please don’t hesitate to contact us on 0800 612 9625 to speak to your specialist consultant or email us at FX@ifamagazine.com

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07/07/2014 22:21

Developing a Strategy

In the run up A good starting point when building a strategy is to look at the work of Michael Porter, the ‘godfather’ of competition and corporate strategy.

Porter says that a business needs to formulate its strategy around one of the following: n Price – Customers will be attracted to your services and will remain loyal

U S I N G D ATA

or partial sale of a going concern which is not reliant on the current owner/s remaining in place.

because they perceive they are getting better value for money than they can reasonably find elsewhere. In retail the obvious examples are Aldi, Asda and Lidl. n Focus – The business sets itself out to be the market leader in a narrow area of advice/service/ customer group. A firm that specialises in advising clients in the legal profession would be a good example of a focussed strategy.

n Differentiation – The proposition stands out clearly from its competitors.

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Using Data.indd 23

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23 07/07/2014 22:22

U S I N G D ATA

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

Execution

Porter argues that a firm should stick to one of these three strategies otherwise it can become ‘stuck in the middle’ and lose competitive advantage to other organisations that are competing on price, focus or differentiation.

Most small to medium sized enterprises (SMEs) in the financial advice market will need to focus on differentiation.

This is because they’re unlikely to have the scale or resources to invest sufficiently to compete on price or to focus on a narrow segment of the market.

If you’ve got a clearly defined business goal, you will know whether to adopt a price, focussed or differentiated strategy in order to achieve it. The question then, is how do you formulate a strategy and, secondly, how do you measure how well you’re delivering against it?

I believe the answer can be found in data.

Know Your Market

First, an audit of your current market position is essential.

There is a remarkable amount of data available to help with this if you know where to look and it doesn’t need to be a time consuming or expensive exercise.

Using current resources available to an Intermediary firm, it’s possible to understand the following with some quick desktop research: n Who is your competition (now and in the future)? n What’s your market share (locally or, if relevant nationally)? n How are you differentiated?

(Or, how can you be further differentiated)?

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n How does your pricing structure (fees) compare to your competitors? › What (if any) are the common themes in terms of the make-up of your customers? › Understanding your own customers; › Knowing who’s profitable; › Knowing what they look like – and where can you get more that look the same?

Remember, here, the world is changing, and referrals will not last forever, as a client bank ages and de-cumulates its wealth.

SWOT Shop

Much of the comparative data to answer the above is available on the free-to-use website www. mytouchstone.co.uk. And by answering these questions, you’ll be assembling what you need to put together a simple SWOT (strengths, weaknesses, opportunities, threats) analysis - which, again, will inform you while shaping your strategy.

Having mined the data identified above, you’ll then have a better sense of where your business sits relative to the various opportunities and threats. You will clearly know where you need to get to.

It will then be your job as a business leader to develop the relevant strategy to best achieve your goals, navigating within the landscape you’ve mapped out.

Execution

It is, however, one thing developing a strategy for a business and an altogether

different challenge executing it. By focussing on the real drivers behind a firm’s strategy, a number of areas for change in direction and the operation of the business may be identified.

One simple means of aiding execution is the use of a balanced scorecard. This is simply a list of activities that are crucial to the delivery of your strategy with simple SMART (specific, measurable, achievable, realistic and timebound) targets against them.

Measures that typically appear on a balanced scorecard are: n Focus – Marketing, client acquisition, market share what measures tell you what clients really think of the service they receive? n Process/operations – In terms of running the business what key service measures (including compliance) should be reviewed? n Financial – revenue measures that track performance against long term strategic goals n Research and Development – including learning and growth what progress has been made to service/ proposition development?

Prepared for Success

So, to summarise, in order to get your firm on the right course for long term success get to the heart of what success looks like for you. Do your research; use available data. Develop a strategy that takes into account the market and competition as well as your capabilities.

And focus on measuring performance against strategic goals step by step.

For more comment and related articles visit...

IFAmagazine.com

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07/07/2014 22:22

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Using Data.indd 25

Job No: 48350-10

Publication: IFA Magazine

Size: 297x210

Ins Date: June 2014

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07/07/2014 22:22

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

GETTING THE PRICE RIGHT

SAM OAKES, OF ACQUISITION BROKERAGE GUNNER & CO TALKS TO OLIVER COUCHMAN, HEAD OF PARTNERSHIPS AT SANLAM, ABOUT WAYS OF MAXIMISING THE SALE VALUE OF AN IFA FIRM Value is in the eyes of the beholder.

Obvious, but no less true for that.

Of course, you might know a wealthy Saudi Arabian Oil Sheikh (or just a neighbour) who already wants to invest in your business – but, barring this eventuality, we are talking about maximising the objective chances

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of meeting a higher valuation when the marketing/networking moment arises.

Professional advisers (Solicitors, Corporate Finance Accountants) – and Lenders - will also rely on accepted metrics/objective assessments to validate the value that’s being discussed. How do we make ourselves look as good as possible?

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Enhancers and Detractors

Maximising embedded value is about: n Reducing (or certainly controlling) costs; n Maximising revenue; n Reducing risks These steps are more likely to lead to ‘sustainable’ profit which acquirers will pay more for – on the basic “P/E multiple” principle. Which says, of course, that the price an acquirer pays will be a multiple of the average annualised earnings they anticipate. Mathematically, (and simply) this “p/e” ratio will give the number of ‘years’ it will take for the deal to pay for itself.

So it’s important to take a long, cool, unsentimental look at your business before you begin the process. Here, for instance, are some of the key things a buyer will be looking for:

THE HUMAN RESOURCE

Getting the Metrics Right

Positive Value Enhancers – for an Advisory Business (Valuation/Due Diligence/Industry Comparables) • Properly segmented and communicated client propositions • A consistent client experience – methods and processes • A de-risking of the advisory cycle. Client awareness and audit trail • Assets under Management and Influence • Relevant and accurate client information • Reliable business management information – accessible and sliceable • Predictability and expectation of business streams • Brand articulation – by clients – what they know, and also value • High persistency rates/low latent (and actual) complaints (de-risking) • Scalability/potential to grow/’fleet-of-foot’ qualities • Access to industry expertise/change assistance • Clear succession planning/staff progression

And here are a few of the weaknesses that might count against you: Value Detractors

Some acquirers (like those who buy Premier League football clubs) may buy for kudos, or other emotive reasons – but for most people acquiring a business, it’s the return that is important.So the price someone is willing to pay for a business is linked to the belief in the return that the acquirer is likely to get over the journey of the investment.

When someone is conducting their review or ‘due diligence’ into a vendor’s business, they will look for both the ‘detractors’ and ‘enhancers’ to the valuation. These will conveniently spin off from the same tripod of Cost, Revenue and Risk that we just examined.

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Owner seeking immediate exit

• Owner/key client relationship holders leave business before appropriate succession planning/implementation

Reliance on owner for key clients

• May lead to greater proportion of consideration being deferred

Reliance on a small group of clients

• High proportion of overall revenue from few key clients • Results in lower multiple or discount applied to future revenues

Poor quality of client records

• You can’t experience how valuable your clients are • Management information is key

Poor compliance monitoring

• Poor compliance monitoring will rule out most buyers • Buyers apply discount and allow for likely correction costs

Current economic environment

• Current market multiples reflect lower AUMs, lower forecast revenues, lower propensity to invest, heightened cost and lack of debt

Not to mention, of course, anything that increases Cost and Risk – or limits Revenue.

How Do We Market Ourselves For a Sale?

Good question. Acquirers will value based on the likelihood of a return – but, as with a house

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

purchase, acquirers will be more likely to ‘take notice’ of the positive traits of a business if they are well packaged and well presented.

So – Management Information (MI) which is the right blend of concise summary and supporting info is essential.

A ‘Vendor’s pack’ – much in the way you would put your house on the market.

How Do We Make Ourselves Stand Out? We live in an intangible financial services industry – however, if you can tell the personal story – and include what makes your business different – this will attract more attention.

Testimonials or citations from clients will help.

So will a strong articulation of your brand.

WHAT SORT OF DEALS CAN BE DONE? Some deals are done to buy “the client bank” – or the assets of the business – and in old language, this was commonly done on “X times renewal”.

Say, two to three times renewal.

Remember, no one “owns” clients!

– only the right/opportunity to market clients. So this is about how loyal/attached the clients are to the vendor’s business – and, how likely this is to transfer forward with the transition to the new acquirer.

Since the language of RDR came in (meaning ‘adviser charging’), we widen ‘renewal’ to cover predictable, repeatable annual revenue which can be expected to come in each year.

(As long as any acquirer would expect to collect the same fees when they roll forwards the transaction – these could be included such as with the old concept of “renewal”).

Other Deals?

Other deals are done on a figure of “X times EBITDA” – (Earnings Before Interest, Tax Depreciation and Amortisation) – or the annualised earnings.

This seeks to find an annual figure for the ‘cash generation’ within the business – the purpose of EBITDA is to find a figure that can be more easily (fairly) compared and takes out any unusual / variable spending so the raw cash generation is shown.

A figure of 5-7 x EBITDA is common in our Industry.

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HOW IS THE DEAL COMPLETED? What about the actual mechanics (method) of payment / in completing the deal? This is a very common issue.

It is all about the negotiation.

Although often, if a vendor seeks a large (or even entire) payment of the deal being ‘upfront’ or immediate, then all the risk sits with the acquirer and the acquirer will discount their offer, based on this risk.

Fast Versus Slow In other words, a vendor might find it achieves a lower lump sum price if its wish is to walk off to their early exit (from the business) in a matter of days or weeks.

The other, more gradual route moves through a spectrum of ‘remaining on board’ – through a form of ‘earn out’ period. And whilst an upfront % (of some 10 – 50%) is possible, the balance would then be earned over a 1-5 year period, post deal. This moves the risk further toward the vendor, who would essentially have ‘targets’ to meet, in order to achieve the fullest valuation pot figure.

Business Plan The way the deals here are normally done is that a “business plan” is completed through the dialogue between the vendor and the purchaser – and the business plan will show a certain predicted ‘performance’ over the earn-out period.

If the business plan is ‘met’ – this would (for example) bring in “£X” amount of profit over the journey. If this is then divided by the (say) 3 year journey, we get the annual profit figure – and this can be given the “X times EBITDA” treatment.

This comes up with a ‘pot’ of deal money which is planned/anticipated. If this pot was, say, £1 million, then the parties might agree a 20% initial up-front payment (£200,000) with the balance of £800,000 only being earned if the business plan comes to fruition.

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THE HUMAN RESOURCE

ADKAR is a helpful ideogram used with Financial Advisory businesses:

ADKAR Awareness of need for change Desire to participate and support change Knowledge of how to change Ability to implement required skills and behaviours Reinforcement to sustain the change

The above is unlikely to be an ‘all or nothing’ balancing payment – but there would be a proportionate lessening of the balancing payment where the business plan was proportionately unfulfilled.

HOW CAN I GET MY BUSINESS SHIP SHAPE? Firstly, we need to recognise the need for change. This is actually harder than people think.

Change in our Industry, is about our heart and our head.

When change happens, be it moving house or the retail purchase of a shiny iPod, M.R.I. scanning of our brain shows that it is emotion that drives our inclination to accept (or reject) the change presented before us. Not logic – but emotion. We are all humans, after all.

An important lesson is to ensure inclusion and engagement (early on) from staff with allocated responsibilities for their own aspects of the ‘ship-shape’ change. People naturally prefer their own change contributions, over those directed to them, from on high.

So, to the Practicalities What is going to help a business enhance its readiness?

We begin with a list of the proven “Value Enhancers” we saw on page 27 – the factors that due-diligence professionals use whenever they value the monetary worth of IFA Firms in our RDR context. And which will in turn define

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what they are willing to pay for this IFA – based also, of course, on industry comparables A due-diligence professional will apply a collective of these criteria and will use a set of spreadsheets to apply scorings and “Monetary equivalence” calculations based on them.

They will further discount the valuation figures where they perceive uncertainty and risk (sitting either within the client bank or across the wider Firm’s governance). A duediligence professional will not be swayed by emotional persuasions or standalone statements of belief – but will ask for evidence! and data that supports the case.

How can I address these points, then?

“By making a start” would be a common reply – and by receiving help and expertise.

For instance: n By applying the FSA’s strong Risk Profiling guidance to demonstrate a clear coverage of “Tolerance, Capacity and Goals” in client risk profiling. n By using the IFA’s own data and testing the “flexing” of customer propositions in order to show how loyal the IFA business is to the different segments declared. Is there discrete daylight between propositions, or do they morph into one another? n By testing the different remuneration models against a mapping of client case sizesand client need scenarios – to examine the satisfaction of TCF as well as expected profit margins for the IFA business.

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

THE REGULATORY SIDE OF THINGS Elements of regulatory uncertainty remain; and whilst changes to the urgency and nature of any change is supremely relevant, a business implementing consistent, clean and de-risked processes (even outside of RDR) is a savvy one, for succession and competitive advantage.

Richard Komarniski (“The Human Factors”) comments on distraction and a lack of focus being the most common blockages to change – and whilst consultants will provide different quantities and qualities of guidance, the honest truth is that IFAs have much of the required ability and some (carefully apportioned) capacity to implement RDR change.

And Finally… n According to David A. Ricks “Blunders in International Business” – by far the most common reason for business goals failing is a lack of change - not too much change! Don’t be afraid to challenge yourself, and your assumptions. n Aim high - a changing business should result with empowered, able staff who have the skills to leave but the desire to stay. n An ideal purchase target is a company that has processes that are robust & scalable – but hard for other businesses to copy from the

Mapping Advisory Time and Profitability The chart opposite represents an IFA’s test of the average time spend (in hours) for different client case sizes. On simple mathematics, different remuneration charging leads to different profit margins (or losses). The empowerment this exercise offers the financial adviser is to add their own “hourly rate worth” and unique hourly spend data into their own calculations, to work out profit and loss.

The next step is to map a full spectrum of “Fit for purpose” Investment Solutions (from Full DFM, through Model Portfolios, OEICs, Index/Passive Funds/ using an online Web/Portal) to ensure the IFA can offer robust advice, within a profitable framework.

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outside.

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ACQUISITION AND SALES

O F I FA BUSINESSES Retirement?

Time for a change?

There are countless reasons to dispose of an IFA business, just as there are countless reasons to get hold of one.

W E A R E A SP EC I ALIST F I N A N CI A L S A L E S A N D BR O KE R AGE BU S I NES S .

We help company owners looking to sell, exit or retire from the industry to optimise their company asset value with an appropriate solution for them, their clients and other stakeholders within their business. We do this by matching them up with appropriate acquirers, whose requirements and solutions are aligned to the needs and wishes of the seller.

We work with leading companies looking to grow and develop their businesses by acquiring or partnering with financial advisory firms.

If you would like to discuss options to sell, exit or retire, or acquire IFA businesses, please get in touch for a confidential discussion. +44 (0)117 908 9686 sam.oakes@gunnerandco.com

gunnerandco.com

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07/07/2014 22:16

Chainsaw Envy TIMBER! NEIL MARTIN LEARNS SOME UNEXPECTED THINGS ABOUT CAUTIOUS MANAGEMENT FROM HENDERSON’S CHRIS BURVILL

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GUEST INSIGHT

Chainsaw envy was one thing I had not expected to experience when talking to Chris Burvill, Director of UK Equities at Henderson Global Investors.

But then, it was an unconventional conversation to start with.

We had been talking about his role as lead manager of the Henderson Cautious Managed Fund, when I asked him what he did to relax? Bear in mind that for over 20 years (he was previously at Gartmore, Investec and Commercial Union), he has been a steady hand on the tiller on investment situations that offer a conservative outlook, looking to steer a course through both calm and choppy waters.

As befits a manager whose fund is not designed to be on the front line, his thoughts tend to come with a sharp focus and clear reasoning learnt from long experience. This is a man not prone to marketing jargon, or one who indulges in City speak to hide a two-minute view of the markets. This is the man you’d want on the other end of the line when your portfolio is in freefall.

worry, at least you’ve got some exposure, but that arguably is exactly the point for retail investors.”

Safety Stance The Henderson Cautious Managed Fund is a mixture of blue-chip equities, bonds and cash. Its whole reason for being is to provide income and capital growth, and to have less volatility than a pure equity fund. The fund’s yield was running at 3.3% at 30 April.

The asset class breakdown of the fund is just over half in equities (stalwarts such as HSBC, BP and Royal Dutch Shell); bonds at around 33% (the biggest being United Kingdom Gilt Inflation Linked 2.50% 2016); and the remainder in cash.

The idea of the Henderson fund is to offer some balance to volatility, although Burvill did admit that there’s only so much they can do in difficult times. “I need to be careful, we are only in equities and bonds, we don’t hold gold, and we don’t hold property directly, as some of our competitors do.

Mind Those Teeth So, when it came to his hobbies, I wrongly guessed he might admit to stamp collecting, collating a butterfly collection, or maybe studying mediaeval German poetry in a book-lined study? I was surprised, then, when he said that he likes to relax with a very large chainsaw.

“I’ve got this ridiculously large chainsaw,” he explained, with a wry smile. “To which my wife draws every analogy that women do.”

Now, I happen to own a small electric chainsaw myself, so for some inexplicable reason I felt a bit inadequate when mentioning this - hiding my embarrassment with ‘manly’ talk about what should happen if the chain came off (a thought that keeps me awake at night). As one who is obviously more knowledgeable than me, Burvill politely explained that it’s not the chain that is the worry, but the way it can bounce off the wood and “…go through people’s heads…”

Hard Hat I’ll explain what Burvill does with his massive chainsaw at the end of this report. But first, let’s turn our attention to the Henderson Cautious Fund – and to my first question.

Given that we’re at that stage of the recovery when talk of caution and safe harbours is receding, are these funds becoming harder to market to the private investor?

Back came an honest answer. “Absolutely.

I’m trying to capture investors in both sides of the market, the markets goes down and I say oh well, hopefully we won’t go down as far as the market, and the market goes up and we’ll say don’t

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“I don’t hedge, I don’t sell the futures, anything clever like that. There’s a responsibility on the individual investor not to expect miracles from the fund when markets are down.”

“I still feel there’s a responsibility with the investor. If markets go down, if interest rates go flying, and bonds do badly, and supposing there’s a high inflation environment, and equities struggle, then I’ll obviously do the best I can to mitigate that - but you know, I am beholden to the markets.

“And if markets fall, I don’t hedge, I don’t sell the futures, anything clever like that. There’s a responsibility on the individual investor not to expect miracles from the fund when markets are down.”

Taking Responsibility Asked whether people will move away from the fund now that we are in a less cautious time, Burvill was clear. “Even if you are positive about the market, extremely positive, does a cautious fund not make sense to you? Because what it’s doing is giving some exposure to the market - within our sector we have quite high weightings

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GUEST INSIGHT

magazine... for today ’s discerning financial and investment professional in equities - but we are giving them a little bit of optionality.”

“If shares have gone a little bit too far, too soon, if there’s a bad day in the market, we’re more likely to be buying, because of the way the fund is constructed. Whereas a full-on equity, high beta equity fund is a one way bet: if markets go up you’ll do very well, but if they go down, you don’t have much in reserve. So I fully accept that if markets go up, it’s going to be hard for us to compete against 100% invested equity funds, although over the very long term, we can nearly keep up with the all-share, despite having far too much cash…”

There is much that the management can do to shield the portfolio. “If we see a problem coming, we can sell shares, we can raise our cash, we can go in short dated bonds, we can shorten duration, we can go more into index linked bonds, if we think that there is inflation coming.

“But all those points will only take us so far if we’re going to try and achieve some good long term capital growth. There is another side to it - if things don’t work out, then by definition we’re likely to struggle and people would have been better leaving cash on deposit.

“In the end, investors still need to make that decision themselves - that they want to be involved in the markets.”

What’s Ready for Felling?

Yet with a fund which is designed to offer what Burvill describes as a balance for a portfolio, there have been flashes of excitement, driven by the amount of mergers and acquisitions speculation in the market. The recent battle for Astra Zeneca has been a prime example.

“I’m fascinated by Astra Zeneca, a share I’ve held for a while, on the belief that at some stage it would come good. I wasn’t exactly sure how it was going to, but I felt there was some underlying value there.”

“So I was holding the share perfectly happy at £35, and the company feels confident enough about its prospects to reject a bid at £55. Now that’s a huge, huge premium.

But I had no idea that there was quite such value in there, even at the current share price of forty two, forty three pounds.”

I asked if he had been tempted to take a profit at £55? “I didn’t, I missed it, but I have bought more at the lower level, and I still think the stock is absolutely interesting if things improve for the company as the management think.

“The management probably took pretty good advice to refuse £55. Do they have a feeling that the stock

market’s not noticed. But I think the key point is, here’s a stock that hadn’t really come up high on everyone’s radar, look at the underlying value, then rejects a bid at a huge premium, so what implications does that have for lots of other stocks?”

Burvill continued with his train of thought: “It means that if there are bidders out there - and we are thinking about the Americans being more enthusiastic about acquisitions, and there’s a great number of stocks on our portfolio, because we run a portfolio of the more stable blue chip companies that tend to be undervalued - it begs a question that surely there’s some real upside from speculative interest.”

“Normally you’d downplay that.

You’d say, ‘isn’t that a little bit low quality argument for buying the market?’ By all means say that, but I’m dealing in the practical world - I think there are companies that can be bid for at huge premiums.”

As an example of this, the fund has a large holding in Smith and Nephew. Burvill said of that stock: “Stryker may well be interested, it’s perfectly reasonable for me to argue that. Look at the long term value in that company and that it could be a lot higher than even the current share price.”

Which shows that although Burvill runs a cautious fund, he still has his eyes on a good deal.

About That Chainsaw...

Yes, we thought you’d be wondering. As for the chainsaw, Burvill is not clearing a forest, or chopping wood for a doomsday scenario, but clearing a few trees in his garden which have been brought down following the recent windy weather.

He took out his mobile and showed me some pictures of wooden planks: “There we go, now look at that, that’s cherry, if I can keep it straight and stop it from splitting, you could make quite a nice table out of that. It’s beautiful stuff.”

We end up joking that if Burvill should ever need another job, at least he has his chainsaw and a half-finished cherry wood table waiting for him.

Somehow though, I reckon that that cherry tree table will have to wait a while – Burvill has the markets to sort out first.

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07/07/2014 17:21

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DFM – Can Anybody Smell Smoke?

IFA MAGAZINE ASKS THE DFMs ABOUT BUSINESS, REGULATION AND THEIR VIEW OF THE FUTURE We’ve been raising a small inferno recently with our examination of the DFM issue, especially on the IFA Magazine website. Okay, that might just possibly have been down to our provocative choice of an image that showed Dr Faustus signing over his soul to Mephistopheles – and certainly, that was how some readers saw the issue, judging by some of the, ahem, ‘vigorous’ responses we received.

So what better topic for a Burning Issue round-up of the view from the other side of the divide? We asked a group of DFM specialists for their own views on the pros, the cons and the definitelymaybes of the present situation.

Our thanks, then, to Steve Trott, Proposition Director at Parmenion; David Cowell, MD of Myddleton Croft; Andrew Thompson, Head of Strategic Distribution at Sarasin; Gareth Johnson and Robin Beer, respectively Director of Managed Investment Services and Regional Director at Brewin Dolphin; and Martin Baines, CEO of Quilter Cheviot. Good sports, all of them.

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1

What do you see as the single biggest driver of growth for the DFM sector at the moment? Whole of market? Price considerations?

Or that advisers are focusing their energies on planning activities where they feel more comfortable?

Gareth Johnson, Brewin Dolphin Outsourcing to a DFM can allow Advisers to remove the burden of investment research and investment committee work - thus allowing them to spend more time with their clients, the most valuable part of their relationship.

We know that clients value highly the face time with Advisers considering their life planning and tax planning; therefore outsourcing the investment management can assist firms as they look to service their client bank and perhaps re-engage with clients ahead of the sunset clause in 2016. Many Adviser firms will have legacy business, and they will be formulating plans to ensure that the removal of trail does not adversely impact their business while ensuring an optimal outcome for the client.

Martin Baines, Quilter Cheviot Many of the successful financial advice firms we work with are choosing to outsource investment management to specialists. This affords them a number of benefits, including more time with their clients to focus on financial planning, and more time to grow and develop new client relationships.

That puts them in a position whereby their relationship with their client is not subject to investment performance. We never forget that we earn our place at a client meeting by being accountable for delivering investment performance in line with client expectations. IFAs who continue to run money as well as providing financial planning services have to deliver consistently on both fronts.

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THE BURNING ISSUES

2

Unquestionably, the wave of new regulatory burdens arising from RDR has been a major factor behind the growth of DFM activity. Do you think we’re past the worst of that wave now, or is there more to come?

David Cowell, Myddleton Croft The biggest driver of growth for DMs like us, who only deal with business introduced by advisers, is the realisation by them that, because we tailor our service to their needs, rather than saying A, B or C - take it or leave it, we can actually save them expense AND increase their profits.

Price considerations are of course a factor, but we tailor the service or services to them and charge accordingly.

It does allow them to focus their efforts on client service and demonstrating the undoubted added value for their fees.

Steve Trott, Parmenion The future of both advice and the delivery of investment management depend upon technology. This has overhauled goods and services in every other sector, yet within the wealth management sector, the transformative power of technology lies largely untapped.

The World Wealth Report 2014 states that globally, 65% of high net worth individuals (HNWIs) expect to run most or all of their wealth relationships digitally in five years… not just younger HNWIs, not just those in lower wealth bands, and not just for investors who direct their own portfolios.

Good back end technology will allow DFMs to manage costs more efficiently and target bespoke fund management to a wider audience.

It’s not about providing model portfolios - it’s about giving Advisers the tools to differentiate themselves by offering a more tailored service with all the benefits of fund review and rebalancing.

Andrew Thompson, Sarasin Advisers are seeking to focus on their planning activities in order to justify their circa 1% fee, and also to protect themselves from “getting it wrong” at the investment level by outsourcing. Where a careful selection process is adopted and a genuine partnership with a DFM firm is created, the adviser owns the customer proposition and experience is enhanced without needing to invest heavily in building their own DFM infrastructure.

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Martin Baines, Quilter Cheviot RDR has been a catalyst for change in the industry. Outcomes such as increased professionalism, better transparency of services and charges are positive for all.

Many businesses were well prepared and have coped well with these changes.

However the administrative repercussions are yet to end. For example, where fee share l with DFMs are in place and the adviser has given the client advice since the beginning of the year, the fee share arrangements will need to cease by the end of 2014, with clients needing to sign new agreements to facilitate the payment of adviser charges agreed with their adviser.

We expect MiFID II to deliver its own set of challenges for the UK financial services arena, and watch and wait for further communication as to what this will mean for us all.

Andrew Thompson, Sarasin We believe the bulk of RDR related burdens are behind us, but that DFM activity will continue to increase, albeit at a lower rate than we have seen since RDR. There is still plenty of business in transition as IFA firms merge, so there will undeniably be more DFM activity to come.

As ever, though, the sting could come from the tail. Outsourcing principles are reasonably clear, and the question is how many advisers have a robust audit trail and methodology behind the selection of their DFM partners? How does the selected DFM fit with the adviser’s own CIP and what are the contingency plans if things go wrong?

Steve Trott, Parmenion Yes, inevitably there will be more regulation. We think that there may be a focus on Advisers’ due diligence processes, and perhaps on provision of ongoing service. The former, is likely to particularly impact Advisers running their own model portfolios who shoulder the significant responsibility of fund selection, fund review and fund rebalancing.

These Advisers are liable to provide best execution to their clients, and PI insurers are increasingly looking at risk within this area. These risks are even greater for funds without a discretionary mandate.

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magazine... for today ’s discerning financial and investment professional Gareth Johnson, Brewin Dolphin It is always difficult to predict what regulatory changes may occur in the medium term. However, I would expect the focus over the next few years to be on the assessment of implementation of the business/advice processes that have been put in place by Adviser firms, and whether these meet the requirements of the FCA. With the sunset clause just over the horizon, I have no doubt that this will lead to further adjustments to existing business models, and we expect the regulator to be looking for suitable client outcomes.

David Cowell, Myddleton Croft I don’t think that we will ever be past the worst, because even if the FCA can’t think of anything, then doubtless Europe will. However, it seems to me that whatever hoops we are all ordered to jump through, the major thing to get right is record keeping.

We have just gone through a hiatus over the change in reporting requirements on liquidity, where the FCA insisted on not only changing from XL to XBRL, but have done absolutely nothing to assist smaller DMs to facilitate the change. The first quote we had to do this was £10,000!

What do we get for our FCA fees? They buy bigger and more expensive truncheons with which to beat us!

3

Are you getting more pressure from advisers for flexibility in the structure of your relationships with them?

Martin Baines, Quilter Cheviot We have always taken a flexible approach to the way we work with financial advisers. One of the main areas we are seeing questions being raised at present is suitability. Specifically, who is taking responsibility for the ongoing suitability of the portfolio managed on behalf of the client?

We are very clear on this point – we take full responsibility for the suitability of all investment portfolios we manage on behalf of clients, except in the case where an IFA has pre-selected one of our MPS strategies, and we have had no contact with the client and/or IFA - for example, where our services are available on third party platforms.

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Robin Beer, Brewin Dolphin Not particularly. Most Advisers are very comfortable with our transparency over the roles and responsibilities of each party in the suitability process. We expect our Adviser partners to cover three key areas: suitability of service, assessment of client needs/KYC gathering, and assessing the correct risk level for the client We will then take full responsibility for the suitability of the investments and portfolio construction, to ensure that this aligns to the risk mandate that the Adviser has agreed with the client.

With our Managed Funds Service (MFS), the service is structured such that we have no relationship with the underlying client, and the Adviser will then select the relevant model to satisfy the risk appetite of the underlying client. This process is clear and transparent and allows the Adviser to translate the story to the underlying client simply while assisting them with the investment goals.

Andrew Thompson, Sarasin Yes. One size does not fit all. Some advisers are happy to refer clients and collaborate, others keep tight controls and insist on platform-related model portfolios where the DFM never interfaces with the client, and still others prefer a hybrid or a different approach. Those firms that can offer an advisory as well as discretionary service will continue to attract certain types of IFAs or clients.

David Cowell, Myddleton Croft We always say to advisers that we will look at anything which is both legal and profitable. This is one of the benefits of using a ‘boutique’ DM. To reinforce what was said in the answer to question 1, we tailor our service to the adviser’s requirements.

James Williams, Parmenion We are incredibly flexible already, so it is not an issue for us. Unlike traditional discretionary fund managers, we put power in the Advisers’ hand. They are empowered to offer bespoke solutions to clients through access to an infinite number of portfolios.

This is achieved easily and simply through technology. As it is our own technology, we retain the flexibility in shaping our services. What we have seen though, is a growing Adviser appreciation of our suite of white-labelled services.

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THE BURNING ISSUES

4

Do you think there’s been a softening of the perceived boundaries between independents and restricted advisers? Where will we be in five years from now?

David Cowell, Myddleton Croft I don’t really think that in the public’s eyes, there has ever been a boundary.

Only an organisation without legal responsibility would try to change the meaning of the word ‘independent’.

For example, does anyone really think that it has affected the amount of business done by St James’s Place?

Reasonable clients will deal with someone they trust and unintelligent ones will get conned. That is the way of the world. Of the 10 commandments, only 5 are ‘thou shalt nots’ and none of these have ever prevented anyone murdering or stealing or committing adultery.

Martin Baines, Quilter Cheviot The labels independent and restricted have always meant more to those of us in the industry than our clients. Quilter Cheviot is defined as restricted by the FCA, yet I am certain this is not a barrier to us winning new business or retaining existing clients.

I see the changes as more akin to a division of roles, where each professional brings a different specialism to the client.

We offer investment services only, and not advice or platform services. This sets us aside from many competitors and allows us to work in true partnership with both advisers and platforms to deliver investment outcomes in line with the expectations of our clients.

Successful advice firms offer financial planning and advice services and nothing else. They do this really well, out-sourcing other specialisms to carefully selected and monitored investment management and platform services, as and when required to trusted partners. In a less differentiated product market, the question as to whether the advice is restricted or independent is far less relevant than the quality of advice being given.

Andrew Thompson, Sarasin It seems we are on a journey towards a market where most advisers are restricted... PI costs, regulatory pressures to prove independence and customer apathy will push a growing number of advisers this way. Being restricted offers advisers the ability to build a vertically integrated proposition and extract greater value from the supply chain whilst delivering a honed proposition to customers.

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Robin Beer, Brewin Dolphin Soon after the RDR came into force, there appeared to be a very strong feeling that Adviser firms needed to obtain “independent” status in order to be able to continue to attract and retain clients. However, the reality of the current regulations means that this status is onerous to both achieve and maintain. In recent times, we have seen a number of Advice firms move to a restricted model, often as part of a Network. Anecdotally, this does not appear to have hindered client acquisition or retention, and if this trend continues, I would expect more Adviser firms to follow suit in due course.

It may well be that the FCA amends the definition/requirements around achieving “independent” status in the future, as I am not sure it has had the intended consequence of providing increased transparency for a retail consumer.

James Williams, Parmenion The boundaries between independent and restricted status are becoming increasingly blurred but that’s not the result of choosing an outsourced investment proposition. It’s from the advent of increased professionalism within the industry, for example the chartered, certified status of firms and Advisers, now there is more focus on client outcomes as opposed to the status of the Adviser.

The outsourcing model gives the flexibility to provide excellent risk adjusted outcomes for a wide client demographic where the focus is more on the quality of the planning and advice being provided. The focus has shifted to the quality of the firm and the advice that they give - are they chartered or certified? - as opposed to whether they operate under an independent or restricted badge.

We would expect there to be more restricted Advisers in future, but that is largely due to the increased costs of the independent badge.

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

On the Road Again NEIL MARTIN TALKS TO DOMINIC CLABBY, DIRECTOR, AT ETP PROVIDER SOURCE

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You might suppose that Dominic Clabby, Source’s main man for the coverage of platforms, intermediaries and independent financial advisers right across the whole of the UK and Ireland, would rarely get the chance to leave his London office. But you’d be wrong.

Here’s a senior executive who loves to be on the road, meeting IFAs and getting feedback on his company’s products.

He attends road shows, visits individual firms and is happy to fly the flag. The theme is always the same however- focus on the end result, and not on the mechanism of the investment product itself. For Clabby, and for Source, it’s the destination that’s important, not the journey.

And as we’ll see shortly, there’s an important job to be done. IFAs are in need of some reassurance when it comes to ETFs. And Clabby for his part, says that at the heart of his mission is a straightforward pitch: don’t be afraid of ETFs.

The Price Factor But yes, there was a special reason why he was keen to talk to IFA Magazine. A day earlier, Source had announced that it had cut the management fee on its flagship S&P 500 UCITS ETF to just 0.05%. Source claims that this is now one of the most aggressively priced ETFs delivering S&P 500 exposure.

“Now, the S&P500 is one of the most followed equity indexes and is recognised as offering the most stable exposure to a broad range of large US stocks. The big plus about the S&P500 is that it is very liquid.”

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The Passive Space “Cost has been under the spotlight ever since RDR started rumbling,” Clabby says. “When it comes to certain portfolios, the efficiency of certain markets, it does make much more of a compelling argument to go into the passive space.”

“I think the question mark over ETF, or index funds, then creeps in - because with a lot of the index funds, of the broad market kind, what they can’t do is offer some of the more unusual and diverse markets.

To be truthful, there are other funds that have also been shadowing the S&P 500 index very well, but the fee cut means that performance has effectively been increased. “We haven’t done anything fancy in the background.”

“It’s more a case of if you’re going to do it, then do it the most efficient way.”

An ETF By Any Other Name...

Clabby explains a bit more about how he sees an ETF. “It’s up to the IFA, but what I’d really like to try to get away from, certainly within the general consensus, is talking about ETFs as an entity. ETFs aren’t an entity. It’s like saying do you buy oeics? It’s a sentence that doesn’t make any sense until you put in a context about what that investment is actually doing.

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INSIDE TRACK

“We now have over US$19 billion invested in our ETF range, with US$1 billion in our S&P500 ETF alone. This scale helps us to make sure the pricing is more competitive for investors.”

“People talk about headline management fees,” he continues, “but what’s really important is the total cost of ownership. Plus, of course, how much does the fund differ from the index at the end of the year?”

“If you just said this investment tracks the S&P500, people would ask: ‘Is it an ETF? What kind of structure is it?’ Well, that becomes a little less relevant, certainly from the IFA’s perspective, when what they want is to buy and hold for potentially longer periods of time – and where intraday trading isn’t necessarily high up on their priority list. Being able to buy a fund efficiently and in a cheap way, those are the kind of tickthe-box type questions that they have.”

He laughs. “Amazingly, if you offered S&P500 exposure as an oeic, and if it did exactly what the ETF did, few people would think twice about using this. Sometimes you get stuck on the word ETF, and you lose sight of what it’s trying to do.”

...Would Smell Good Too Clabby believes that the problem with the perception of ETFs is that many advisers focus on too much granular detail, and that the central benefits are being missed: “It’s a fluid conversation to be had with firms to say look, in the case of some of our fixed income products, yes it is a high yield, yes it will have the associated higher risks you would expect with the asset class, but it’s exposure that is difficult to get outside this kind of structure.”

“So with that in mind, I think some firms on the learning curve try and get their heads around not only how ETFs work and operate, but also maybe some of the considerations around physical or synthetic.

But they shouldn’t get bogged down in the detail of how the fund is actually structured as opposed to what it is trying to achieve.”

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INSIDE TRACK

magazine...

What Advisers Still Want to Know I ask Clabby whether they have progressed in terms of their general product knowledge with such vehicles as ETFs. He responds with an example of one small outfit, a oneman band that he visited recently.

“He started to review ETFs only about six months ago, and since then we’ve had a couple of conversations on the phone. I went over to see him, he’s not a million miles away from where I live, so it was quite easy for me to pop in. It’s always nice to step out of London and understand how the regional firms work, their needs and wants, instead of sitting in the office and trying to understand their business from afar.. And he’s now bought a variety of Source ETFs across the asset spectrum.”

“This adviser understands that this is an investment option in the first place, rather than an ETF primarily. So he was comfortable with the structure. Obviously, he has to do what the FCA requires him to do, but at the same time the appetite to look outside of the main stream for certain clients is very much there.“ “And this is just one man, who fortunately I was able to spend some time with. Obviously I won’t be able to do that for every IFA in the country - I’d love to - but this is a prime example of a firm which has never touched an ETF before and found that they were a great option for their clients.”

Time on the Links

Clabby’s career has been very much a progression through the ranks - most recently including positions at AXA and Fidelity FundsNetwork. He originally started out as part of the correspondence team within the Fidelity offices in Reigate, handling everyday complaints and queries. And this, he said, gave him a unique perspective on the financial service sector, one which is still very useful today: “You start at the bottom and you start to understand how a business operates all the way through.”

He joined Source in January this year with a brief to listen to the IFAs and get their feedback.

“Sometimes you get stuck on the word ETF, and you forget about what it’s trying to do”

But here’s a tip. If you want a visit from Clabby, organise a corporate golf day. But be prepared for a decent game.

I ask him if it’s true that he’s earnt the reputation within Source of being a “lethal golfer”? He answers with a laugh and a line that all keen amateur golfers have to trot out when asked such questions.

“I have a younger family,” he laughs.

“And I’ve just moved home, so there’s a lot of other things, such as wall paper stripping, and knocking down walls, that are taking up a lot of my time at the weekend. So the golf game might suffer. But if there’s a sunny, or rainy afternoon for that matter, and if I’ve got a spare four to five hours, then you’ll find me on a golf course.”

So what’s his handicap? He’s reluctant to say. It wouldn’t do to have the bosses thinking he spends too long on the course. But, if you’re looking for someone to explain just what an ETF is, and why you should be considering them, then a quick word with Mr Clabby would be a good place to start. And if you have a bag of clubs handy as well, then so much the better.

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ADVERTORIAL

Peter Georgi of Halo Films talks about why IFAs need an “About Us” Video The About Us page is the second most important page on your website – only behind the home page. This is your one chance to talk about yourself, and not about your customers. This is the opportunity they give you to impress them. Your “About Us” is your audition - Seems self-evident to make it quality, right?

1 – Make your Branding Message Who are you? What do you do? Clients want to have a deeper understanding of the people who they will be dealing with if they select your company. And remember, it’s also a chance for you to talk about areas of speciality and identify who your ideal client is – this can be a good way of weeding out the unsuitable clients at an early stage.

2 – For Potential Employees When people hear about your company’s job openings, they will almost assuredly visit your website and check out your About Us page. Having a video that prospective applicants can watch is a great idea. They can get a feel for who you are and who you serve.

They should also gain a greater understanding of your values and your mission. It’s also a great idea to include your staff in the video so that the job seekers get a feel for your company’s diversity and the attitude and demographics of the people working there.

Prospective clients and job seekers should also learn the history of the company. Through all of this subtle information, the applicant finds out whether they might be a good fit for your company and whether your company is a good fit for them. Today’s employers realize the value of recruiting someone who feels at home and will stay. The About Us video is another tool for engaging prospects and helping to reduce the wasted time of interviewing someone who really wouldn’t be a good fit and doesn’t realize it until they show up at your office.

3 – For Current Employees Having an About Us page isn’t just about new employees.

It’s to help focus and align your current ones as well. A good About Us page gives your employees identity and a sense of proudness to be working for this company. It’ll also help your employees explain who they work for and what they do.

With thanks to Kirstie of WarroomInc.com

For more information on how we can help with a home page video, or any other aspect of video marketing, please get in touch: phone: 01453 810914 email: info@halofilms.co.uk You can also view examples of our work at: www.halofilms.co.uk

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A WISE MAN

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

EDUCATION EDUC THE NEW STATE PENSION? STEVE BEE SAYS YOU DON’T NEED TO BE A SWOT – JUST CAPABLE OF THINKING AHEAD Every now and then, you’ll hear people say that we need to teach our children about finance while they’re at school.

A financially literate populace is seen by and large to be a good thing but financial education is far more than giving people a detailed knowledge of the inner workings of the tax and savings systems.

And, anyway, most financial issues are not that difficult to get the hang of.

Cue Charles Dickens’s David Copperfield and the (presumably by now) immortal words of Mr Micawber: “Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness.

Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” That would probably cover most of what people need to know about holding folding.

Pensions Are Supposed To Be Simple But the subject I’m caught up with, pensions, isn’t like ‘most’ financial issues. The detailed complexities of our pension system are mindnumbingly bamboozling and well beyond what ordinary human brains were built to cope with.

But pensions really shouldn’t be like that; they should be no harder to understand than any other financial product like an ISA, say, or a piggy bank.

Pensions at a basic level are pretty straightforward really.

We’re born, we get educated, we go to work, we stop work and then we die. (I don’t want to spoil it for anyone, but that’s the way it pans out.) The bit between leaving work and leaving the planet is what we refer to as ‘retirement’.

A pension is used to provide ready money for people in that position.

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07/07/2014 22:17

ON CE S A I D

ATION EDUCATION The alternative to putting money aside for the future while it’s rolling in while we’re employed is to cut out the last bit in the previous sequence of events and go straight from the starting work bit to the leaving the planet bit without having the retirement interlude in between. That might appeal to some people who really get a kick from being at work or who are lucky enough to have a job that isn’t too stressful or difficult, but it’s not for everyone.

No Lamborghinis, And No Desperation The government (a.k.a. the rest of us) will soon provide a basic subsistence level pension that will keep the wolf from the door, but won’t stretch to foreign holidays, sports cars and all the sort of stuff older people are supposed to be into. That’s the way it should be I suppose; we don’t want to see older people begging in the streets, but we don’t want to see them running around in Lamborghinis we’ve paid for either.

The 19th century idea of the poorhouse was not a good one. The 20th century idea of a subsistence level state pension that people can use as a reliable foundation upon which to build their own later-life savings is much better. That idea that Beveridge first postulated during the Second Wold War is now at last about to become a reality in the second decade of the 21st century; we’re going to have a subsistence-level state pension for all new retirees from 2016.

Older people will hopefully no longer face the ignominy of receiving means-tested support and will have a solid foundation that will ensure their own savings are not devalued through the withdrawal of benefit.

That’s great. Now all we need to do is tell everyone about it while they’re young enough to usefully build on that foundation.

That’s where education comes in.

Steve Bee is CEO and founder of Jargonfree Benefits, which supplies auto-enrolment and workplace benefits solutions for smaller businesses.

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ON E W AY

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

MIXED MESSAGES

THE HEADLINE FIGURES FOR THE US ECONOMY ARE SLOWING, SAYS BRIAN TORA, BUT THE MARKET IS STRONG The US has long been a market that’s dangerous to ignore. Not only is it by far the largest in capitalisation terms; the American economy also remains the most important in terms of our global wellbeing.

But recently a strong performance by shares over there has been watered down by a declining dollar. The question anyone charged with assembling portfolios of equity investments should be asking is this: where are markets and the currency going from here?

A Disconnect

The signals coming out of what is arguably the only remaining world super-power (though doubtless China would disagree) are mixed to say the least. Unemployment is coming down faster than expected, the housing market is bouncing back, and yet economic growth has faltered. Not only did the economy shrink in the first quarter of this year, but such venerable bodies as the International Monetary Fund have reined back their expectations for 2014.

Yet despite this underlying concern, shares on Wall Street remain close to their alltime high, with the S&P 500 Index tantalisingly close to the magic figure of 2000. Moreover, merger and acquisition activity and new share issuance are also buoyant. Indeed, a Chinese on-line retailer recently decided to list in New York, rather than Shanghai or Hong Kong. On the financial front, things are looking good.

Where’s the Confidence Coming From?

America has a number of things going for it at present, including its renaissance as an oil giant.

Once a major producer, it has slipped down the rankings over the last hundred years, but it is fast re-emerging thanks to shale oil. Moreover, after a long ban on exporting, the Americans are now considering selling oil abroad again. With unsettling developments looming in the Middle East and Russia, such an approach could bring comfort to investors fearful of geo-political consequences.

Back in the late 1990s, I took over leadership of an investment management operation that had decided to back Asia over Europe and America. I could understand the reasoning, but the size of the

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bet meant that when the Asian debt crisis hit, performance took a tumble. Moreover, during the same period the US was benefiting from its continued commitment to technology – something that has continued since.

Consigning America to the sidelines was an expensive mistake then.

It could be today, too. While the technology bubble some 15 years ago wrought disaster amongst the investment community, much of the carnage can be put down to greed and carelessness. US technology giants still rule the roost in this increasingly wired world of ours. That, and energy, combine to make America a market that is hard to ignore, despite the continuing rise of the major indices there.

Carney’s First Year

Meanwhile, back at home, our new Bank of England Governor celebrates a year in his post.

Mark Carney started his new job on 1 July 2013.

Let’s be fair, there hasn’t been a lot for him to be aggressive about since he assumed office. OK, he wants to head off a housing boom and he’d like to raise interest rates – just a little. Still, I am reminded of a good description of central bankers from one of their group. An Asian himself, he likened them to tea. You would only learn how good they were once they were in hot water.

Japan Welcomes Inflation

Don’t forget, too, that Japan has just recorded its highest inflation level since 1982. The 3.4% rise in the cost of living there is mainly down to tax increases, but it surely shows that Abe’s strategy is taking hold even if we can’t be sure how successful it will be. Deflation has turned what was once the world’s second largest economy into a near basket case for investors. Only time will tell if Abenomics can rescue this once world-beating nation.

Brian Tora is an associate with investment managers JM Finn & Co For more comment and related articles visit...

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J

OR A N OTH ER

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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07/07/2014 17:18 27/02/2014 12:44

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

Nice Little Earner INVESTORS LOOKING FOR INCOME CAN EARN A COMPETITIVE YIELD FROM ALL CORNERS OF THE MARKET, SAYS NICK SUDBURY Return of the King CF Woodford Equity Income Neil Woodford is one of the most highly protection: it was this approach that enabled regarded managers of his generation, him to avoid the worst of the fallout from the and he has recently returned to the dot com bubble and the 2008 financial crisis. market with a new Equity Income fund Woodford is fairly cautious about the that bears his name. He intends to use market as a whole, but he has a great track the same investment process as he did record when it comes to stock selection. It with Invesco Perpetual Income, where is likely that the bulk of the portfolio will his 23 year reign produced an annualised be invested in well-established companies cumulative return of 14.3% compared with decent yields, although there will to a sector average of just 9.3%. also be some smaller caps that offer the Woodford Equity Income aims to offer potential for strong capital growth. capital growth with a rising income stream, Starting his own investment management paid quarterly. It will mainly invest in the firm is a bit of a gamble, but Woodford’s UK, although up to 20% can be reputation is such that he held overseas, with the objective should have little trouble in being to generate 10% more attracting enough capital to CF Woodford Equity income than the FTSE Allkeep it cost efficient. The fact Income Fund Share. This would be equivalent that he has recruited several to a current yield of 4.0%. of his team from Invesco TYPE: UCITS (UK) The investment process is Perpetual should ensure that SECTOR: IMA UK designed to identify companies he is not spread too thin.

Equity Income that are undervalued relative CF Woodford Equity to their ability to generate Income is bound to incur higher FUND SIZE: n/a cash in the prevailing economic transaction costs as the initial LAUNCH: June 2014 conditions. Woodford and wave of capital is invested. his team will then invest Having said that it is not often TARGET YIELD: 4% where they believe that this that you get the chance to get in ONGOING CHARGES: 1% will lead to a re-rating of the at ground level when a proven MANAGER: shares. As with Woodford’s manager makes a fresh start. It Woodford Investment previous funds, there is a is hard to think of a safer pair of Management big emphasis on capital hands for your clients’ money.

WEB: woodfordfunds.com

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PRODUCT REVIEWS

The Appliance of Science Liontrust Global Income

Liontrust Global Income TYPE: Unit Trust SECTOR: IMA Global

Equity Income Clients who are looking 20% to make sure that the to diversify their sources data is indicative of the type of FUND SIZE: £252m of income overseas may forecast errors they are hoping LAUNCH: July 1990 be interested in Liontrust to exploit, and to ensure that the shares offer a decent yield.

Global Income. Originally YIELD: 4.53% One of the most the fund had a UK-only Ongoing Charges: 1.67% surprising – and welcome – mandate, but it was changed results is the concentrated last July and now has MANAGER: Liontrust nature of the portfolio. around 43% of its portfolio Fund Partners There are currently just 26 invested internationally.

WEB: liontrust.co.uk holdings, with the top 10 The managers mainly accounting for around half concentrate on high of the £252m fund. These yielding shares, which explains why it include: Restaurant Group, AstraZeneca, is currently paying around 4.5%, with Next, Total and British Sky Broadcasting. distributions made twice a year.

It is very much a bottom up, stock James Inglis-Jones and Samantha picking approach, with little emphasis on Gleave use a proprietary investment process the top down asset allocation. This explains known as the Liontrust Cashflow Solution. why just under 58% of the portfolio is This is designed to ensure that they only buy invested in the UK, with the remainder high yielding stocks with unusually strong divided between 10 other countries in North cash flows where investors have low profit America, Europe and the Far East. expectations. It does this by concentrating Liontrust Global Income provides on two main measures: cash flow relative exposure to a concentrated global list of to operating assets and cash flow relative companies that pay generous dividends and to enterprise value. They then use this to that are supported by strong balance sheets rank their global universe of stocks. and robust cash flows. This should be a decent approach, given that the equity markets The companies with the best combined are not likely to be as buoyant as over the score have a higher cash flow yield and a better last few years - in which case the cash return on operating assets, which is income will make up a significant usually a reliable indicator of outperformance. proportion of the total return.

Inglis-Jones and Greave then research the top

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PRODUCT REVIEWS

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

Nice Little Earner A winning strategy Jupiter Strategic Bond such as inflation, interest rates and the shape More conservative clients, and those for of the yield curve to decide how to position the looking for a higher yield, would typically portfolio. It was this approach that led him to use a fixed income product. Given the invest in Lloyds Bank bonds, so as to benefit risk of rising interest rates, the safest from the company’s return to profitability. option would probably be a strategic bond fund, where the manager has the Currently almost 40% of the £2 billion freedom to invest in whichever parts fund is invested in the UK with a further of the market he sees fit, as long as at 32% in Europe. There is also 8.5% in the least 80% of the portfolio is denominated Far East ex Japan – mostly Australian or hedged back into sterling. government bonds – and 7% in the US. The A good example of this type of product average credit rating is BB+, which is just is the Jupiter Strategic Bond, which aims to below the investment grade threshold, and achieve a high income with the prospect of the portfolio duration is a short 2.16 years. In capital growth. Over the five years to the end total there are 324 individual holdings, with of April the accumulation units are up 97.2%, the top 10 accounting for 16.4% of the fund. while the income units are yielding 5.7%, with The short duration is intended to distributions being paid every limit the negative impact quarter. These impressive of higher interest rates, returns show what a good time while the low credit rating Jupiter Strategic Bond it has been to be invested in reflects the fact that the fixed income, although the TYPE: Unit Trust best opportunities are to manager is more cautious be found in European high SECTOR: IMA Sterling about the current conditions. yield bonds where companies Strategic Bond Ariel Bezalel, who has have been busy repairing FUND SIZE: £2,031m managed the fund since it was their balance sheets. This launched, has developed an LAUNCH: June 2008 shows that it is a cleverly interesting top down/bottom up managed fund with a go YIELD: 5.70% strategy. This involves spending anywhere mandate and the ONGOING CHARGES: 1.47% a lot of time researching the past performance suggests company fundamentals, while that investors have been well MANAGER: also looking at macro factors Jupiter Fund Management rewarded for the active risk.

WEB: jupiteronline.com

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PRODUCT REVIEWS

BlackRock Commodities Income (BRCI) TYPE: Investment Company SECTOR: Commodities and Natural Resources MARKET CAP: £116m

Off the beaten track

LAUNCH: December 2005 YIELD: 5.4%

BlackRock Commodities NET GEARING: 7% Income Investment Trust There is a growing concern Looking at the rest ONGOING CHARGES: 1.4% that the search for yield has of the portfolio, the next MANAGER: BlackRock pushed the value of many largest exposure is the 20.6% Investment Management income generating assets weighting in mining stocks, into dangerous territory.

WEB: blackrock.co.uk/brci where BHP Billiton and Rio One way to get round this is Tinto make up 9.3% between to look further afield - and them. The other key holdings it is hard to think of a less likely option than include a 7.4% allocation to copper and 5.5% in commodity funds. Yet some of these products gold bullion, while the principal geographic split pay healthy dividends. It has been a difficult is: 30.2% US, 22.9% Canada and 19.3% UK. three or four years for the sector, but many BRCI has a decent long-term natural resources companies now look to be performance record with a 5-year return decent value – unless, that is, you feel that the of 32%. Since the fund was launched in slowdown in China has a lot further to run.

December 2005 it has consistently grown A good option is the BlackRock its dividends and has built up revenue Commodities Income investment trust. BRCI reserves of 3.3 pence per share, which invests mainly in mining and energy stocks equates to more than half of the 5.95p target and aims to achieve an annual dividend target pay-out for the year. About a third of the together with long-term capital growth. Last year income typically comes from writing covered it paid out 5.95p per share, which was equivalent options on the underlying stocks, although to a yield of 5.2% with quarterly distributions. this is more of a company-specific strategy Despite the high pay-out, the investment trust is rather than a systematic approach. only trading on a small 2% premium to its NAV. The managers are fairly optimistic about The £116 million portfolio currently has the outlook, largely because of the pick-up in 36.4% invested in integrated oil majors with global growth. They also think that mining and the largest holdings including the likes of energy companies offer good value compared Chevron, Exxon Mobil, Total and BP. There is to the wider market. BlackRock Commodities also 12.5% in Oil Exploration and Production, Income is clearly a higher risk option than where the managers have a strong bias to most of the other income generating funds, US shale gas, as well as a further 9.5% in but it could have a lot more upside potential if the remainder of the Oil & Gas sector. the world economy continues to recover.

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

SO-CALLED ‘BALANCED FUNDS’ PERFORMED WELL OVER THE LAST TWO DECADES, SAYS NICK SAMOUILHAN, MULTI-ASSET MANAGER AT AVIVA INVESTORS. BUT THE GILTS ARGUMENT IS HISTORY NOW, AND WE NEED TO RETHINK OUR PLANS Building balanced, diversified portfolios was easier in the past than it is now.

Take, for instance, the common allocation split of 60 per cent equities and 40 per cent gilts for balanced funds.

Those funds, while simple, managed to provide strong returns, low volatility and few significant drawdowns for clients over the past 20 years.

Understanding Balanced Funds

The key to the successful performance of balanced funds provided by their allocation between equities and bonds was partly the equity component. However, the major explanation to their success was their allocation to government bonds - specifically gilts.

While equity provided the core growth engine, gilts played three different roles in the portfolios. Understanding these helps show how they provided protection, income and returns to portfolios and why they are unlikely to do so in the future.

Firstly, gilts provided strong returns due to a background of falling inflation and interest rates, which move in the opposite direction to bond yields. Secondly, reasonably high interest rates on bonds allowed funds to ‘tick along’, earning a return even if nothing happened.

Lastly, given the high level of yields, bonds were able to provide significant capital protection to portfolios during risk-off market environments.

Key Message

The key message to keep in mind here is whether all three of the above factors will still apply in the future. For instance, government bonds are

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currently priced at a level where all three of these factors will be hard to achieve with them.

Firstly, low single-digit yields reduce the running yield they provide. While still positive, this carry aspect is significantly less positive than in the past. Secondly, the long period of falling yields and inflation looks to have come to an end (rates cannot permanently fall below zero) limiting capital growth prospects. Finally, low yields mean the scope for protection during a negative environment is very limited.

An Alternative Approach

How should fund managers respond to the changing environment for balanced funds?

The main point is there is no single asset class that provides all of the above attributes like gilts did in the past. As such, portfolios need to become much more diverse to provide the same objective as they did in the past.

For example, to provide income credit (eg corporate bonds, high yield and emergingmarket debt) are useful candidates. For growth, equities remain the best asset class for long-term growth, particularly given relative valuations to other asset classes. Finally, for capital protection gilts still help but far less so than previously.

So, more complex investment strategies must be employed to combine suitable types of investment to provide the performance clients want with balanced portfolios. What is needed is a strategy that provides value during a negative environment while not costing too much during a normal environment. Here, currencies such as the dollar are possible candidates, likely to rally in a risk-off environment.

July 2014

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

Compliance Consultant Lee Werrell with the first of a two-part feature on what to do if the worst should happen Managing A Regulatory Crisis In my experience of firms calling me to explain that they have had an event that requires fixing, a wide array of excuses and reasons are provided to justify the unusual occurrence of the issue at hand. More often than not I am sent a smokescreen covering the real reasons, many times they are not known by the senior management themselves, and a variety of assumptions are made.

Sometimes they know what’s wrong, but they try to cover up the flaws and deficiencies in a bid to save face. Often their remedial plans are merely papering over the cracks because they think it looks good. My job is to ascertain the real facts, the true facts and the impacted business boundaries.

What the Regulator Expects Now, very few people in business are ever likely not to have problems; mistakes can and will happen all the time, even in the best of UK Financial Services organisations. It could be the discovery of significant accounting or trading errors, market abuse or fraud detection, systems breakdown or a procedure failure where retail customers have not been treated fairly.

In accordance with every firm’s regulatory obligations under the Principles for Businesses, the regulator expects firms to identify their own issues and initiate appropriate remedial action. Ideally this activity should be as early as possible, but whenever people are involved, a complex mix of status, shame, ego and all manner of variables often contorts the issue and often masks it until something breaks.

Identification is often made by analysis of management information or from compliance or internal audit monitoring. However, it may come from another angle, such as a complaint or reconciliation exercise or even implementation of a new system where certain activities or records just don’t add up.

Provided that the firm identifies, appropriately scopes out the issue and takes the necessary remedial action, which may or may not include compensating any

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affected customers, the final action would be for the firm to notify the regulator of the issue, what it has already done, or what it intends to do - and in what timescale.

Enforcement Powers In some cases, the regulator may be content with the planned activity and ask to be kept regularly informed of the progress. In other cases, however, the regulator may exercise its enforcement powers where it deems necessary for and in pursuit of its statutory objectives. For the FCA, this means protecting consumers, enhancing the integrity of the UK financial system, and promoting effective competition in the interests of consumers.

There are three routine enforcement powers that the FCA could take - and will, in addition to discussing the situation as appropriate with the PRA for any dual regulated firms: n Investigation n Remedial action n Disciplinary action.

Limit the Damage The greatest mitigation any firm can provide is the acceptance of responsibility of the real issue and causes by senior management.

Both of the new regulators in financial services place considerable weight on senior management responsibility. The regulators now believe that a specific action against individuals that hold a significant influence function is likely to have a far greater deterrent effect than actions against firms alone.

Typically, the first hour after identifying your issue, challenge or problem can be critical. Once you have established that the issue was more than a glitch or a one-off occurrence with no material effect on any number of clients, you need to set off on a path of containment and limitation.

Assemble Your Project Team What you need to do first is to create a project team, which should include senior management, legal and compliance people.

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If, through the course of business, you need to maintain operations and create any new documents, you should ensure that, where possible, to attract legal professional privilege your procedure includes legal reviews and opinions.

Initially, confine the issues to a small group of senior management until the specifics are established, and the impact has been fully scoped out. Do not communicate to any wider audience, even internally. There is no point in discussing anything with the FCA at this time unless you are up against regulatory requirements to notify. Although the regulator requires to be informed, it may be prudent for any firm to delay telling the regulator for a short while.

A delay for a few days could well be justified by needing to verify initially internal findings, or possibly to brief overseas or other branch management. A courteous and interim telephone briefing confirming that investigations are underway may satisfy the regulator, and the FCA may highlight a specific requirement that it need answers to; but you cannot properly delay notification any longer than that as dim view will surely be taken.

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

Ideally, someone independent of the apparent problem should head it such as a non-exec director, legal or compliance. Within the project team, it is vital that you establish a clear line of communication so that all information given to the project team should be channelled through a single person. In that way that person can monitor, direct and prioritise the information, but should not judge or decide if it goes any further.

failure in systems and controls. These are compounded if they also undermine market confidence, cause material loss in any form, impact a “significant” number of customers or affect the company’s risk profile, resources or reputation.

What Should You Tell the Regulator?

Any report should address each of the regulator’s typical concerns: n What went wrong n The scale of the issue n Is it limited or contained in anyway? n The root cause of it n What remedial action has been taken.

In addition to the answers of these points, the regulator will also be looking for reassurance that senior management are actively concerned in the issue and that a competent and skilled project team has been established with sufficient resources allocated to addressing the issue.

Of paramount importance will be confirmation of how the fair treatment of customers is featured in the activity.

Take expert advice and do not leave it to off-hand or internal experiential remarks. You need to use an experienced compliance or legal professional with a broad experience who is used to dealing with serious regulatory matters; otherwise you should consult expert external specialists.

Inform the Regulator Both of the UK financial services regulators place great store in any firm freely and promptly providing information under Principle 11 for Business and the Code of Practice for Approved Persons Principle 4 - primarily because they have limited resources to monitor or assess third party reports. They rely on all firms and institutions to promptly notify them of any positive and negative material developments. In this, the FCA has taken a change of stand from its predecessor; it has moved its focus from being the financial services regulator to now being the regulator of financial services.

With this reliance on the flow of information, the regulators therefore, expect to be told of any significant issues that may be affecting a firm which, on analysis, could indicate systemic problems, management weaknesses or significant

Next Month Part 2, in the September issue of IFA Magazine, will look at what the options are from the regulator’s perspective, under each of the three areas we’ve listed. And we’ll consider ways of avoiding or reducing the impact of any intervention, as well as thinking about what to do if things don’t go in your favour.

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

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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

Examples of Good and Poor Practice in ‘Banks’ Control of Financial Crime Risks in Trade Finance Finalised Guidance Ref: FG14/5 12 June 2014 15 Pages In July 2013 the regulator consulted on examples of good and poor practice in ‘Banks’ control of financial crime risks in trade finance’, with the intention of including these examples in Financial Crime: A Guide for Firms, the FCA’s regulatory guidance, which sets out its expectations of firms’ financial crime systems and controls.

Although most respondents found the examples useful, some had said they were too prescriptive.

Accordingly, the FCA has amended its proposed guidance to address these concerns.

The regulatory guidance, Financial Crime: A Guide for Firms, is now being amended. The new guidance took effect on 12 June 2014.

Client Money Held in Individual Savings Accounts Consultation Paper Ref: CP14/9 11 June 2014 25 Pages Of interest to: n ISA managers who manage either stocks and shares ISAs or cash ISAs and hold, or wish to hold, those monies as client money n Deposit takers of money held within ISAs managed by investment firms n Consumers who currently have an ISA or may consider one in future The Consultation proposes rule changes, in line with the 2014 Budget, that will affect investment firms managing ISAs: n Requiring all investment managers who hold any money within stocks and shares ISAs to hold these sums as client money n Allowing investment firms who manage cash ISAs to op-into the CASS regime and elect to hold money in cash ISAs as client money, and

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n Excluding any money held as client money by ISA managers from rules preventing the use of unbreakable term deposits of longer than 30 days.

Consultation process ends on 25 June 2014. Changes to the ISA Regulations are due to come into force on 1 July 2014.

Review of the Client Assets Regime for Investment Business Policy Statement Ref: PS14/9 10 June 2014 25 Pages The FCA announces the finalised changes to the client money and custody assets (client assets) rules in the Client Assets sourcebook (CASS), affecting approximately 1,500 FCA regulated firms engaged in investment business, with a collective £100bn+ of client money and £10tn of custody assets.

The final rules,w which arise from Consultation Paper CP13/5, address lessons learnt from recent insolvencies, feedback from firms themselves and observations from the FCA’s specialist Client Assets Unit. The FCA says the changes will improve firms’ systems and controls around segregation, record keeping and reconciliations and set out how investment firms must address client assets risks within their business.

Some issues remain unresolved, however, and the FCA intends to conduct a further review of the client money distribution rules in line with HMT’s implementation of the SAR review recommendations. It intends to publish a further consultation on the client money distribution rules later this year.

FCA Updates Retirement Income Market Study Terms of Reference Press Release Ref: FCA/PN/65/2014 9 June 2014 2 Pages The FCA announces an update setting out its current and ongoing work on the retirement income market, in the light of the changes to the pension regime announced in the March Budget.

As part of this update, a revised Terms of Reference for its market study into retirement income has been published.

The regulator says it has revised the scope of the report to give it a more forward looking focus. This will allow the FCA to understand developments in the new landscape, and to

www.IFAmagazine.com

07/07/2014 20:31

Quarterly Consultation No.5 Consultation Paper Ref: CP14/8 6 June 2014 129 pages The regulator proposes to: n Modify the list of appropriate qualifications in the Training and Competence sourcebook n Amend the Handbook as a result of the transfer of consumer credit regulation

Dates for your diary JULY 2014 1

Italy assumes the EU Presidency until 31 December

n Implement changes to the Handbook regarding employers’ liability registers, the collection of employer reference numbers, and the scope of provisions regarding directors’ certificates and auditor reports

1

Derivatives transactions must be made directly to ESMA

n Modify the information disclosed in periodic reports and accounts for authorised funds

1

Changes resulting from Consultation paper 14/9 (Client Money Held in Individual Savings Accounts) come into force

2-6

Royal Henley Regatta Henley-on-Thames, UK

5-27

Tour de France France

6

Consultation period ends for Chapter 2 of FCA Quarterly Review

n Amend persistency, annual report and accounts and product sales data reporting

n Require banks and building societies which offer current accounts to confirm each year that they have complied with the Immigration Act. Consultation period ends 6 July 2014 (Chapter 2), and 6 August 2014 (all other Chapters).

Consumer Credit Interim Permission Fees for Local Authorities Consultation Paper Ref: CP14/7 29 May 2014 14 pages The FCA is amending its fees rules to facilitate the charging of interim permission (IP) fees to local authorities under proposed Government legislation, extending the IP period for local authorities.

Consultation period ends 12 June 2014.

Commercial Insurance Intermediaries - Conflicts of Interest and Intermediary Remuneration Thematic Review Ref: TR14/9 27 May 2014 22 pages The report summarises the findings of the FCA’s thematic review, which looked into whether insurance intermediaries serving small to medium-sized enterprises (SMEs) are able to effectively identify and mitigate conflicts of interest arising from their remuneration structures.

The review had found a number of issues and unmitigated conflicts that could result in intermediaries prioritising their own interests over those of their SME customers. These included:

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I FA C A L E N D A R

identify any competition risks and potential consumer detriment.

The Budget also announced plans for a guidance guarantee, on which the Government is currently consulting. The FCA says it is is working with Government and stakeholders to develop the framework for the impartial guidance guarantee which will be offered to individuals at retirement from April 2015.

17-20 British Open Royal Liverpool Golf Club, UK 13

Fifa World Cup ends Brazil

19

G20 Finance and Central Bank Summit Melbourne, Australia

22

End of the AIFMD transitional period.

Date by which firms already managing or marketing AIFs must have applied for authorisation

July 2014

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I FA C A L E N D A R

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

AUGUST 2014 1

Single Euro Payments Area (SEPA) Migration Regulation comes into full force

6

Consultation period ends for FCA Quarterly Review (excluding Chapter 2)

7-8

Forum on Industrial Organization and Marketing 2014 Munich, Germany

10 & 24 Presidential elections in Turkey

SEPTEMBER 2014 1-4

Red Bull America’s Cup San Francisco, USA

4-5

NATO summit, Newport, South Wales

9

Parliamentary elections in New Zealand

10-13 St Leger Festival Week Doncaster, Yorkshire, UK 15

Sixth anniversary of Lehman Brothers bankruptcy

18 Scotland: Independence referendum

OCTOBER 2014 6-8

Institute of Financial Planning annual conference Newport, Wales

23-24 European Council Meeting Brussels, Belgium 31

Deadline for self-assessment tax returns 2013/2014 (paper only)

NOVEMBER 2014 9-11 World Economic Forum Summit on the Global Agenda Dubai, United Arab Emirates

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

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n Significant conflicts of interest resulting from the structure of some intermediaries’ businesses and sources of revenue created, particularly where firms or groups fulfilled multiple roles in the distribution chain and acted as agent for both the customer and insurer in the same transaction. n In some intermediaries the control framework and management information had not developed in line with changes in the business model, and were therefore no longer suitable for the size and complexity of the business. n Many intermediaries relied on disclosure as the main way to address conflicts of interest rather than having effective control frameworks that prevent conflicts of interest working against customers’ interests

Insurers’ Management of Claims – Household and Retail Travel Thematic Review Ref: TR14/8 22 May 2014 34 pages

This report summarises the findings of the FCA’s thematic review into claims handing in household and retail travel insurance, which assessed the extent to which consumers as claimants are at the heart of insurers’ businesses.

The report found that, 64% of the policyholders surveyed were either ‘satisfied’ or ‘very satisfied’ with their experience, which is seen as broadly positive. But the regulator identified a series of areas where insurers could further increase consumer satisfaction. These included: n Communication and ownership throughout the claim. n Insurance in relation to medical conditions (travel). n Consumer outcomes in long chains of delegation. n The clarity of product documentation.

Advertising Standards for Consumer Credit Firms Press Release Ref: FCA/PN/59/2014 16 May 2014 Financial Conduct Authority (FCA) statistics show that one in five (108) of the 500 adverts studied from consumer credit firms, for products including payday loans, are falling short of the FCA’s financial promotion expectations.

Particularly concerning were examples where consumers were encouraged to hit the ‘apply’ button before having a chance to access important information. Others concerned: n The unsuitable targeting of young audiences with promotions for products that consumers must be over the age of 18 to use. n Claims that loan products would help repair credit ratings. n Claims that loans will clear a customer’s debt, instead of actually substituting one debt for another.

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07/07/2014 22:36

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

Fit and Proper?

THE REGULATOR IS FALLING ASLEEP ON THE JOB, SAYS GILL CARDY

Recent news, which even made it onto BBC Radio 4’s satirical The News Quiz, has included the revelation that Britain’s biggest payday lender Wonga: n ‘Used unfair debt collection practices which put customers under great pressure to make loan repayments that many could not afford. n ‘Sent communications to customers in arrears... leading customers to believe that their outstanding debt had been passed to a law firm, or other third party. Further legal action was threatened if the debt was not repaid.’

Oh, and don’t forget that administrative fees for sending recovery letters were added to customer accounts too. Which cannot exactly have helped the indebted to resolve their financial problems.

2010. But, ignoring the fact that this is Wonga, or any payday lender - generally assumed to be the spawn of the financial services devil - there are still huge implications for the future and the reputation of financial services regulation in this case.

Wake Up

The thought that the managers of any financial institution could conceive that they might improve their debt recovery ratios by coming up with this plan is, in my mind, a clear breach of the regulator’s Fit and Proper rules.

The over-arching requirements for regulated individuals to be Fit and Proper has never received more attention than in recent years - primarily in relation to bank executives. It’s actually a very short chapter in the handbook, with the broad headings of Honesty, Integrity and Reputation, Competence and Capability, and Financial Soundness.

Now, compliance consultants in these pages and elsewhere write frequently about the considerable, even

Of course, the FCA’s powers to act are constrained by the fact that Wonga only became FCAregulated in April of this year, and that the offences cover an earlier two year period between 2008 and

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INDEPENDENCE

excessive, powers of the FCA. The regulator has vast powers over the people it authorises to conduct significant influence functions in regulated firms.

But it’s fair to say that you don’t need to read the examples of Fit and Proper behaviour to work out that anyone in any company who devises a plan to engage in such practices is lacking in honesty and integrity. So, if they are not Fit and Proper, why does the FCA not require that they are replaced?

One Standard for All And why, given all of these failings, does it fall to the Chief Executive of Wonga to write a Voluntary Application for Imposition of Requirement? Why is neither the FCA nor the OFT (which regulated Wonga during the period in question) being more assertive? Setting out failings in enforcement notices, and setting out their requirements for the future regulation of a firm with over one million customers?

The FCA was quick enough to require advisers to include an ethics module in their new qualifications, and ethics reporting in complaint data. The regulator wants to weed out the unfit and improper, certainly - but perhaps advisers are not the only ones who need to learn the lessons of how to behave (or regulate) ethically, with honesty and with integrity?

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For more comment and related articles visit...

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July 2014

61 07/07/2014 22:22

Financial Services Recruitment Specialists

Employed Financial Planner

Home-based Financial Planner

Private Client Consultant

London, South West, Surrey and Oxford

London, South West, Midlands, Glasgow and Surrey

Manchester or Peterborough and Northampton

Average £80k-£100k

Basic £45k with realistic OTE

£45k-£50k basic plus benefits

Due to exceptional growth, our client a long established and leading Employee wealth management firm are seeking Advisors for an employed position to cover various areas across the UK.

Our client is a National financial firm who have strong principles and a vision to continue working hard to manage their client’s assets whilst maintaining the utmost professionalism and efficiency.

The client has taken their AUM from £90m to a staggering £500m in the space of 5 years and are now in a position where they generate an average of 1000 leads per month, with their current advisors making around 12 initial meetings a week.

Their commitment to service and their growth through acquisitions has resulted in them generating a large portfolio of clients across the UK and they are now seeking Financial Advisers to join them on an employed basis to manage and service these clients. Our client work on a business model that sees each adviser receive 100% of clients, so there will be no need to have a transferable client bank.

My client is a leading financial services company who have a view to meet the challenges of a rapidly-changing financial services industry. They continue to expand and are now seeking a Private Client Consultant to join their firm and provide profitable, effective and compliant Independent financial planning advice to their loyal client bank and new clients across Manchester or Peterborough and Northampton.

The right candidate will have a strong desire and the right skills to convert these hot leads into new and repeat business, you will be very well presented and exude professionalism in your client meetings and seminars. You will be required to carry out the report writing associated with your work, so skills in this area are essential.

The salary will be £40k-£45k basic with an OTE of up to £100k. There is a generous bonus scheme in place, earning 80% of all business written once threshold is met.

Average earnings for current advisers is between £80k-£100k. Our client is seeking hungry individuals who have a drive to succeed and has a strong performance record. Leads are provided so there is no need to have your own client bank, however if you do have transferable business, this will be welcomed.

This is a home and field based role, so advisers will receive a car allowance and technology to enable you to carry out your role, as well as this there are serviced offices across the UK, depending on location.

If you have strong technical knowledge and background in Pensions Planning, Have proven seminar and presentation skills and are a strong business writer this is the role for you.

Please contact Stuart at Recruit UK for further detail.

Thinkers.indd 62

This is a home based role and advisers will receive all equipment needed to do their job, such as phone and laptop, however it is required that you have sufficient office space with a fast broadband speed already in place.

Appointments are pre-booked and you will service clients around your local area.

Considered applicants will be qualified to level 4, hold CAS, SPS and have a continuous personal development plan.

You will be able to evidence your past performance with minimum of £70k fees and have experience of carrying out detailed fact finds. Although clients are provided, our client is still looking for natural hunter instincts in their candidates so evidence in self generating is essential. It also goes without saying that successful candidates will be extremely well presented and have a professional disposition. As this role is home and field based, candidates must have a clean UK driving licence. Company car is not provided, but mileage is paid for.

Contact Frankie Pailing for a confidential discussion

Answering to the Private Client manager, you will Identify and develop new business opportunities and promote and provide a comprehensive and compliant service, acting in accordance with the TCF and FSA principles and meeting agreed revenue targets. My client does provide some access to leads, however they are ideally seeking an individual who can transfer an existing client bank within restricted covenants. You will also have proven ability in developing leads and be confident to generate leads through the banks.

This is a home-based role, so it is essential that you have the flexibility and space to work in this type of environment, as well as have strong planning and diary management skills. You will also liaise daily with the Business service centre and paraplanning team to ensure that client activity is progressing.

You will have proven experience in working within a similar role and environment and be qualified to level 4 minimum with evidence of working towards Level 6, or be a current holder of this qualification.

In return you will receive a salary with a generous car allowance to enable you to carry out your role and a list of employee benefits.

To discuss this role in more detail, please contact Sam Oakes at Recruit UK

07/07/2014 22:18

Contact us to discuss our latest opportunities:

T 0844 371 4031

Financial Paraplanner

Experienced Paraplanner

E HR@ifamagazine.com

Independent Financial Adviser

Glasgow or Birmingham

National based in Fareham, Hampshire

South West

c£25k basic plus benefits

Circa £30k basic

OTE £80k+

My client is a trusted IFA firm who provide Independent Advice to clients across the UK, focusing mainly on medical and healthcare professionals yet embracing the needs of clients from other professions.

A national IFA firm is seeking a Paraplanner to join their successful team to provide dedicated and efficient support to the IFAs enabling them to write business compliantly. This is to include research, report writing, conducting gap analysis of a clients circumstances and reviewing existing arrangements.

My Client is a leading Chartered Financial Planning and Chartered Accountancy Firm in the South West. They have enjoyed many years success and growth. They are seeking a high calibre professional Independent Financial Adviser to join their vibrant team in the South West.

This is an exciting, young, growing firm with an already established team that prides itself on providing high quality independent advice, and uses modern technology to support its research and development.

The ideal candidate will be fully level 4 qualified with a desire to obtain Chartered Status within the next 12 months. Solid and secure experience working as an IFA or a Senior Adviser within Bancassurance is essential. You will provide a safe pair of hands to their Clients and will be able to demonstrate integrity, excellent communication skills and determination to excel.

Their dedication to their clients and staff has now led to them requiring a Financial Paraplanner to join their team in Glasgow or Birmingham and provide high quality support to their loyal partners and advisers through carrying out research and analysing information to prepare plans and proposals best suited to clients needs.

The Paraplanner will comply with the requirements of the company and the FCA and will evidence strong commercial awareness through previous experience within the financial services sector, demonstrating your report, research and analytical skills.

You will ideally be qualified to level 4 or be extremely close to obtaining this.

My client is seeking an individual who can prove their professionalism and confidence in effective communication, using their own initiative, self motivation, service focus and organisation. On top of this you will have a strong team ethos and be able to hit the floor running.

In return the successful individual will receive a basic salary c£25k plus benefits and you will be joining an established firm who recognise good performance and believe in developing their staff.

Only individuals who are level 4 qualified or close to obtaining, have experience of report writing within a personal financial planning/wealth management environment and who have G60, AF3 or equivalent will be considered by my client.

Along with the above criteria, you will also be able to demonstrate strong communication, organisational and technical skills and be experienced in using CRM’s and portals and discussing complex issues in a coherent manner.

Personal attributes will be your courteous, friendly and outgoing personality, smart appearance and proactive attitude to work.

In return, on offer is a competitive salary, Company pensions scheme and extended holiday, as well as the development to support you towards achieving the long term goal of becoming an accomplished IFA if you so desire.

In return, you will be working within a mature and supportive environment. You will receive the benefits and structure of an employed position, dealing with High Net Worth clients professionally supported by a dedicated admin and para planning team. Having your own client base is not necessary for this role as there are clients in situ, but any transferable clients will be welcome.

My client offers a salary circa £50k (OTE £80k +) with market leading benefits and reward for your talent and contribution.

This is a superb opportunity that will suit any current paraplanner or IFA Administrator who is seeking to carve a carer within a national firm.

To avoid disappointment, please contact Shakiru at Recruit UK today to express your interest.

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07/07/2014 22:18

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

Paraplanner

Location: Henley-on-Thames

Location: Rayleigh

Salary:

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.

w w w. h e a t r e c r u i t m e n t . c o. u k Thinkers.indd 64

07/07/2014 22:18

THINKERS

The Bubble Bursts “Stability is destabilising”

Hyman Philip Minsky Born 1919 in Chicago Died 1996 in Rhinebeck, New York

Was there ever such an under-appreciated genius as Hyman Minsky? Having spent so much of his life as a ridiculed outsider, how ironic that he came to prominence twelve years after his death, as the prophet who had foreseen the relationship between poor credit practices and recurring asset bubbles.

Yes, yes, but we take all that debt stuff for granted, don’t we? Everybody knows that loose lending was what created the 2007 subprime emergency that then engendered the 2008 banking collapse. What can have been so original about this strange man’s thoughts about credit?

Good question. And would we ever have heard of Minsky at all if it hadn’t been for Paul Krugman (left-leaning New York Times op-ed writer and Nobel Prize winner), who entitled one of his 2008 addresses “The Night They Re-Read Minsky”. (A filmic pun on an unworthy work of fiction, by the way.)

The Awkward One Another good question. But then, Minsky had never made it easy for people to accept him.

Not for him the laborious strictures of building mathematical models which might validate his theories. Instead, he had simply expounded them verbally, while the central bankers and economists chose to ignore his insistence that private debt should be considered as an important economic factor. Which is why it’s especially sweet that central bankers in many countries – including Janet Yellen and formerly Mervyn King -are now advocating the incorporation of a Minsky factor into their policy models.

The awkward Mr Minsky rejected one of the most fundamental central tenets of modern economic thinking –that a modern market economy is fundamentally stable, and that its progress is periodically interrupted by external shocks – a war, an oil price shock, or a game-changer like the internet. At other times, however, it reverts to its usual cosy “equilibrium” and life goes on as before. www.IFAmagazine.com

Thinkers.indd 65

Minsky, however, said the system was perfectly capable of generating its own devastating shocks without the need for outside help. And that the main cause of these shocks was complacency.

The Three Debt Stages Minsky believed that a confident society moved through a cycle of three phases, which he called the Hedge, the Speculative and the Ponzi stages. During the Hedge phase, which will often follow a financial crisis, both banks and borrowers are cautious about debt, and nobody borrows debts where they can’t afford to repay both the principal and the interest.

The Speculative phase moves the temperature up a little. Borrowers start to take on loans where they can only afford the interest – and banks agree to this as long as the loans are secured against hopefully rising assets. But the dangerous Ponzi phase starts when banks start to lend on the necessary assumption that asset prices will rise (or the loans will be affordable).

All it takes at this point is a Minsky Moment – that awful split-second where everyone realises that asset values are based on assumptions of the borrower’s ability to pay, but where borrowers simultaneously go into default. At which point negative equity generates real losses, the bubble bursts and the financial market can be utterly endangered.

A Minsky Moment in China?

That, of course, is a hopeless over-simplification of the theory, which also encompasses the role of banking. But look into it, and you’ll find people wondering publicly whether China’s housing asset situation is becoming a dangerous bubble, and whether its banking system might be teetering on the edge? Our guess is no – because China’s consumer revolution is still consumption-based, not asset-based. But it’s good that the questions are being asked.

July 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

TRADING PLACES

TRANSPARENCY? LONG-SUFFERING CLIENT RICHARD HARVEY REELS OFF A CELLULOID COMPLAINT OR TWO Tsk, tsk, tsk ladies and gents. We really aren’t sticking to the rules, are we?

The personal finance columns in mainstream media didn’t devote much space to the FCA’s latest review into the industry’s performance on disclosure of fees and costs. If they had, you can imagine the tabloids frothing over with headlines like “Secret Bungs Of The Fast Buck Money Men”.

You’ve presumably perused the FCA’s TR14/6 paper (OK, not exactly a thrill-a-minute poolside read, but if you haven’t taken on board its conclusions, then I’d bet you’re one of the advisers who is in their firing line).

Despicable Me According to the FCA’s findings, around six in 10 firms aren’t being upfront with clients about fees; annual costs, expressed in cash terms, are still conspicuous by their absence; and three out of every four advisers might quote an hourly rate, but omit to say how many hours they’re likely to rack up.

Now, while most clients don’t have the foggiest about the funds, bonds and other investments recommended by their IFA, they do seem happy to trust their advisers to look after their money. And trust is the Big Thing.

La Grande Illusion So the RDR revolution was all about bringing greater professionalism into the industry, and was firmly on the side of the consumer. While the former objective seems to be on track, lack of progress on the latter means that the poor punter is still none the wiser about how much of his hard-earned an IFA is likely to trouser.

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It’s not as if this issue hasn’t been raised before. Last year, the FCA’s Factsheet 007 on “Disclosing your Firm’s Charges and Services” made it quite clear what was required. For many IFAs, 007 was simply “Licensed to Cock a Deaf’un”.

No wonder the FCA’s director of supervision Clive Adamson said he was “disappointed” that so many firms were failing the transparency test - announcing that the Authority would be issuing a video guide to highlight what needs to be done.

One wonders if “Disclosure – the Good, the Bad and the Ugly” will have any greater audience impact than Factsheet 007? (Do you detect a cinematic theme here?).

However, it is unarguable that the industry needs to produce a simple system of answering that time-honoured client question – “what’s all this going to cost me?” It really shouldn’t be difficult.

Goodfellas Meanwhile, my IFA mate Nigel - the only man I know whose glass can be half full and half empty at the same – points out there is a danger of disclosure overkill.

According to him (and this was divulged after several glasses had been comprehensively emptied), it’s possible that even an agesold investment made on behalf of a longdisappeared client, which nets him a princely 50p in ongoing monthly commission, will have to be justified by a regular disclosure update.

Despite this, Nige was in buoyant mode, and kept re-filling the glasses in celebration of the fact that he’d been hired by a new client, grateful that he’d been able to untangle her complex financial affairs.

Rummaging through a dusty box of documents, the lady had asked why her bank kept sending her letters suggesting she moved some of her current account cash to deposit. “The last time I looked, I had £20,000 in there”, she said.

Further investigation by Nige revealed that, actually, the amount was nearer £58,000, and he was able to find a home for some of that, in a manner likely to significantly better the return on a bank deposit account.

Now all he has to do is ensure that the lady is clearer in her mind about the fees he will charge than about the whereabouts of significant slabs of her own money.

www.IFAmagazine.com

07/07/2014 22:18

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