GONE BUT HARDLY FORGOTTEN
For today’s discerning financial and investment professional
SIPPS
MARCH 2013 ■ ISSUE 19
FSA
THE CRACKDOWN BEGINS
EMERGING MARKET
DEBT
CRISIS? WHAT CRISIS?
IS AMERICA’S OPTIMISM JUSTIFIED?
N E W S R E V I E W C O M M E N T A N A LY S I S Cover 19.indd 1
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@Investec_SP_UK
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Nick Sudbury is a financial journalist and investor who has also worked as a fund manager. Kam Patel a former deputy editor at Hemscott. He is a qualified investment adviser. Monica Woodley is a senior editor at the Economist Intelligence Unit.
Lee Werrell is the Managing Director of leading UK consultancy, CEI Compliance.
Brian Tora a Communications Associate with investment managers JM Finn & Co. Richard Harvey a distinguished independent PR and media consultant. Gillian Cardy managing director of The IFA Centre.
03.13
Editorial advisory board: Richard Butler, Michael Holder, Ian McIver and Mark Pullinger
THE FRONTLINE: No sense of crisis yet. Are the bulls right to be confident?
17
8
News
All the big stories that affect what we say, do and think
Editor’s Soapbox
34
Think western industrials are undermined by cheap Chinese competition? Think again
46
Scary European Spring
Brian Tora isn’t frightened of the Italian election result. In fact he rather likes it
I Say, I Say, I Say
Stand up if you dare, and be counted. Steve Bee has a new line in after-dinner speaking
52
48
Pick of the Funds
Nick Sudbury’s pick of a sector that’s going mainstream these days
Compliance Doctor Lee Werrell of CEI Compliance on today’s important issues
59
FSA Publications
Our monthly listing of FSA publications, consultations, deadlines and updates
The IFA Centre
The Regulator’s New Baby. What will it look like, asks Gill Cardy?
65
56 60
Recruitment
Standards are changing, says John Anderson of Recruit UK. And a good thing too
Thinkers: George Ross Goobey The prophet who put equities into UK pensions, and lived to see his controversial idea triumph
66
The Other Side
Editor: Michael Wilson
editor@ifamagazine.com
Art Director: Tony Merlini
tony.merlini@thewowfactory.co.uk
Publishing Director: Alex Sullivan
alex.sullivan@ifamagazine.com
Bigger annuity payouts? No thanks. Richard Harvey is flabbergasted
features
This month’s contributors
regulars
C O N T R I B U TO R S
magazine... for today ’s discerning financial and investment professional
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CONTENTS
features 22
COVER STORY
America: Which Way Now?
This year’s buoyant stock market sentiment might be overplayed, says Monica Woodley. But there are hidden strengths to this economy
30
INSIDE TRACK
Chartered Status for All?
Yes, it’s probably just a pipe dream. But, asks Bill Tomlin of Verridian Recruitment, will your clients settle for anything less?
36
SIPPs and the Capital Requirement The FSA’s proposals for a crackdown on SIPP providers are welcome, says Kam Patel. But the details are beyond mere clumsiness
CASE STUDY
44
300 million determined optimists, a massive federal debt, and a Grand Old Party that says it doesn’t matter. Interesting times
Doing What You’re Best At
Mayfield Financial Planning’s Darren Potter on why DFM outsourcing has improved his business
IFA Magazine is published by The Wow Factory Publications Ltd., 45 High Street, Charing, Kent TN27 0HU. Tel: +44 (0) 1233 713852. ©2013. All rights reserved. ‘IFA Magazine’ is a trademark of The Wow Factory Publications Ltd. No part of this publication may be reproduced or stored in any printed or electronic retrieval system without prior permission. All material has been carefully checked for accuracy, but no responsibility can be accepted for inaccuracies. Wherever appropriate, independent research and where necessary legal advice should be sought before acting on any information contained in this publication.
IFA Magazine is for professional advisers only. Full subscription details and eligibility criteria are available at: www.ifamagazine.com
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WORDS OF WILSON
GAME PLAN
MY BROTHER IN LAW IS A COMPUTER GAMES NUT. FROM SOLITAIRE TO SHOOT’EM UPS, HE’S PLAYED IT. AND ONCE, OUT OF PURE INTEREST, I ASKED HIM WHETHER THERE WAS ANY GAME THAT HE REALLY HATED? ANYTHING HE WISHED HE’D NEVER EVEN TAKEN OUT OF THE BOX? “Oh yes,” came the gloomy reply. “Any game you can get better at with loads of practice.” And there, in a moment of genius, my bro in law had put his finger on what’s wrong with so many people’s portfolio strategy. The harder you work at it, and the more often you tinker with it, the less likely you are to turn a profit. Instead of living a normal life, you go to bed at night with charts and ratios and resistance lines embedded on your eyeballs, and you wake up exhausted and ready for another day of making more mistakes. I should know, I’ve been there. My portfolio contains barely 25 shares and funds, and I probably trade only once a month, but checking out the latest short-term trends becomes a kind of obsessive-compulsive thing. Sometimes I have to positively force myself not to hit the trade button. The thing is, for us saddos, watching prices is actually interesting. So we tinker and we predict, and we try to time the market – something which only a few blessed individuals can achieve with any success. And we fritter away our money on fees and commissions, and by staying out of the market on the best up days we cripple our performance too. The reason I’m saying this is that 2013 has been an excellent year for staying in and not getting distracted by the bumps in the road. By Budget Day the UK and US markets were both 8% ahead, and the Nikkei was up by a magnificent 15%. All of them punctuated by sharp spells of high turnover resulting from short-term bad news that always seemed to evaporate in an instant. All that volatility has been a complete performance killer for the self-styled timing experts with itchy trigger fingers. But for those of us who’ve kept our nerve, not even the prospect of an April correction – not a particularly rare event, actually – should distract us from the improving fundamentals. Or the vast amounts of investor cash still waiting in the wings.
M ik e
Michael Wilson, Editor IFA magazine
www.IFAmagazine.com
Ed's Welcome.indd 7
Write to Michael at editor@ifamagazine.com
March 2013
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shorts
magazine
UK inflation hit 2.8% in February, according to the Office for National Statistics. CPI data showed that rising fuel prices were largely responsible – an oddity, given that global energy prices were stable – and that leisure goods such as consumer electronics had also gone up. By contrast, the retail price index fell slightly to 3.2% from 3.3% in January.
IT COULD HAVE BEEN WORSE In some ways it’s almost a pity that so much of the spring budget is leaked ahead of the big day. It rather spoils one of the more special days of a journalist’s year. But this year we’ve been mostly glad of it. If the Chancellor hadn’t let it be known in advance of 20th March that he was planning to order a 1% annual reduction in departmental budgets (except for schools and health) during the coming financial year, and another 1% cut in 2014/15, we’d only have spent precious time wondering whether Mr Osborne really had the nerve to chop an annual budget overshoot that’s already risen by £1,000 per person since he came to power. But the resulting £2.5 billion of savings – most of it destined for public infrastructure projects – confirms his sense of purpose
Surprise, Surprise
Despite the doubters, Mr Osborne did manage to ambush the Labour opposition with a couple of genuinely interesting proposals. He announced
a further 1% drop in corporation tax, with effect from April 2015, that brings the main rate down to 20% - and he added that a single rate would apply to all businesses, large or small. A new ‘Employment Allowance’ will effectively give every business owner £2,000 worth of National Insurance credit, and he declared his intention to spend an extra £15 billion on public infrastructure projects by 2020. The Chancellor announced that AIM and other junior stock market investments would be freed from stamp duty. (AIM will soon be eligible for inclusion in ISAs too, if a new Treasury consultation paper gets its way.) But that was about as far as his concessions to the City went. By far the best headline-grabber was the Chancellor’s confirmation that the personal tax allowance is to rise from its planned £9,400 in 2013/14 to the magic £10,000 figure in April 2014. There were uproarious cheers in the House, which almost drowned out the barracking that he’d been receiving up to that point.
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America’s sequester,
President Xi Jinping, was sworn in as the country’s central bank warned that it was on ‘high alert’ over inflationary pressures. Annual consumer prices had risen by 3.2% in February, from 2% in January – which was awkward because the government was trying to boost economic growth and industry would be damaged by higher lending rates.
No Economic Let-Up Yes, it has to be admitted that expectations were low before Mr Osborne stood up before the House. And the economic picture he painted was indeed grim. The official GDP growth forecast for 2013 had fallen again, he said, from the 1.2% in the Autumn Statement to just 0.6%. That means it’s has now risen by barely 1% since the election that brought George Osborne to the job. But he said that growth is now predicted to reach 1.8% in 2014, 2.3% in 2015, 2.7% in 2016 and 2.8% in 2017.
The One Hand Giveth…
The flat-tier pension of about £144 a week will now start in 2016, rather than 2017, and the cap on the amount the elderly can be required to pay for social care in England has been reduced slightly to £72,000. From 2015, childcare costs of up to £6,000 per child will qualify for vouchers that will effectively give basic rate tax relief to working parents. And, most impressively, Mr Osborne announced two new schemes intended to get the housing market moving. One is a £3.5 billion shared equity scheme to help buyers (not just first-timers) raise the deposit for new-build houses, which will provide 20% for every 5% they can supply themselves. And the other is a government mortgage guarantee scheme that he says will underwrite £130 billion of mortgages for three years. Presumably he’s not expecting too many defaults. Money was promised for shale gas exploration, and a shake-up of regional development
the first stage of the automatic budget-slashing programme, came into effect on 1st March – to be followed on 28th March by the expiry of the ‘continuing resolution’, which will effectively force actual spending cuts. The temporary suspension of the Debt Limit is due to expire on 19th May.
NEWS
China’s new leader,
funding. Etcetera. But if anyone thought this was going to be a general handout, the Fiscally Neutral Chancellor had a message. The crackdown on aggressive tax avoidance is going to bring in a fortune in new revenues, he said. And, combined with new disclosure agreements with the Channel Islands and Isle of Man, the writing was on the wall for any adviser foolish enough to promote such things. Perish the thought.
All Change at the Bank of England
Finally, Mr Osborne confirmed that he had agreed to alter the remit of the Bank of England’s Monetary Policy Committee, so as to help the economy get back to sustained growth. Specifically, he said, he was giving it instructions to consider “unconventional monetary instruments” that would enable it to target economic growth, or even unemployment, in addition to its continuing commitment to the 2% inflation target mandate. That sounds like rather a sea-change for the BoE, which has been independent of the government since 1997 and which isn’t used to being given political orders. Still, its new boss Mark Carney, who starts in July, has given notice that it all sounds acceptable. And even the outgoing Mervyn King - no fan of government steerage at the BoE – has given it the nod. It could have been worse. For more comment and related articles visit...
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NEWS
Bankers’ bonuses
, in all EU member states including Britain, are to be capped from next year at one year’s salary, EU leaders decided. Although exemptions will be allowed if the shareholders approve larger payouts. The move incensed the government, which had fought to block a measure that it said would damage London’s predominance in banking.
The Institute for Fiscal Studies
estimated that it would take tax increases of £10-12 billion during the next parliament if Whitehall were to avoid having to reduce its inflation-adjusted spending by a third between 2010 and 2018. Or between 2.5p and 3p on income tax.
Greek Tragedy, Act 2 Like the second boot falling off the shelf in the middle of the night, Cyprus became the second Greek victim of the banking crisis But if anyone was expecting a Greek-style bailout for the nation’s banks, they were in for a shock. Cyprus’s banks had been thumped, at least in part, by their willingness to lend money to the Athens government – whose own fiscal problems, as we know, had been famously caused by a lethargic tax collection regime, exacerbated by a concerted policy of falsifying official statistics over a couple of decades. But when the Eurozone leaders sat down with the IMF to consider a €10 billion bailout for the Cypriot institutions, they rejected the pattern of previous bail-outs. Instead of simply linking an official bank bail-out to a policy of government austerity, as they had already done for Greece, the Eurozone leaders decreed that the Cypriot banks’ own account holders should be forced to carry some of the pain. Depositors who have at least €100,000 in their accounts will have 9.9% of their money taken away and replaced with bank shares to the value of the levy, while account holders with more than €20,000 will lose 6.75% of their money. The smallest savers should escape the levy. Immediately, and predictably, all hell broke loose. In vain did President Nicos Anastasiades
try to tell his people that the bailout was Cyprus’s only chance of avoiding a “disorderly bankruptcy”. His government was outvoted, and the reform plan failed to be ratified. Meanwhile, northern Europe’s finest were back to the drawing board to try and think up a better rescue plan that didn’t target the retail banking clients. Which was an oddity, in this case, because one of the reasons why Brussels chose to hit the small man was that it strongly suspected that Cyprus’s banks were actually stuffed with dodgy cash originating from Russia – meaning that Germany had refused point blank to contemplate financing an easy way out for suspected money launderers from outside the EU. As we went to press, Cyprus’s foreign minister had flown out to Russia to try and arrange another rescue from Moscow. It seemed oddly logical. For more comment and related articles visit...
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NEWS
Another rebuff for David Cameron
from Robert Chote (right), head of the Office for Budget Responsibility, who protested publicly that the PM had wrongly claimed the OBR’s support for his claim that Europe, rather than the deficit reduction plan, was responsible for slow economic growth. In practice, said Chote, the OBR had consistently identified high taxes and spending cuts as reasons why 1.4% had been knocked off GDP since 2011.
Advisers
who charge their clients a percentage of portfolio values are earning broadly the same as before RDR, according to a poll of 1,400 adviser firms by Action Consulting. 72% said that their earnings were unchanged, while just over 25% said their percentages were lower. The survey also found that 30% of firms were charging solely on a percentage basis, while 25% were levying explicit fees and another 40% were using a combination of the two methods.
Into the Great Unknown Is it just us, or is there a shortage of information out there about exactly what the coming months will bring for the adviser community? Yes, most of us have got hold of the fact that the Financial Services Authority will hang up its regulatory boots on 1st April, the so-called Legal Cutover, when its various Rulebook powers transfer to the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). And we’ve more or less got our heads round the existence of the Financial Policy Committee, a part of the Bank of England that will spend its time thinking about the really big regulatory issues that transcend the more micro scope of the PRA. On the whole, it’ll be the FCA rather than the PRA that advisers will find themselves dealing with. But the authority has been strangely coy about providing detailed information about what else is going on. Will the FSA now be simply abolished without even a proper farewell, as
Hello? Is there anybody out there?
some of the more exuberant commentators have claimed? Or will it be given a few months in which to clear its desks and move on? (The FCA will be moving into its offices, so maybe not.) The publications division at Canary Wharf has been oddly reticent about the geography of the new regulatory environment. And, as late as 20th March, IFA Magazine was still having real problems with getting even an email address out of either organisation. It’s a shambles, frankly. In case of doubt, the FSA’s HQ should be posting contact information soon. Or try an independent provider such as the Practical Law (http://finance.practicallaw.com). Don’t leave us this way, please, FSA. Not without a forwarding address. After all these years we’ve spent together...
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NEWS
Child care will attract
Investor confidence
20% tax relief for households where both parents are working, it has been announced. The measure, which currently applies to all children under five, will be capped at £6,000 per child – meaning that the maximum relief will be £1,200.
in Germany showed a surprise improvement, as a survey by the respected ZEW Institute confirmed the fourth successive monthly rise in its confidence index. Observers had been expecting a slight fall. Earlier, the Bundesbank had also pointed toward a resumption of growth.
Blind Date Meanwhile, back on the consumer front, the IFA social networking site LifeTalk (formerly IFA Life) has launched a new consumer-facing website which aims to connect puzzled private investors with expert information from advisers Ask LifeTalk (www.asklifetalk.com), aims to provide answers for consumers on everything from personal financial planning and tax questions to life assurance, mortgages, ISAs or pensions. The individual starts the process by typing in a question which is then relayed to a selection of advisers for their expert responses. That’s when the good part starts for the advisers. Unlike an open forum, where respondents are obliged to more or less bare their souls in public if they want to get answers, the Ask LifeTalk format keeps the question private. And the individual can even stay anonymous if he or she wishes. The payback for advisers is that, once the consumer has read the various responses to his questions, he is encouraged to signify his approval by ‘liking’
them – and also, more importantly, to think about taking up a contact with an adviser of his choice, which may well develop into a lasting relationship. “We wanted to reinvent the way people find, assess and interact with IFAs and financial advisers,” said founder Philip Calvert when the site was launched in March. People are already comfortable with using search tools and the Internet, he says, but usually all they can find on the Web are straightforward directories of advisers which give them little way of differentiating between one adviser and another. “So we thought we’d bring the whole thing up to date,” Calvert added. And he has, in a way that will hopefully tempt more of the reluctant public into the adviser sphere. We’ll be telling you more about the new service in the April edition of IFA Magazine.
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NEWS
Beyond Active vs Passive – Investment Strategy for the Modern Adviser IFA Magazine’s two forthcoming seminars, in association with DFM specialists JM Finn, will be held in London on 24th April and in Manchester on 14th May, and will feature presentations and discussions from leading fund managers and industry figures including
Vanguard’s Neil Cowell, SPDR’s Matt Arnold, and Gillian Cardy, the IFA Centre’s managing director. Both seminars carry full CPD accreditation, and both will be followed by lunch and by an address by cricketing legend Alec Stewart – whose Phil Tufnell jokes alone are
generally agreed to be worth the trip. A further seminar will take place in Birmingham on 12th September. Places are limited, so early registration is recommended. See details on the opposite page, or visit http://tinyurl.com/bm4yfpp
Wealth Managers Prospering New figures from high net worth researchers Compeer have revealed that last year saw a 9.2% rise in the total assets invested with UK managers, to a final-quarter crescendo of £527 billion – up from £512 billion in the third quarter And that’s not all. Even though the total number of client trades dropped by 2.1% during the year, the revenues recorded by Compeer’s researchers increased by a decent 7.4% - quite a long way ahead of the 5.8% average gain for the FTSE/APCIMS Balanced Index. Not bad at all, in fact, for a year when the UK equity markets were looking a bit lost. But Compeer are not ducking the fact that trading volumes were a long way down. The final quarter’s 4.7 million trades were sharply lower than the 6,000-7,100 that were normal in 2010 and 2011.
Investment Assets (£billion) Clients Trades* (000s) Retail market bargains (000s) Total Revenues (£million) FTSE/APCIMS Balanced Index
To some extent, Compeer is blaming the decline on the uncertainties surrounding the runup to RDR. But it does add that, perhaps against expectations, the average wealth manager achieved a 3% reduction in costs during a year when regulatory pressures might have been inclined to drive them up. The upshot, says Compeer, is that wealth managers achieved a creditable pre-tax profit margin of 28.9%, despite slightly falling volumes. That’s not to deny, though, that executiononly stockbrokers had an even better year with 40.7% margins – not quite as good as 2011’s, but still hardly the stuff of tragedy.
Current Quarter
Previous Quarter
% Change
527 4,674 2,685 1,305 3,063
512 4,522 2,603 1,338 3,014
3.1% 3.4% 3.2% -2.5% 1.6%
Same Quarter in Previous % Year Change 483 4,774 2,688 1,215 2,895
9.2% -2.1% -0.1% 7.4% 5.8%
*participating firms only
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Beyond Active vs Passive Investment Strategy for the Modern Adviser IFA Magazine, in association with JM Finn & Co, is proud to announce a series of events across the country that will help advisers interpret and articulate the modern investment proposition. Today’s better-informed adviser has already moved past the traditional ‘passive versus active’ argument: instead, these events are designed to help advisers develop and understand blending strategy, and the benefits of adopting a unified approach. Dates and Venues JM Finn & Co, Coleman Street, London City Tower, Piccadilly Plaza, Manchester Venue TBC, Birmingham JM Finn & Co, Coleman Street, London
24th April 2013 14th May 2013 12th September 2013 14th November 2013
Provisional schedule:
10:30 am : Open for refreshments 11:00 am : Seminar Begins: Brian Tora - Chairman’s welcome 11:05 am : Gillian Cardy, IFA Centre: The IFA perspective on Passive and Active Funds. The regulatory environment, and what the modern IFA needs to know.
11:30 am : Mike Mount, JM Finn & Co: The DFM approach to blending. Examples of real world mandates, filtering and demand.
12:00 am : Panel discussion and expert insight from leading providers Neil Cowell – Vanguard, Lawrence Brennan – Artemis, Guest Panellist Passive 3, Guest Panellist Active 1, Guest Panellist Active 2, Michael Wilson, Editor IFA Magazine. Topics to include: Passive/Active Balance and the Client Profile
• Passive and Active Strategies How Much More Can an Active Approach Achieve? Control Versus Cost, and Finding Solutions for Every Client
12:45 pm : Lunch: Entertainment will feature an address and Q&A by international cricketing legend Alec Stewart, the most capped England Test cricketer of all time.
2:00 pm :
Alec Stewart
This seminar is CPD Accredited
• Hands On or Hands Off?
Close
Add to register or for more information, visit www.ifamagazine.com/events or e-mail events@ifamagazine.com magazine
The events will be filmed and edited to appear on web sites and will also be distributed via BrightTALK thought leadership channel.
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26/9/12
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This document is aimed at Investment Professionals only. All content is intended as general information only and does not constitute advice, recommendation or investment research. This information is not guaranteed to be correct, complete, or accurate. FE Research is a division of Financial Express Ltd, an appointed representative of Trustnet Ltd which is authorised and regulated by the Financial Services Authority. For our full disclaimer please visit www.financialexpress.net/uk/disclaimer.
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ED ’S SOAPBOX
IF YOU THINK MANUFACTURING IS SOMETHING WE DON’T DO
COMPETITIVELY ANY MORE, THINK AGAIN, SAYS MICHAEL WILSON
Herd Mentality I blame the risk-on risk-off boys, personally. We’ve spent the last four years looking so hard at the herd and the big picture and the macro fundamentals that we’ve all but forgotten the fine art of bottom-up
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Eds Soapbox.indd 17
stock-picking. Instead, we’ve become used to finding that whole sectors behave in monolithic ways that owe more to group-think than to ordinary common sense.
March 2013
17 22/03/2013 11:37
ED ’S SOAPBOX
magazine... for today ’s discerning financial and investment professional Rio Tinto’s sacked its chief executive? That’s ten per cent off every mining corporation in the world. BT’s up? Good news for Vodafone. Glaxo’s had a new drug refused? Watch out Pfizer, here it comes. Now, to some extent this sort of herd behaviour is simply the legitimate result of index tracking, especially among those passivelymanaged physical funds which have to maintain a required balance whether they like it or not. If the world’s selling Ford shares this week, then you have to follow suit with the whole of the index - including some car makers who shouldn’t be in line for selling off at all. But mostly it’s complacency that makes people mark down whole sectors at once, or even whole markets. That and a fear of the unknown. Because, naturally, the logic of a risk-on risk-off environment is that the safest thing to do is follow the momentum.
The Inscrutable East So, at last, I’ll get to the point. Honestly, I will. You can’t have failed to notice that this hasn’t been a particularly good year for China’s vast economy. Well, relatively speaking. The mere whisper of the thought that the People’s Republic might not crack 8% GDP growth this year has been enough to send shivers through every sector that trades stuff with China. Which, these days, means just about every branch of Western manufacturing, including luxury goods and foodstuffs. The last month’s weakness in sterling has only added to the pressures that importers of Chinese products are said to be feeling. Although, in fairness, the exporters surely ought to be rubbing their hands with glee at the prospect of being able to sell their goods to Beijing more easily and profitably?
18
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Odd, then, that everything seems to be under the same dark grey cloud. Part of the problem, I think, is that we’ve got used to thinking of manufacturing as uncool and unprofitable. At the same time, here in Britain, we’re grappling with the reality of some very poor manufacturing figures in February. No wonder we’re not feeling particularly upbeat. But look, maybe this is the moment to cut loose from the group think and make our own decisions? There are some bargains out there on ridiculously attractive fundamentals. And each of them is special for its own unique reasons.
Emerging Economies? Bring It On Here’s my personal, totally unrepresentative list of manufacturing companies that don’t conform to the collective wisdom on China’s automatic dominance of everything. And when I say China, the same applies to India, Brazil, you name it. Let’s be clear that I’m not recommending these companies’ shares – just suggesting that we spend some time thinking about how they break the usual mental connections. There are hundreds more like them. If we can just shake ourselves out of the rut in our thinking, that’ll be a step forward.
Catering to the Middle Classes Diageo is one of those companies that can’t stop growing. Voted Britain’s Most Admired Company for 2012 by the British Standards Institute, the group has taken the fight right into China itself with a renewed push to sell spirits and fine wines to its aspiring middle classes. Its 40.5% share price improvement during the 14 months to early January reflected a confidence that Beijing’s newly wealthy urbanites are likely to carry on wanting Western branded products – especially whisky – for all of the foreseeable future.
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Market capitalisation
£49.9 bn
P/e ratio (TTM)
19.58
Dividend yield
2.28%
% growth since January 2012
40.5%
Others? Aspirational mid-market brands in China are proving to be more robust than topend couture. And oddly, funds such as the Nordea Emerging Consumer Fund are finding that there’s just as much money to be made in Asia from soaps, cosmetics and trainers as from jewellery and flash watches. It’s all about thinking flexibly, and not allowing ourselves to be distracted by what we think we know.
Unique Selling Points BASF, the Anglo-German chemicals and pharmaceuticals company, has proved itself not only in the mainstream markets but in the developing world. Not least through its involvement in biotechnology research, including genetically modified crops which may yet hold the key to fulfilling the developing world’s demand for more reliable food supplies. This will not be an uninterrupted ride, however. China and India have both proved themselves to be politically sceptical about the impact of GM, and we shouldn’t ever underestimate the scope for hold-ups and setbacks on that front. BASF’s euro share price has been ricocheting around since early 2011, and the recent trend has been slightly downward.
ED ’S SOAPBOX
Diageo
Rotork, a Bath-based engineering company specialising in the arcane field of hydraulic valves and controls, has seemed unfazed recently by the prospect of competition from the Far East - for the simple reason that it holds the international patents on what is probably the finest valve actuator equipment in the world. These products are specified throughout Asia for water systems, drainage and sewerage plants, industrial applications and oil and energy systems. Although relatively small, at just £2.54 billion, the company has vastly expanded its sales to the Far East over the last decade. A price/earnings ratio of nearly 30 is rare among metal-bashing technologies – and all the more so in this case, since Rotork’s trajectory through the global financial crisis of the last five years has been almost spookily singleminded. The shares have soared from around 600p in early 2009 to a colossal 2,930 in March 2013.
Rotork Market capitalisation
£2.54 bn
P/e ratio (TTM)
29.14
Dividend yield
1.35%
% growth since January 2012
52.6%
The Comeback Kid Toyota’s stellar return to stock market form over the last year reflects, to a large extent, a better economic environment in the United States, where sales had been dented by a disastrous run of technical problems and product recalls in the mid-decade. And strong sales in Asia, many of
BASF Market capitalisation
€66 bn
P/e ratio (TTM)
13.52
Dividend yield
3.63%
% growth since January 2012
28.6%
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ED ’S SOAPBOX
magazine... for today ’s discerning financial and investment professional them coming from joint-venture operations based in China itself, have helped to bolster the company at a time when European sales have been flagging. Earlier this year, Toyota overtook Volkswagen once again to reclaim the title of the world’s most successful automobile market leader. So far, so good. But we dare not forget that Japan’s new prime minister Shinzo Abe is a controversial character who manages to rub the Chinese up in all the wrong ways. Whether it’s Tokyo’s increasingly militaristic line on Pacific security, or Japan’s attempt to buy up the disputed Senkaku Islands (Diaoyu Islands), which are also claimed by China and Taiwan, there are real reasons to fear a diplomatic backlash. In March this year, China’s foreign minister accused Japan of “illegally stealing China’s territory and occupying it,” and added that Japan’s decision represented “a challenge to the post-World War II international order.” That’s fighting talk. It might not put Toyota into boycott territory in China, but then again it won’t do much to ease its further industrial development.
Toyota Market capitalisation
£114 bn
P/e ratio (TTM)
19.56
Dividend yield
1.14%
% growth since January 2012
82.7%
Feeding the Masses Bunge, an international supplier of food products, is all the reminder we ought to need that there are still yawning gaps in China’s requirement for basic imported products, and that there is plenty of money to be made from meeting it. Bunge supplies maize, soya, cooking fats and many other staples to the Chinese market – much of it grown in North or South America. But, here again, the foodstuffs market can be a brutally volatile place. The North American scene was badly hit by drought last year, and last year’s final profit figures came in at a puny $28 million, the lowest in a decade. In 2011 they’d been $908 million. Ouch again. The poor result was partly due to a hefty write-down of sugar operations in Brazil, Bunge shares fell 9.1 per cent to $72.12, a seven-week low. But it may also have reflected China’s on-off decision on whether or not to accept new strains of GM corn. Either way, Bunge took a 9% one-day setback in February, from which it is only slowly recovering. Nothing in life is guaranteed, it seems.
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Bunge Market capitalisation
$11.1 bn
P/e ratio (TTM)
30.5
Dividend yield
1.43%
% growth since January 2012
27.8%
And One That Didn’t Perform I have, of course, selected mainly winners to illustrate my point that we can be too defeatist about the outlook for western companies that produce mainstream consumer goods. And for that, I apologise profusely. I was, after all, trying to challenge the assumptions. But sometimes things can work out poorly even in promising situations. Take Siemens, for example. Six years ago, the markets were buzzing about the German industrial giant’s contracts to supply power station technology to China, including any number of nuclear and gas turbine installations. Now, China is still building energy infrastructure at a staggering rate, and Siemens is still right in there and working away. The company has secured the contracts for massive new wind turbine plants – China intends to increase its installed capacity from 60 gigawatts to 150 gigawatts by 2020.
All good. But Siemens’ share price has been dogged by volatility over the last two years, and it’s still a good 20% below its €100 euro peak of early 2011 – having dropped close to €60 last summer. That wasn’t all down to the Eurozone banking crisis, even though the euro’s travails did impact heavily on badly indebted industrial giants. No, a slowing demand for industrial automation equipment in Europe had coincided with what Siemens’ chief financial officer perhaps rashly described as “very weak” Chinese demand for the second half of 2012. Coming on top of his previously optimistic prediction of a second half recovery in China, the markets took fright and decided that maybe they’d been over-egging the Chinese pudding and that it was time to cool off.
Siemens Market capitalisation
€70.4 bn
P/e ratio (TTM)
13.8
Dividend yield
2.76%
% growth since January 2012
8.1%
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ED ’S SOAPBOX
All of which looks rather odd in retrospect. China’s industrial outturn for the whole of 2012 came through at a highly satisfactory 10% - and, although that was 3.9 percentage points less than in 2011, it was hardly a disaster, was it? So which way will Germany’s industrial superstar go in 2013? Is a p/e of 13.8 high enough, considering that the troubled consumer goods market is still quite important to Siemens’s bottom line?
No Sure Way To Tell What can we conclude from all this? Firstly, that there’s still a massive amount that China needs from the West that it can’t produce for itself – engineering equipment, foodstuffs, know-how, science, you name it. And we haven’t even mentioned banking and insurance. Secondly, that even a more slowgrowing China will continue to experience these needs in volumes that will open up enormous opportunities for those companies that are in a position to deliver it.
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But thirdly, that dealings are likely to be affected by political issues of all sorts. And that, given the slightly over-hyped forward expectations that can sometimes get attached to these lucky companies, some degree of exaggerated volatility may result when things take even a temporary downturn. It’s all to be expected.
Do you have a good reason for the Editor to jump back onto his soapbox? Not that he needs any encouragement, please send your requests to editor@ifamagazine.com and stand well back!
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magazine... for today ’s discerning financial and investment professional
IN GOD IS MONICA WOODLEY SAYS AMERICA’S POLITICIANS ARE PLAYING A GIGANTIC GAME OF CONSEQUENCES. NOBODY KNOWS YET WHAT THE OUTCOME WILL BE
First we had the ‘grand bargain’ in 2011, followed by the ‘debt ceiling’ showdown. Then came the ‘super-committee’ and the battle over the ‘fiscal cliff’. And now we get the ‘sequester’ of 1st March. Now, maybe it’s because that last word is not as sexy as ‘fiscal cliff’? (For which thanks to Ben Bernanke, by the way).
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Or maybe it’s just that Americans are tired of their bickering politicians and have decided to ignore them and get on with it? But at the time of writing the Dow had risen above 14,250, breaching the record high last seen in October 2007 - despite looming cuts of $1.2 trillion in government spending, which could hit the US’s struggling economic recovery.
Oops
The ‘sequester’ was originally created as something that was never supposed to happen. The White House and Congressional Republicans had agreed on $1 trillion in spending cuts as far back as 2011, but they’d been unable to agree on how to cut an additional $1.2 trillion. So, in order to incentivise the bipartisan congressional
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US DEFICIT
OUR TRUST super-committee that was tasked with finding a solution, the White House created the ‘sequester’ – automatic cuts, half from discretionary programmes and half from defence – which would kick in if they failed to reach a deal. It had been safely assumed that the threat of severe and arbitrary spending cuts would force Democrats and Republicans to reach a compromise - but alas, no one counted on the extreme intransigency of American politicians. As it turned out, the deadline for reaching a compromise passed on March 1 - leaving all the different groups to figure out how each of them will be affected.
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And the pondering has been colourful, to put it mildly. The potential effects raised so for range from the slightly comic, such as widespread shortages of eggs, to the downright scary – reductions in air traffic control staff. At the serious end of the scale, the Federal Aviation Administration’s plan to ‘furlough’ most of its 47,000 employees by one day per pay period (i.e. to cut their working hours without pay) might cut America’s air traffic capacity by 5% to 10%, with cargo flights most badly impacted. But the situation would be no better on the ground, where the furlough of customs officers could result in huge delays at border crossings, hitting supply chains.
Even the comic end of the spectrum could have a big impact. Trade groups are warning of widespread shortages of meat, poultry and eggs, due to the $2 billion in automatic cuts to the US Department of Agriculture’s budget - which would cause it to furlough food inspectors at more than 6,300 plants. That would cost the industry an estimated $10 billion in lost production and $400 million in lost wages, and it would have trickle-down effects on farmers, who would bear extra costs, and on consumers, who would need to pay more if supply were constricted.
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magazine... for today ’s discerning financial and investment professional The impact of these cuts could add up. The non-partisan Congressional Budget Office (CBO) says growth will be 0.6 percentage points slower than expected and there will be 750,000 fewer jobs at the end of 2013 if sequestration remains in place. The International Monetary Fund (IMF) echoes that concern, warning that it will cut its growth forecast for the US if the situation is not resolved.
Reasons To Be Cheerful
If the economy had been in a strong position to start with, knocking up to 0.6 percentage points off GDP would have been less significant. But unfortunately it’s still struggling to bounce back. And political strife has already had an effect. Firstly, the fourth quarter was marked by worries about the fiscal cliff, which may have caused a fall in defence spending. And secondly, payroll taxes also went up at the turn of the year, leading to concerns that already-squeezed consumers would further retrench.
But overall, the signs are positive. The fourth quarter of 2012 was the first in four years to see consumer debt rise. After years of deleveraging, Americans are once again borrowing for cars, education and homes. US households have cut about 10 %, or $1.3 trillion, from their debt load since the third quarter of 2008. Auto loans are back to levels last seen in 2007 and new mortgages rose for a fifth straight quarter, to their highest level since July 2008, with delinquency rates also improving. The stock of unsold houses dropped to 1.74m in February – the lowest level since December 1999. The Conference Board index of consumer attitudes on business and employment conditions, as well as expectations for the next six months, rose to 69.6 in February - the biggest annual gain in more than six years. This was no
doubt influenced by jobs growth, which continued in the fourth quarter and in January. In fact, the increases in non-farm payrolls for the final two months of 2012 were both revised upwards. In addition to feeling more secure in their employment, Americans have seen rising house prices and stock market gains add to household wealth, which is good news for retailers and the wider economy. Getting people shopping again is vital in an economy where about 70% of GDP comes from consumer spending. Retail sales in January rose by 4.4% and are still well above their year-earlier levels. Additionally, overall inflation is still relatively low. There are positive signs on the business side too. In January, durable goods orders (excluding transport) rose by 1.9% - meaning that they have risen by more
“GDP growth last quarter was temporarily restrained by weather-related disruptions” Fed chairman Ben Bernanke
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magazine... for today ’s discerning financial and investment professional than 1% for five straight months. Industrial production was up by 2.1% on the year before. The Institute for Supply Management’s manufacturing index climbed by 1.1 percentage points to 54.2%, and 15 out of the 18
industries followed by the ISM reported growth. Meanwhile the Fed has stated that it does not expect to raise interest rates until 2015 at the earliest. That’s going to help both consumers and businesses recover their appetite for borrowing.
“Obama is proposing much the same solution to reduce the deficit as he has previously”
The Bad News
But it’s not all good news out there. Despite improving delinquency rates, as of January, 10.9 million US homeowners – 26% of mortgages – were still seriously underwater, meaning that they owed at least 25% more than their homes were worth. And despite jobs growth, the unemployment rate is still unchanged since September 2012, at 7.8-7.9% - equivalent to 12.3 million unemployed people - and wages are still not growing very quickly, with incomes after taxes and adjusted for inflation rising just 1.5% in 2012 after a 1.3% increase in 2011. Let’s not forget, either, that income will also be affected by the expiry of last year’s payroll-tax cut and by higher taxes on the wealthy, which kicked in at the start of 2013. The payroll tax alone is expected to cost US households an average of $1,000 in 2013. And, despite overall inflation remaining low, the average
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spending, even as demand by US households and businesses continued to expand.”.
Sequestration – the Real Impact
So the overall economic picture looks positive, if still a bit vulnerable. If allowed to continue on its way, the economy would no doubt continue its recovery. But there is the little matter of the sequestration. On the positive side, the $1.2 trillion in spending cuts will take effect slowly, over a period of 10 years, with a cut of $85 billion for the seven months until the end of September. (Although in practice that will reduce actual spending by only $42 billion, since some money approved in one fiscal year is spent in the next.) On the negative side, though, most entitlements, such as pensions and healthcare, are excluded - which makes the reduction in other areas more severe: 13% in defence spending for the next seven months and
US DEFICIT
cost of gasoline – always a big consideration for car-loving Americans – has risen by 14% since the beginning of the year. It’s true that the estimates of US growth in the fourth quarter of 2012 were revised up from an annualised fall of 0.1% to a rise of 0.1% - but that revision still came in well below the general expectations of a rise to 0.5%. The main change in the revised Q4 figures was an upward revision to net trade - but GDP growth, on the other hand, had been dragged down by big falls in business inventories and federal defence spending. But Fed chairman Ben Bernanke is keeping his cool. “The pause in real GDP growth last quarter does not appear to reflect a stallingout of the recovery,” he told Congress in late February. “Rather, economic activity was temporarily restrained by weather-related disruptions and by transitory declines in a few volatile categories of
a 9% cut to other domestic discretionary programmes. The consensus amongst economists is that sequestration could knock 0.3-0.6 percentage points off US growth in 2013 while also maintaining the current unemployment rate. The Economist Intelligence Unit (EIU) assumes that the sequester will not last all year – but, even if it lasts for a short period, there will still be a significant effect. If the sequester lasts for only one month, the EIU says it will reduce its forecast for US GDP growth in 2013 from its current 2.1% down to 2%. If an agreement is not reached until the end of May, that drops to 1.9%, and it goes down to down to 1.6% if the sequester remains in effect until the end of September. In the worst-case scenario - if the sequester remains in force for the remainder of 2013 – the EIU believes that growth will reach just 1.4%.
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magazine... for today ’s discerning financial and investment professional
Political Brinkmanship
If the sequester was never supposed to happen, why has its deadline passed with so little effort being made to find a solution? Perhaps because sequestration is a tolerable way for politicians on both sides to stand firm on their principles. Of course, the threat of a US debt default hung over the original 2011 negotiations, and the impact of huge tax rises subsequently forced the government to deal with the fiscal cliff. But the delayed and indirect nature of this year’s sequestration cuts have made the impact less worrying for the American public. A recent poll found that 49% of Americans hold the Republicans responsible for the stalemate that brought on the sequester, and 31% blame President Obama. But so far there is little public pressure or outrage. President Obama is sticking to his guns, proposing much the same solution to reduce the deficit as he has previously. He bravely has offered to allow substantial cuts to Medicare, the government’s health-insurance scheme for the elderly, which most
out further tax increases. Many feel they already gave in with deal done at end of 2012 to increase taxes on the wealth, but they did secure 10-year spending cuts worth almost three times as much as the $620 billion in tax increases. However they are looking for further cuts spending cuts.
The Medicare Mess
The biggest sticking point in future negotiations is agreeing on how entitlements should be reformed. With Medicare, for example, most Republicans believe benefits have to be directly constrained by converting the programme to a voucher system. But President Obama prefers instead to cut payments to drug companies and hospitals and experiment with different ways of delivering care. Entitlements must certainly be reformed if the deficit is to be reduced. A recent Economist article estimated that in 2012 about 65% of federal spending went to healthcare, income security and pension programmes. At $2.3 trillion, that is 15% of GDP, not including what the 50 states spend separately on similar programmes.
“If they could get this fixed, the economy is poised to take off” Bank of America’s CEO Brian Moynihan Democrats oppose, in exchange for Congress raising revenue by eliminating tax loopholes and deductions. However reform of other entitlements such as Social Security are more politically sensitive. Republicans have generally been in favour of tax reform, but they have repeatedly ruled
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By the time you’ve deducted that 65%, plus another 20% for the military, that leaves just 15% of the budget for discretionary spending - and this includes things building infrastructure and financing education, both of which are areas that could help fuel economic growth.
Cutting these areas also does nothing to resolve long-term pressure on the deficit, which comes from entitlements. These programmes are not in good shape themselves. The Social Security disability trust fund is projected to blow through its reserves by 2016 and the Medicare fund that pays hospital bills will exhaust its resources by 2024.
America Needs a Deal
So the imperative to reach a deal is there, at for those who are not completely short-sighted. And negotiation on lifting the sequester will be complicated by the expiration of funding for some federal programmes at the end of March. If an agreement is not reached on that issue, a partial government shutdown could happen, which may bring the public out of its stupor. That, plus the furlough of federal employees, which would take effect in April at the earliest, would make the impact of the cuts more visible. Either way, by September 30, the federal budget year ends, meaning the cuts have to be accounted for – and the next federal budget year begins, triggering a second year of sequester cuts. President Obama is banking on this being too much for the public to bear, putting pressure on Republicans to negotiate. On the other side, the Republicans hope the impact of the sequester cuts will not be significant, giving them time to stand firm and get the spending cuts they want. For their part, investors in the US are frustrated at the political stalemate and uncertainty. Bank of America’s CEO Brian Moynihan was putting it quite gently in a recent interview, when he said: “If they could get this fixed, the economy is poised to take off.” It needs to happen. For more comment and related articles visit...
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magazine... for today ’s discerning financial and investment professional
UNCHARTERED BILL TOMLIN OF VERRIDIAN RECRUITMENT ASKS WHETHER CHARTERED STATUS OUGHT TO BE THE MINIMUM STANDARD FOR ADVISERS?
In the wake of compulsory attainment of level four Diploma status, as well as ongoing continual professional development (CPD) to continue operating, the financial advice industry is now embracing this new way of working. But as the dust settles, a new question is being raised about the progression to chartered status. Should it in fact be the minimum industry standard? According to data from the CII, a total of 3,471 people held the chartered qualification on 28 January 2013 - representing a rise of 644 people year-on-year. This is the largest yearly rise in the Chartered qualification since the launch for individuals in 2005.
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Chartered status is widely accepted as the gold standard qualification for financial advisers. Those at the forefront of recruitment are seeing many clients insisting on chartered status as a primary requirement. As Ian Scott, head of wealth planning at Arbuthnot Latham, explains: “As a private bank with corporate chartered status for our wealth planning, we ensure that all of our senior financial planners are chartered. We know the value our clients place on this status, and that this commitment helps differentiate our professional advisers from those who attain the bare minimum qualification requirement.
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TERRITORY
Our clients expect to pay a professional fee for professional services, so this works well.” With the number of people achieving the status and leading firms only working with those that are chartered, the industry seems firmly set on its course. However, a number of advisers are not of the same opinion.
Experience versus Qualifications
On the other side of the fence, a number of advisers see chartered status as excessive. As one recent commentator on a discussion forum put it: “The trouble is that there are a very large number of advisers - in fact, probably the majority of advisers - who not only strongly
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objected to being forced through to what they see as a completely unnecessary qualification at level four, but who will also feel that any further compulsory qualifications in their case are entirely unnecessary, bordering on victimisation.” So advisers might feel pressured or even forced into chartered status, as the industry looks for higher standards. But this still begs the question about whether advisers feel it’s actually necessary to go beyond level four? The majority have a great deal of experience, a long-standing customer base, and the expertise to keep abreast of industry changes and legislation. Their customers
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magazine... for today ’s discerning financial and investment professional
“So advisers might feel pressured or even forced into chartered status, as the industry looks for higher standards. But this still begs the question about whether advisers feel it’s actually necessary to go beyond level four?” Verridian Recruitment’s Bill Tomlin
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also understand the change in fee structure, and so they are looking much more closely at the adviser and questioning the value they receive, as well as the return on investment. As another commentator noted: “A recent ‘prospect’s’ (assuming it wasn’t a mystery shopper) first question to a colleague of mine was, “Are you a chartered adviser?” He isn’t yet, and is working towards it - which he informed the individual. Her reply was thank you (but no thanks) and the enquiry went no further.” I firmly believe that many (customers and employers) will select their advisers and employees based on their qualifications as well as their experience, in a marketplace which is seeing a shift as seismic as the polarisation caused in the late eighties.
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To Be or Not To Be? It seems logical that the next minimum standard will be chartered. Institutions are demanding that status, as well as savvy consumers. We now need to accept this fait accompli and identify a tool that supports each adviser – not only on the route to chartered, but with CPD. The work of the CII, PFS and IFP has been at the forefront of the on-going development of a professional career path for financial advisers, and we must now embrace these changes, placing everyone in a learning frame of mind, which I believe will help improve the professionalism and reputation of financial advisers further. For more comment and related articles visit...
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KNOW WHEN TO HOLD ‘EM
magazine... for today ’s discerning financial and investment professional
WILD CAR BRIAN TORA REFLECTS ON THE WEAKNESS OF HIS FELLOW MEN
Reflecting on what has been a buoyant start to the year (the FTSE 100 Index was flirting with 6400 not so very long ago), I was endeavouring to avoid getting too carried away with the return of optimism amongst investors. Not that I was pessimistic, you understand, but I’ve been in this game long enough to appreciate fully that markets do not move in straight lines. Why do markets rise? Because more people are buying than selling. And what marks the top of the market? The time of maximum optimism amongst investors. As it happened, within a day of reaching this latest peak on 25th February – still below the levels attained at the end of 1999, don’t forget – shares went sharply into reverse as comments from Ben Bernanke unsettled investors. That’s the trouble with markets. They should be looking ahead to what is going to happen, but those whose actions drive share price movements are only human, and vulnerable to emotional reactions to daily events. And as if to demonstrate the capriciousness of markets - and of the human beings who influence their behaviour - two further events blighted sentiment as February drew to a close. First, the UK lost its highly prized AAA rating in the sovereign debt market. And second, Italy’s general election descended into a shambles, with no single political grouping able to claim leadership. To make it worse, a stand-up comedian, campaigning on an anti-austerity, anti-politician platform, garnered a quarter of the popular vote. Sigh. Only in Italy...
Sweet October 1987 With all this happening, it’s all too easy to ignore the supposedly predictive nature of markets. I mean, share price levels are supposed to reflect what is likely to happen – not that this is an infallible concept either, unfortunately. In 1987 shares crashed, with the major indices both here and in America shedding a third of their value in two short weeks. Such was the terrible impact of this crash that our then Chancellor, Nigel Lawson, suddenly eased monetary policy because he believed that a financial catastrophe lay just around the corner.
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With the benefit of hindsight, we now know that the great crash of 1987 was little more than a correction to an unsustainable bull run during the previous months - but that it was condensed into a few short trading days, thanks to the effects of the burgeoning derivatives market, which were then insufficiently understood by market regulators. August 1987 had seen a time of maximum optimism. And in Britain’s case there was the further complication of a market being shut down by the hurricane which had swept through south east England on the exact day that the sell-off in the US started. But the damage was real, all the same.
…And The Echoes Of February 2013 So much for the predictive power of the markets, then. But perhaps it would be more accurate to say that markets reflect what the participants believe will happen? So, in that light, it’s interesting to contrast the reaction to these two latest pieces of negative news. The Moody’s downgrade in late February caused barely a ripple in markets. Perhaps this was because the downgrade, from AAA to AA1, had been largely expected - but the fact that the US and France had already walked down this particular street of shame clearly helped matters. Whatever the reason, it was clear that bondholders of UK government debt weren’t overly concerned. Indeed, probably the only real casualty of this seemingly unimportant event is the credibility of George Osborne. But shares certainly did tumble upon the news of an ungovernable Italy, with the EuroFirst 300 losing an entire month’s gains, and with Italy’s bond yields putting on 50 basis points. Again, it’s hardly rocket science to determine that the election result of 25th February throws a spotlight once again on the fragility of the single European currency zone. Italy is the third largest economy in this group of increasingly disparate nations. The fact that the largest single party is led by a political ingénue called Beppe Grillo who openly espouses dumping the Euro will be sending shivers down the corridors of power in Europe and the trading
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KNOW WHEN TO FOLD ‘EM
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floors of investment houses.
Wonderfully Concentrated Minds
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Personally, though, I view all this as a positive development. The comforting words from the head of the European Central Bank last autumn allowed Eurozone leaders to be diverted from the task of finding a lasting solution to the problems of the single currency. And now the Italian elections look likely to concentrate their minds once again. Why, 2013 could turn out to be the better year that January presaged after all.
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This advertisement is directed at investment professionals in the UK only and should not be distributed to retail investors. The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. The material contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this document does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this document when making any investment decisions. Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Services Authority. © 2012 Vanguard Asset Management, Limited. All rights reserved. VAM-2012-10-05-0177
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magazine... for today ’s discerning financial and investment professional
THE DEVIL IS IN THE FSA’S CRACKDOWN ON SIPPs IS JUSTIFIED, THE INDUSTRY BELIEVES. BUT ITS IDEAS ABOUT RISK AND ASSET VALUATION ARE STILL FLAWED. KAM PATEL REPORTS No-one is doubting that the SIPP sector has had a decidedly tough time of late - what with unrelenting bad press and a regulatory watchdog snapping at its heels, following revelations of dodgy schemes and of clients being kept in the dark about the true risks associated with investments. Yet our researches confirm that the outlook for SIPPs as a whole remains strong. New data from MoretoSIPPS, a specialist consultant and advisory service, reveals that the UK market now boasts just over a million SIPP plans worth £122 billion - and that it has grown by a hefty 35% per annum since pension A-day in 2006. The 10 largest providers now account for almost 80% of SIPPs and 66% of assets, according to MoretoSIPPs’s founder John Moret. But it’s the smaller operators who are under pressure.
A Promising Future MoretoSIPPs’s research is drawn from a survey of over 90 SIPP operators, including all the major players. To which we should add
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that there are at least another 80 organisations approved by the FSA as operators, most of them are very small. Moret says that while it’s unrealistic to expect the heady growth rates seen in the past will continue, there is more growth to come. Key driving factors, he says, include the role of platforms, which are focusing more and more on acquiring and retaining pension assets into retirement. But, with interest/ gilt rates looking set to remain at historically low levels for some time yet, Moret says he also expects that increasing numbers of wealthier investors will put off buying an annuity and use SIPPs instead as the drawdown vehicle. Moret also expects that auto enrolment will have a positive impact, because it will lead to growth in DC pension pots which may well move into SIPPs as employees change jobs. Moret points out that there is still a lot of money - around £250 billion left in legacy individual pensions, much of it underperforming and therefore suitable for transfer. “I think it’s reasonable to project another 500,000 SIPPs by 2020,” he says. “The only
caveat is the potential damage to the SIPP brand that’s been caused by the fallout from certain dubious investments which have received considerable adverse publicity in recent weeks.”
Lumbering Regulatory Response Hallelujah to that last bit. But of course, concerns over the SIPP sector and its messy, uncontrolled growth have actually been doing the rounds for many years. It was last year that the chickens properly started coming home to roost, with the Serious Fraud Office warning in July 2012 of fraudulent abuse, after uncovering cases of SIPP investors who were being encouraged to disinvest their pensions and put them into highly speculative schemes with little or no chance of payback. Sure enough, the FSA lumbered onto the scene in November with new rules requiring SIPP operators to provide key features illustrations to consumers, and to show how charges would impact on their investment returns. In addition to the rules, which come into force in April 2013, the FSA
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SIPPs REFORM
THE DETAILS lowered the pension projection rates that give retirement savers some idea of the return on their investment. And for good measure it also ordered providers to quote appropriate rates of return, subject to the regulator’s maximum projection rates. Then came a challenging consultation paper in which the regulator proposed raising the minimum amount of capital required to held by SIPP operators from £5,000 to £20,000 - the minimum the FSA says it usually costs to wind down a SIPP operator. The exact amount of capital required, however, will depend on volume of assets under administration. Generally speaking, the more assets an operator holds, the more capital it will need. The watchdog also proposes an additional capital surcharge for operators who hold non-standard asset types such as Unregulated Collective Investment Schemes, because they take longer to transfer in a wind-down situation. For ‘non-standard’, read any asset not appearing on the FSA’s defined list of standard assets such as cash, real estate investment trusts, corporate bonds, exchange traded commodities and unit trusts.
Watch Those Assets Andy Bowsher, director of self invested pensions at provider Xafinity, is clear about the merits of the FSA’s stance on
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key features: “Transparency is vital to the health of this industry,” he says, “and this measure should result in providers with customer driven businesses ultimately thriving. So we absolutely support clear information to clients at outset.” But Xafinity is “very concerned” at the prospect of SIPP providers having to project underlying assets - including the charges of those underlying assets - because of the margin for error that’s involved. “Can you imagine trying to project for a DFM account or a structured product?” he asks. “The FSA’s rules suggest that providers can use ‘reasonable assumptions’, but the scope for divergence is really quite obvious.” Bowsher fears there is a very real danger that comparative illustrations will favour those who take, for instance, the most cost effective route in order to reach the most favourable answer. Xafinity’s preferred solution is to base all projections on just the SIPP provider’s charges to allow for proper comparison. “Unfortunately, the FSA chose not to take note of the concerns that we and others raised on this point, and I fear we’ll end up with projections that are at best no good for comparison, and at worst deliberately misleading.” As for the capital adequacy proposals, Bowsher acknowledges that there is a need for a better approach on this front. “There are SIPP providers who apparently
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magazine... for today ’s discerning financial and investment professional haven’t carried out appropriate due diligence on certain assets - and subsequently those assets have failed, lost money, been fraudulent and so on. And it’s no good for the reputation of the SIPP industry. If there are SIPP providers holding these sorts of investments, it is right that they should be reserving some form of risk-based capital. We think the minimum capital requirement is a good idea.” Still, like many in the industry, he is “highly concerned” that capital requirement will be based on asset values, some of which cannot be valued. He also points out that asset valuations within a SIPP don’t happen very often for some
types of assets, especially for commercial property.
Paint By Numbers Then there’s the rather perverse result that a firm with lots of small SIPPs with non-standard assets will be required to hold much less capital than firms which hold small numbers of large value non-standard asset SIPPs. “Ultimately, the time taken to wind down a business depends on the volume and nature of the investments, not their value. Xafinity has proposed that capital should be based on numbers of SIPPs. We’ve also disagreed with the inclusion of property as a ‘non-standard asset’ – it’s a well understood asset that doesn’t have to be sold upon wind-down.”
Indeed, he says, no assets actually need to be sold on winddown if there’s a separate bare trustee. On wind-down the bare trustee can be disposed of by sale (always assuming that there’s a buyer) with a simple change of trustee name. “There is no recognition within the proposals that some companies have set up their businesses so as to ring-fence trustee ownership thereby almost fully removing the wind-down risk, apart from, perhaps, providers who have allowed any really dangerous investments – but there are other ways to tackle this.” Bowsher is unconcerned, on the whole, by the enhanced level of regulatory scrutiny; indeed, he regards even the new capital adequacy proposals as drivers of competitive advantage
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Suffolk Life Over at Suffolk Life, there’s also a mixed response to the FSA’s crackdown. On the key illustrations requirement, and the impact of charges on returns, Suffolk’s head of marketing Greg Kingston points out that SIPPs, covering as they do a diverse array of investments, are being unceremoniously squashed into the rules intended for normal
personal pensions. Because the FSA has deemed that they should be treated the same, this means to Kingston that a number of inconsistencies immediately arise. “What is relevant for comparing costs of similar investments in stakeholder pensions, for example, soon becomes largely irrelevant for a large number of SIPP investors,” Kingston says. And another thing, while we’re at it. “Often the cost of the actual SIPP wrapper is totally dwarfed by the costs of investment - yet the provider is still obliged to show all relevant costs – and that includes the cost of advice too. There is no doubt that some SIPP providers find this frustrating, especially for certain investments – such as commercial property – where illustrations do not appear
SIPPs REFORM
for the business. “For example, we remain very much in the commercial property space, when others will have to consider long and hard as to whether they can remain there. Indeed commercial property and land investment remain a core driver of ‘true SIPP’ growth, and as one of our key specialisms, helped drive Xafinity sales growth last year.
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magazine... for today ’s discerning financial and investment professional to add any value and may in fact add confusion.”
An Essential Shake-Out Suffolk Life says it experienced its strongest year of growth during 2012, thanks in part to a much greater focus on integrating with platforms and investment providers. Over the past couple of years the company has built integrations with over 20 new different platforms and investment firms. “If, for example, an IFA uses a DFM such as Cheviot, we want them to be able to run that in a Suffolk Life SIPP – SimSIPP, in this case. But then, if that same adviser has a client that requires a model portfolio run on a platform, we can offer a Suffolk Life SIPP to support that too.” Despite the gloom created by the pace and severity of regulatory change, Kingston is convinced that the SIPP market has a bright future: “That future will likely see fewer SIPP providers, but they’ll be stronger and safer, and the consumers will still have the same range of choices, access to investments and flexibility that they have today.” But smaller providers are likely to become scarce, he thinks, unless they have a niche unique selling point or else the financial means to invest a significant amount into their businesses. “We’ve already heard from a number who clearly have decided that they do not
want to continue operating. I made the prediction that, if the FSA’s proposals in CP12/33 [“A New Capital Regime for SIPP Operators”] were to be implemented as written, then we would see fewer than 40 SIPP providers remaining by 2015. The market needs that kind of consolidation to move forward.” Commenting more broadly on the sector’s current woes, Kingston is clear that the (until very recently) light touch regulatory oversight of the industry and negligible setup costs have much to answer for. “It meant that there’s been no barrier to virtually anyone entering the SIPP market. Poor quality providers have emerged as a result, some of which appear to have been set up for no reason other than to channel money into highly questionable, often high commission, investments.” Due diligence is the order of the day, he says. “Established names and reputation are no longer sufficient guarantees of security – advisers need evidenced facts. Any sign that a provider is not willing or able to entertain such scrutiny is likely to immediately demonstrate that it is time to look at a different SIPP provider.”
Due Diligence Is Vital Martin Tilley, director of technical services at SIPP and SSAS specialist Dentons, agrees on the critical importance to IFAs and clients of fully researching
potential SIPP providers and their due diligence procedures. He advises them to look for a track record that goes well before the FSA opened the doors to SIPP Provider status in 2007. And he says the expertise of staff, the continuity of key personnel, the financial stability and – crucially - the due diligence process should all be examined carefully. Tilley says it is unfortunate that the FSA has had to ‘go public’ with its criticisms of the sector, but he believes the greater involvement of FSA should still be regarded as a positive. “It is the FSA’s job to ensure that the interests of the client are protected. We cannot escape the fact that some SIPP providers have tainted the SIPP market by putting short term new business and/or profitability before long term sustainable business goals. But, although a few might have ruined it for the many, there are still a large number of perfectly well run, respectable, resourceful, profitable and stable SIPP providers who can offer the consumer and the IFA plenty of choice in a wide market.” Dentons has experienced strong growth in its new business - up 28% in 2012 versus 2011 with a good number of new IFAs using the provider for the first time in 2012. Its own SIPP offers access to some 70 platforms and DFMs - right the way through to complex
“SIPPs are being unceremoniously squashed into the rules intended for normal personal pensions. Because the FSA has deemed that they should be treated the same” 40 SIPPs.indd 40
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magazine... for today ’s discerning financial and investment professional commercial property transactions and unquoted equity. Critical to business, says Tilley, is the due diligence put in to make sure that, whatever asset is proposed, it can be accepted, acquired, held, valued and disposed of efficiently and practically. “We recognise that in the market we deal, IFA advice is crucial so we gear our SIPP, our website and marketing towards IFAs to make it as simple as possible for them to understand what we can do and how we can help them. Demand for commercial property in SIPPs is strong, with around 50% of new SIPPs in the last four months looking to have an interest in direct commercial property. “From our perspective, if you are not utilising the investment flexibility of a SIPP, there are less expensive platform arrangements that will suit. We rarely if ever accept a client with less than £50k pension assets and our average client size is around 10 times than that,” says Tilley.
No Stopping the Train None of the experts we spoke to believe that there is any chance of the SIPP train stopping any time soon, as so many pensions investors have become disillusioned with the performance of standard pensions. “SIPPs have been seen as the opportune product to sweep up past pensions and engage
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more fully with the flexibility that they offer,” says Denton’s Tilly. “And this key driving factor will remain. Despite hitting a million SIPPs, the market is far from saturated.” But even so, he shares some of the reservations about the FSA’s proposals. The industry body AMPS itself has robustly rebutted the FSA’s capital adequacy proposals, insisting that purely looking at size of assets under administration is not necessarily a good measure of the resources necessary to effect a controlled wind-up of a SIPP company, should it ever be necessary. “There are several alternatives that have been put forward which we think better fit the remit of protecting the consumer,” says Tilley. “However, some are quite far from the FSA original proposals.” The FSA needs to give appropriate consideration to the weight that AMPS deserves, since it represents over 55 SIPP provider firms. “It may well be that if the FSA take these points on board it might issue a further consultation, but I suspect they will jump straight to a final outcome.” “What is hopefully clear is that, as a result of the publicity that has surrounded capital adequacy and SIPP due diligence requirements, there will be fewer clients duped into misrepresented esoteric assets - and fewer SIPP providers agreeable to accepting them.”
“As a result of the publicity that has surrounded capital adequacy and SIPP due diligence requirements, there will be fewer clients duped into misrepresented esoteric assets - and fewer SIPP providers agreeable to accepting them” 42 SIPPs.indd 42
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CASE STUDY
magazine... for today ’s discerning financial and investment professional
EMBRACING CHANGE
MAYFIELD FINANCIAL PLANNING’S DARREN POTTER TALKS TO IFA MAGAZINE ABOUT THE CHANGE OF DIRECTION THAT RDR HAS BROUGHT TO HIS BUSINESS It must have taken a fair bit of courage to set up a new IFA firm at the back end of 2010, at the exact moment when so many other small advisers were considering whether they even wanted to be in the business any more. But Darren Potter, of Mayfield Financial Planning near Newcastle, seems to have had no doubts about the new direction that his business was about to take. It helped matters, of course, that Potter was far too young to consider himself a candidate for trying to ‘grandfather’ his way out of the new requirements, as so many older advisers were tempted to do at that time. Rather, with his 16 years of experience - seven years with Britannic Assurance, followed by another nine and a half years with an IFA known as Positive Solutions – he was ideally positioned to leverage his connections, his youth, and his readiness to embrace the new and upgraded training requirements, so as to develop his business in a new direction. Up until that point, he says, much of his work at Positive Solutions had been related to businesses such as mortgage arrangement. “But mortgages had become much more difficult,” he says, “So I decided to make a major change of focus, in favour of investment work. And, since that coincided with the RDR-related exams that I was taking, the opportunity was there for a complete change of direction.”
The DFM Imperative Which is how Potter ended up taking on an outsourcing arrangement with discretionary investment managers Myddleton Croft, who are based in Leeds. He certainly doesn’t duck the reasons why RDR has been a headache - the whole-of-market obligation has put a big strain on small operators, he says, and the responsibility of juggling a whole raft of new compliance and regulatory requirements has added powerfully to the argument for a DFM solution.
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“I wanted a proposition where clients could have access to strategic portfolios within a platform,” he says – “with a discretionary investment manager’s input as well as individual funds. Generally, I wanted my focus to move away from individual fund picking to the strategic portfolio idea.” Was it difficult to find the right partner? “No,” he says, “I liked the way that Myddleton Croft worked. And the way that they keep within the risk profiles and keep a close eye on risk. But I wasn’t ever going to go into DFM just for the sake of it. It took me a good number of meetings with various DFMs – not just the local representatives but also the fund managers themselves - before I was sure that I’d found the right one.” It also helped that Leeds is relatively close (about 100 miles), with a local representative who he says has been a huge help. Potter caters mainly to a local clientele, most of whom he says are located within a 20-30 mile radius of Newcastle. The majority are private individuals, with a reasonable share of high net worth investors among them, but he also caters to a growing community of small businesses.
No Need for White Labelling One of the key benefits, he feels, is that Myddleton Croft are able to provide a high level of support to his clients. Firstly in the form of personalised quarterly portfolio updates, and secondly in the form of a market commentary on the wider economic and business climate. All of which helps the client to understand the factors that have prompted changes to the portfolio. “It’s cost-effective for the client,” he says, “in that the client is getting daily active management of a portfolio, to a higher level than I could ever achieve on my own.” But unlike some advisers, he says, there’s no obvious need to adopt a whitelabelled approach to the outsourcing task. Instead, he’s quite happy for his clients to be aware that the all-important investment aspects are being
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CASE STUDY
handled by Myddleton Croft’s professionals. “I’m providing the overall advice to the client,” he says, “and my periodic portfolio reviews with the client are where I look at all that. Most importantly, the clients have daily access to me if they have queries that need following up.” And, if necessary, face to face meetings with Myddleton Croft can be arranged.
Pensions Business What’s coming up in the future? Pensions business, in a word. “I’m starting to get more involved with group pensions,” he says, “and I expect that trend to increase significantly with autoenrolment.” One of those changes will entail an increasing level of work with the solicitors and accountants with whom he’s in contact. “Because I’m now classed as a pensions transfer specialist, and have an advanced AF3 qualification, I’ve found that to be useful in working up the connections that I have. I’m hoping to expand on those relationships.”
Darren Potter, MD, Mayfield Financial Planning
“I wanted my focus to move away from individual fund picking to the strategic portfolio idea” Mayfield Financial Planning Suite B2, Design Works William Street Gateshead Tyne and Wear NE10 0JP Telephone: 0191 423 6206
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THE BEE LINE
magazine... for today ’s discerning financial and investment professional
I SAY, I SAY, I SAY... STEVE BEE MANAGES TO DODGE THE ROTTEN TOMATOES ON THE AFTER-DINNER CIRCUIT
One of the things I do these days, something I sort of fell into really, is doing afterdinner speeches at conferences and award ceremonies and things. I know it’s not that unusual these days, and that plenty of people do that sort of thing. And it’s a good thing to get into if you can stand up and speak at the same time and you don’t mind doing it. But I’m still amazed that I get so many bookings. I’m amazed because, whenever I do an after-dinner speech, I always talk about the current goings-on in the world of pension reform. It’s not a topic I would have thought anybody would have found even a bit interesting for a light-hearted after-dinner speech, that’s all. I’m sure it wouldn’t come up on a list of the one hundred most requested topics that people would like to hear about in an afterdinner speech. Probably wouldn’t come up in the top ten thousand, come to that.
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Brevity, the Soul of Wit There is one advantage that it gives me, though. Most after-dinner speakers are asked to speak for twenty minutes and no longer than twenty-five minutes, since that’s about as long as anyone wants to listen for, especially at the end of a long evening. My advantage is that I can get away with talking for just ten to fifteen minutes and because I’m talking about pensions, it just seems so much longer to the people I’m inflicting it on. So per-minute I’m getting a better rate than most of the other speakers on the circuit. Having said that, I am very popular, although it’s fair to say that’s not so much with the audiences, but rather with the venue owners. They love me. “Steve Bee’s doing the after-dinner speech? Brilliant!” is what I hear in ballrooms and seminar venues up and down the country. Basically, when you do a pension gig after
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This’ll Slay ‘Em For instance, did you hear the one about how employers are
THE BEE LINE
dinner at the end of a long day’s conference, the late-night bar bill goes through the roof. The after-dinner speeches I’ve been doing lately are usually about the new autoenrolment reforms and the demise of S2P. If I’m being really honest, you have to work hard to get laughs with some of that stuff. But there are plenty of aspects you can light on around the various employer duties that have come about as a result of the 2008 Pensions Act.
obliged to put people into pension schemes, but that those people can opt out again if they wish to? That one always goes down well - particularly when you get to the punchline about how, if they do opt out, the employer’s duty is to put them back in again. That one usually cracks the audience up. But not all of it is such good material. I mean, the S2P stuff and its effective merger with the BSP is one that I don’t get that many laughs with. I think the problem there is that hardly anyone in the country has ever heard of S2P, so they’re not actually that bothered to hear that it’s getting the bullet. So I usually try to end with something else, like the story of the time we set out to simplify pensions by introducing a more complex pension regime. I tell you, that one usually sends them to the bar happy... Steve Bee, a well-known campaigning pensions activist, is the managing pensions partner at Paradigm and the Founder and CEO of www.jargonfree pensions.co.uk
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PRODUCT REVIEWS
magazine... for today ’s discerning financial and investment professional
EMERGING MARKET DEBT FUNDS HAVE BEEN GENERATING SPECTACULAR GAINS COMBINED WITH A HIGH LEVEL OF INCOME, SAYS NICK SUDBURY. BUT YOU NEED TO
APPRECIATE THE RISKS Local Knowledge Investec Emerging Markets Local Currency Debt Moody’s recent downgrade of the UK’s coveted AAA credit rating has put an unexpected spring into the step of a sector that would normally be regarded as high risk. Although emerging market debt might not always seem such an obvious way to benefit from sterling’s disgrace, the prospect of high incomes from a faraway source, combined with the equally strong possibility of substantial capital gain, has been enough to turn many people’s heads. Several of these funds have produced spectacular results recently, with Investec Emerging Markets Local Currency Debt a particularly strong example. Since its launch in June 2006 the fund has achieved an average annualised return of 12.9% - putting it top of its peer group of 42 funds. Income seekers will also appreciate the 5.78% yield, which is distributed on a quarterly basis. The fund aims to achieve strong long-term returns by investing in corporate and government bonds denominated in the local currencies. Many of the countries FUND FACTS issuing these securities Name: Investec have made major Emerging Markets Local improvements in their Currency Debt political and institutional frameworks and are Type: OEIC enjoying healthy economic Sector: G lobal B onds growth. This has pushed up the value of their Fund Size: £2.2bn bonds and strengthened Launch: J une 2006 their currencies. Portfolio Yeild: 5.78% At the end of January the largest TER: 1 .69% geographic exposure Manager: Investec Asset Management Website: investecasset management.com
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was Turkey at 13.3%, followed by Russia 11.6%, Brazil 10.7% and Malaysia 10.5%. Its currency profile was slightly different with the main weightings being the Malaysian Ringgit, the Indonesian Rupiah and the Russian Rouble. The average credit rating of the various holdings is BBB, which is towards the lower end of the investment grade spectrum, while the average duration of the portfolio is 4.7 years. It is this positioning that enables the fund to achieve such a high distributable yield, a feature that is further enhanced by charging its expenses against capital. Investec Emerging Markets Local Currency Debt has generated returns that are more akin to an equity fund - yet over the last 3 years the annualised volatility has been just under 10%, which represents an excellent tradeoff. It could make an ideal holding for income seeking clients who are comfortable with this level of risk.
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PRODUCT REVIEWS
Hedge your Bets Threadneedle Emerging Market Bond Clients who are concerned about the local currency risk, on the other hand, might prefer to invest in a fund that invests in EM bonds denominated in hard currencies like the US dollar. Threadneedle Emerging Market Bond has been one of the most successful of these funds, with several different share classes available to UK investors - including one that is hedged back into sterling. Hard currency EM bond funds are not driven by the same currency and interest rate dynamics as their local currency equivalents. Instead, the manager aims to maximise the dollar based returns by allocating his portfolio between the different countries according to their relative valuations. This is a reflection of their perceived credit worthiness and the political risk. The Threadneedle fund was launched in December 1997 and has close to £1 billion in assets under management. Its aim is to generate an income with the prospect of capital growth – and its 170% return in the last 10 years is ample proof that you really can have it both ways. The distribution yield is currently 5.1%, with the payments made every quarter.
Henry Stipp, the manager, invests the majority of the fund in high yielding public sector sovereign EM bonds, although up to a third of the portfolio can be held in other fixed interest securities including those issued by the developed nations of the G7. This gives him a useful safety net in times of crisis. The portfolio has 189 separate holdings with the top 10 accounting for 18.7%. Its largest country weightings are Mexico at 13.1%, Venezuela 12.6% and Russia 10.2%, although only the first two are overweight relative to its benchmark. The average credit rating is BB with the fund tilted away from higher A rated securities in favour of lower B rated debt. Overall, the effective duration of the portfolio is 7.4 years. This is a measure of the sensitivity of bond prices to changes in interest rates with the higher the figure the greater the potential impact. Despite this the annualised volatility of the fund’s returns over the last 3 years is just over 7%. A hard currency fund like Threadneedle Emerging Market Bond cannot take advantage of exchange rate movements to the same extent as a local currency equivalent, which makes its performance record even more impressive. It is well worth considering for clients with a slightly higher level of risk aversion.
FUND FACTS Name: Threadneedle Emerging Market Bond Type: OEIC Sector: G lobal Bonds Fund Size: £984m Launch: D ec 1997 Portfolio Yeild: 5.10% Charges: Initial: 3.75%, Annual: 1.50% Manager: Threadneedle Investments ment Management Website: threadneedle.co.uk
The effective duration of the portfolio is 7.4 years due to the sensitivity of bond prices to changes in interest rates www.IFAmagazine.com
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PRODUCT REVIEWS
magazine... for today ’s discerning financial and investment professional
Best of Both Worlds Aberdeen Emerging Markets Bond The alternative to investing in a local currency EM bond fund or its hard currency equivalent is to go for a hybrid of the two. These give the manager the scope to pick and choose the combination of countries and currencies that offers the best prospects. The Aberdeen Emerging Markets Bond is a good example of this genre, which aims to generate an attractive level of income as well as long-term capital growth. The fund was only launched in March 2011, and it’s still quite small with assets under management of just £71.8m – but don’t let that put you off. It has got off to an excellent start with a gain of almost 12% on an annualised basis since inception – putting it in the top quartile of its peer group. Aberdeen has a well respected EM equity team, and it has enough resources in the region to be able to research more than 40 different countries. The fund’s largest conviction call at present is in Mexico, with a 12% weighting – more FUND FACTS than double Name: Aberdeen its benchmark Emerging Markets allocation of Bond 5.4%. Type: OEIC Sector: Global Bonds Fund Size: £71.8m Launch: March 2011 Portfolio Yeild: 4.83%
This is (perhaps surprisingly) followed by the UK at 10.2%, then by Russia 8.7% and Brazil 8.3%. Most of the currency exposure (78.2%) is hedged back into sterling, with the main remaining weightings being the Mexican peso and the Russian rouble. The average credit rating is BB+, while the duration is considerably shorter than the benchmark at 5.3 years. The sharp increase in the value of EM debt over the last few years has driven the yield substantially lower. Back in January 2003 an index of hard currency denominated securities was yielding more than 10%, but it is now almost down to 4%, although the local currency equivalents have held up far better. Over the same period, American and German 10 year government bonds have gone from 4% to less than 2%. This decline in the yield gap limits the scope for further gains and increases the risk of a sell-off. Despite this, Aberdeen believes that EM debt valuations remain attractive on a relative basis and expect returns in the middle to high single digits for 2013. If they are right this would still represent a reasonable riskreward trade off. They also think that a selective approach to the currencies provides further scope for outperformance. Aberdeen Emerging Markets Bond is currently yielding 4.83% with monthly distributions, which is a big attraction for income seeking investors. It is still quite new, but the group has a massive reputation in the region.
Ongoing Charges: 1.68% Manager: Aberdeen Asset Management Website: aberdeen-asset.co.uk
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PRODUCT REVIEWS
Passive Observer iShares JP Morgan $ Emerging Markets Bond Fund Clients who prefer low-cost index trackers might like to consider taking up a position in the iShares JP Morgan $ Emerging Markets Bond Fund ETF, which trades in London under the ticker SEMB. It is a large fund, with $2.4bn in assets under management, and it has a competitive TER of 0.45%. SEMB aims to replicate a diversified index of US dollar denominated sovereign and quasi-sovereign bonds from EM countries. The latter are securities issued by entities that are either 100% owned by their respective governments, or that are subject to a full credit guarantee. The fund’s benchmark is the JP Morgan EMBI Global Core Index, which only contains securities that have at least two years remaining to maturity at time of inclusion, and that have a minimum amount outstanding of $1 billion. These represent the most actively traded EM bonds, with the fund being rebalanced on a monthly basis. The ETF physically invests in a representative sample of the underlying securities by using portfolio optimisation. It currently has 119 separate holdings with the largest country weightings being Brazil 7.03%, Turkey 6.72%, the Philippines 6.66% and Russia 5.80%. In total there are 42 countries represented, with the resulting portfolio having a modified duration of 7.59 years. Since its launch in February 2008, SEMB has achieved an average annualised return of 9.19% - which is impressive, but atill slightly less than the 9.88% achieved by the benchmark. It has a distribution yield of 4.69% and pays a monthly income. Clients should also be made aware that the fund uses securities lending. Emerging markets are generally more sensitive to economic and political conditions than their more developed counterparts. So potential or actual sovereign credit downgrades can have a significant impact - as could also a global macro
economic shock of any sort. And then there’s often a risk of higher inflation and/ or rising interest rates. Despite all the possible downsides, EM bonds have performed remarkably well and are still offering yields well in excess of 4%. Bullish clients – especially those seeking a regular source of high income – may feel that there is further upside to come.
FUND FACTS Name: iShares JP Morgan $ Emerging Markets Bond Fund (SEMB) Type: ETF listed in London Sector: Fixed Interest – Emerging Markets Fund Size: $2.4bn Launch: F eb 2008 Yeild: 4.69% TER: 0 .45% Manager: B lackRock Website: uk.ishares.com
Despite all the possible downsides, EM bonds have performed remarkably well and are still offering yields in excess of 4% www.IFAmagazine.com
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magazine... for today ’s discerning financial and investment professional
Lee Werrell, Managing Director of CEI Compliance Ltd, concludes his two-part question and answer survey of the key issues resulting from the RDR changeover and the forthcoming Legal Cutover on 1 April RDR Questions and Answers: Part 2 With RDR nearing the end of the first quarter of existence, there are still queries and questions being asked. I hope the following will address the remaining issues. Q1
A1 If your firm has already had a regulatory review, then the FSA will not be visited again specifically to look at compliance with the RDR. However, if you answered questions about your progress towards compliance with the RDR as part of your previous review; this may be checked during the year. Q2
Do you have to regularly advise on all products to remain independent?
A2 No, you need to consider all retail investment products in the relevant market, but the FSA do not expect that you will actually recommend all retail investment products as a matter of course. Q3
What do I need to do on the Suitability Report to show the products I have not recommended?
A3 The suitability report for an individual client (which will be required in most cases) should set out the client’s demands and needs and explain why the firm has concluded that the recommended transaction is suitable for the client. It should also set out the possible disadvantages of the transaction. There is no requirement to set out all the products that you have not recommended.
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A firm can exclude a certain type of RIP from its ‘panel’ because, after review, it decides that doing so is consistent with the client’s best interests rule. It should be able to show evidence of this decision, but it does not have to repeat this in the suitability report.
My firm has already had a regulatory review - will I get another in 2013 on RDR?
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Q4
If I don’t recommend all the products in the retail investment product range, will I lose independent status?
A4 To hold itself out as independent, an advisory firm must be willing and able to advise on all RIPs that could potentially meet the investment needs and objectives of its retail clients (see also the next question). The FSA would expect a firm’s review process to always start with it considering the whole of the relevant market in an unbiased and unrestricted way. However, the FSA does not expect a firm to actually recommend all products captured by the broad definition of RIPs as a matter of course. The firm may conclude that, for many of its clients, certain products are not going to be suitable, and therefore not consider these product types further for those clients. Q5
Can I use a single platform and retain my independence?
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Generally, a single platform will not offer products from the whole of the RIP market. So a firm will need to advise ‘off-platform’, or through another platform if that would be in the best interests of a client. Our factsheet ‘Using platform-based investments and the independence rule’ covers this subject. Q6
Do all my advisers have to offer independent advice for my firm to be classed as independent?
A6 Yes. If your firm is stating that it is independent, all advisers in the firm must provide independent advice. Q7
Could a group of independent advisers offering the range of RIPs be classed as independent?
A7 No. Individual advice to clients by individual advisers needs to meet the independence rule. Q8
Can you outsource certain pieces of advice to others and remain independent?
A8 In most circumstances, no. If a firm cannot or will not advise on a particular type of retail investment product, and that product could potentially meet the investment needs and objectives of its new and existing clients, then its advice will not meet the standard for independent advice. If an adviser does not in practice give advice in an area where their clients have needs, but outsources the advice, then the FSA would question whether the adviser can or will advise in this area - and, hence, whether the firm is providing independent advice. Q9
How are you going to supervise adviser charging?
A9 The FSA will monitor the adviser charging rules as business as usual during visits, reviews and thematic work. Q10 Will you criticise my fees? A10 The cost of advice is a business decision for the firm, provided that it meets the rules the FSA have laid down in our rules (e.g. COBS 6.1A) on how to determine its charging structure, and that it considers its duties under the client’s best interests. As long as it complies with those rules, it is unlikely that the FSA would comment
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C O M P L I A N C E D O C TO R
A5 The FSA expects it to be very rare, if possible at all, that a firm could use a single platform for all of the investment business for all of its clients and meet the standard for independent advice.
on the amount charged or the method used. But the FSA will pay close attention to the disclosure of the cost of advice and the disclosure of what the client should expect to receive for this cost, especially in the area of ongoing advice. Q11 What is your view on charging clients with fewer assets a proportionately higher fee, since they can cost more to advise? A11 Your firm decides the cost of advice, in line with its charging structure, which must be shown to the client before advice is provided. The FSA understands that the time taken to provide a recommendation does not depend on the sums of money involved. The FSA can see circumstances where it would be feasible to charge somebody with less to invest, a proportion 0ately higher fee than someone with a higher amount. However, any material difference in charges from those set out in the charging structure will need to be drawn to the client’s attention and agreed with them. You are also free to offer or negotiate a different price to that in the charging structure for a particular client, for example, a lower price for an existing client. Q12 Can we charge clients if they don’t follow our recommendations? A12 You must disclose clearly the nature of your charging structure to the client before you provide advice. It is up to you whether you make a charge in all cases, or only if the client decides to follow your recommendation. Q13 What areas can an adviser deal with clients without the required RDR qualifications? A13 The full list of regulated activities with details of whether an appropriate qualification is required to carry out that activity can be found in the handbook under TC APP 1.1.1R. Tables showing which qualifications are appropriate for each activity can be found in the handbook at TC APP 4E. As a result of the RDR, the qualification requirements for advising on securities, derivatives and packaged products have changed, but the requirements for all other activities remain the same.. Q14 Can I advise on pensions and investments not in the RIO range? A14 Advising on pensions and investment products is a regulated
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C O M P L I A N C E D O C TO R
magazine... for today ’s discerning financial and investment professional activity with a qualification requirement. You must hold an appropriate qualification to advise on these products.
Q18 With the FSA changing to the FCA, do I need to get all the stationery changed?
Q17 I took my exams in December, can I continue to advise until I get the notification?
A18 To give firms time to plan for change, the FSA have proposed that the changes to GEN 4 and the revocation of the FSA logo license should include a transitional period of six months after legal cutover. They believe six months will give firms time to make the necessary changes to their relevant business stationery however if something can be easily changed faster, this will be expected, such as any electronic equivalents to letters, email footers and websites. The six month transition will also limit the period in which consumers are potentially at risk of confusion arising from status disclosures that reference the FSA as well as the FCA and PRA.
A17 No. If you do not achieve the necessary status, any retail clients that you deal with will need to be advised by an alternative adviser until you reach full compliance.
Remember: If you have any concerns regarding these issues, please contact your compliance department or an independent consultant.
Q15 Will my professionalism status be shown on the FSA register? A15 The FSA will not be listing details of professionalism status on the FSA Register. If you want this information, you should contact your accredited body. Q16 If I don’t achieve the necessary status, what happens to my GPP clients? A16 Any retail clients you deal with will need to be advised by an alternative adviser until you reach full compliance. GPP clients are retail clients and so will fall into this category.
Legal Cutover – What’s Happening? April 1 is the date when the FSA’s various Rulebook powers are transferred to the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). The former, a subsection of the Bank of England, will be responsible for keeping a supervisory eye on banks, insurers and larger institutions; the FCA, for its part, will be responsible for policing the conduct of all firms, including those which are also regulated by the PRA. (The so-called dual-regulated firms.)
Advisers will fall under the direct remit of the FCA, and accordingly most of the FSA’s rulebook relating to advisers transfers intact to the FCA. The FCA will exercise a prudential role over advisers which is analogous to what the PRA is doing for larger institutions. The FCA’s operational aims are: n To secure an appropriate degree of protection for consumers; n To protect and enhance the integrity of the UK financial system; and
n To promote effective competition in the interests of consumers. Both agencies share a single register, and your FSA number will be carried across to the new register. The same Financial Services Act which gave the green light to Legal Cutover also transfers supervisory responsibility for clearing houses from the FSA to the Bank of England, and it places the Financial Policy Committee (FPC), a committee of the BoE, on a statutory basis.
PRA
FCA
20 Moorgate London EC2R 6DA
25 The North Colonnade, Canary Wharf London E14 5HS
Telephone: 020 3461 7000
Telephone: 020 7066 1000
Email: firmenquiries@bankofengland.co.uk
Email: ccc@fsa.gov.uk
Further details from: www.fsa.gov.uk/static/pubs/other/pra-transition-update.pdf
See also the listings of FSA publications on Page 56 of this issue
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FS A P U B L I C AT I O N S
magazine... for today ’s discerning financial and investment professional
FSA Publications OUR MONTHLY SUMMARY OF THE LATEST OFFICIAL PUBLICATIONS BY THE FSA These listings exclude the FSA’s routine monthly handbook updates.
Primary Market Bulletin No. 5 Guidance Consultation Ref: GC 13/02 22nd February 2013 19 pages
Of interest to the issuers of transferable securities (companies/entities), their advisors (sponsors, advisory firms and law firms) and other persons who interact with the UKLA. This Consultation is in connection with the creation of the Knowledge Base, which was launched in December 2012 as the UKLA’s repository of formal guidance for assisting issuers, sponsors and other practitioners advising issuers in interpreting the Listing Rules (LR), the Prospectus Rules (PR) and the Disclosure and Transparency Rules (DTR). The creation of the Knowledge Base raised awareness of a demand from the regulator’s stakeholders for further guidance in relation to aspects of the LR, PR and DTR. Accordingly, the Consultation aims to clarify these matters. Full details are available at http://tinyurl.com/a7ngxap Consultation period ends 8th April
Consultation on Guidance Under Section 234F Relating to Super Complaints and Section234D References Guidance Consultation Ref: GC 13/01 15th February 2013 19 pages
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The Financial Services Act 2012 introduced two new mechanisms to allow certain persons to bring information to the attention of the Financial Conduct Authority (FCA).
(FCA) and the Prudential Regulation Authority (PRA). These changes need to be in place when the new regulators acquire their legal powers at Legal Cutover on 1st April 2013.
Section 234C enables designated consumer bodies to make a super complaint to the FCA. Similarly section 234D enables regulated persons and the Financial Ombudsman Service to make references to the FCA.
The FSA says that some more substantive changes to the existing FSA Handbook are also needed to align the new rulebooks with the future objectives and functions of the FCA and PRA, as set out in the Financial Services Act 2012, and the resulting adjustments to the regulatory procedures of the new regulators.
The FCA is obliged to publish a response to a section 234C supercomplaint or a section 234D reference within 90 days, stating what, if any, action the FCA proposes to take as a result of the super-complaint or reference and why. Accordingly, this Consultation sets out the regulator’s views about presenting a reasoned case for a super-complaint under section 234C or a reference under section 234D. The Consultation does not cover Cost Benefit Analysis. Consultation period ends 18th March
Regulatory Reform: FCA Handbook Amendments Relating to the Enforcement Guide Consultation Paper Ref: CP 13/06 8th February 2013 37 pages
The paper forms part of a series of papers setting out proposed changes to the regulatory requirements needed to create the new rulebooks and policies for the Financial Conduct Authority
It is mainly this category of substantive changes – to the Enforcement Guide – that the regulator is consulting on here. Consultation period ended 1st March
Quarterly Consultation Paper No. 35 Consultation Paper Ref: CP 13/05 6th February 2013 92 pages
The paper includes provisions to: • Extend a transitional provision and guidance in the Insurance: Conduct of Business sourcebook (ICOBS), requiring insurers to include all UK commercial lines employers’ liability policies, entered into or renewed on or after 1 April 2011, on employers’ liability registers (Chapter 2); • Introduce application and annual fees for
primary information providers to cover the costs of regulating them (Chapter 3); • Amend the appropriate qualifications list in the Training and Competence sourcebook (TC) to include three qualifications (Chapter 4); and • Make further amendments to the Collective Investment Schemes sourcebook (COLL) following the Treasury’s significant changes to the features of the tax transparent fund regime since the FSA’s previous consultation (Chapter 5).
Consultation period ended 20th February (Chapter 2), 6th March (Chapters 3, 4 and 5)
Financial Services Compensation Scheme Management Expenses Levy Limit 2013/14 Consultation Paper Ref: CP 13/04 25th January 2013 32 pages
This paper consults on the Financial Services Compensation Scheme (FSCS) management expenses levy limit (MELL). The FSCS’s management expenses are the noncompensation costs that it expects to incur to deliver its functions. This CP sets out a consultation proposal on the FSCS MELL of £94.4
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Consultation period ends 21st February
Payment Protection Products Finalised Guidance Ref: FG 13/02 24th January 2013 37 pages
A paper from the Bank of England and the Financial Services Authority, consulting on the Prudential Regulation Authority’s (PRA’s) approach to enforcement.
The guidance sets out the importance of: • Identifying the target market for the protection; • Ensuring that the cover offered meets the needs of that target market; and • Avoiding the creation of barriers to comparing, exiting or switching cover. It also discusses how firms can manage these risks through their distribution and marketing strategies and through their governance arrangements.
Regulatory Reform: Handbook Transitional Arrangements, the Appointment of With-Profits Committee Members and Certain Other Handbook Amendments Consultation Paper Ref: CP 13/03 25th January 2013 50 pages
The Paper consults on the detailed Handbook provisions which will be needed to support this
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legislation creating the revised Handbooks of rules and guidance for the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), which will replace the FSA on 1 April 2013 (“Legal Cut-In”). Most provisions already in the FSA Handbook will be adopted (or ‘designated’) by the FCA and PRA into their respective Handbooks, according to each regulator’s scope and powers. Secondary legislative measures under the new Financial Services Act 2012 will set out how the current UK regulatory regime will be transitioned to the new regime. This consultation aims to make the transition of rules, guidance and associated processes as smooth as possible.
Dates for your diary MARCH 2013 17-20
European Winter Finance Summit (EWFS) 2013 Obertauern, Austria
18
Consultation period ends for Guidance Consultation 13/01 (Consultation on Guidance Under Section 234F Relating to Super Complaints and Section234D References)
19
Consultation period ends for Consultation Paper 12/38 (Mutuality and With-Profits Funds: A Way Forward)
20
UK Spring Budget
21
Consultation period ends for Consultation Paper 12/40 (Financial Conglomerates Directive Technical Review Amendments)
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5th BRICS Summit Durban, South Africa
Consultation period ends 25th February
Regulatory Fees and Levies: The Money Advice Service Cost Allocation Method for 2013/14 Consultation Paper Ref: CP13/02 22nd January 2013 15 pages
The FSA is consulting on a new proposed method of allocating Money Advice Service (MAS) money advice costs to fee-blocks, with a view to implementing it for 2013/14. This is a year earlier than originally planned. But the Fsa is clear that it is not proposing any changes to the way the MAS allocate debt advice costs. The proposed method affords a clearer usagebased picture of how consumers use the service the MAS provides, and of which firms pay for it. The link that emerges will improve on the current allocation method that has no such relationship. Consultation period ends 22nd February
I FA C A L E N D A R
million for 2013/14.The usual consultation has been brought forward this year so that the relevant changes can be in place by 1st April 2013. Invoices will be sent out from July onwards.
APRIL 2013 1
Legal Cutover. Formal empowerment of the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), and the transfer of most existing FSA Handbook provisions to the new bodies
6
Tax year 2013/2014 begins
18-19
G20 Finance Ministers and Central Bank Governors’ Meeting Washington DC, USA
22-24
European Pensions & Investments Summit 2013 Montreux, Switzerland
29
Final FSA deadline for advisers contacting investors regarding redress for the Arch Cru funds March 2013
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I FA C A L E N D A R
magazine...
MAY 2013 8-10
World Economic Forum on Africa 2013 Cape Town, South Africa
13
European institutions to submit first data on new European Capital requirements regulation
13
Conference on The Impact of EU Membership since 1973 London, UK
13-14
Global Tax Summit 2013 Montreux, Switzerland
15-16
European Business Summit Brussels, Belgium
18
Heineken ERC Cup Final Dublin, Rep of Ireland
22
European Council Meeting Brussels, Belgium
25
Aviva Premiership Cup Final Twickenham, UK
JUNE 2013 3-4
5-7
6-7
Emerging Markets Investment Summit Warsaw, Poland World Economic Forum on East Asia Nay Pyi Taw, Myanmar G20 Finance Ministers and Central Bank Governors Deputies Meeting St Petersburg, Russia
17-18
G8 Summit Enniskillen, Northern Ireland
19-23
Royal Ascot Week Berkshire, UK
24-7
Wimbledon tennis championships London, UK
27
European Council meeting Brussels, Belgium
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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and the SUP 16 annex 25 reporting guidance.
FSCS Funding Model Review - Feedback on CP12/16 and Further Consultation
The new rules came into force from 21 January 2013
Consultation Paper Ref: CP13/01 18th January 2013 114 pages
Finalised Guidance Ref: FG 13/01
This paper summarises the feedback to CP12/16, FSCS Funding Model Review (July 2012), concerning the creation of an adequately funded and supported compensation scheme which, the FSA says, is important for financial stability and consumer confidence.
The FSA’s September 2012 consultation on guidance about the risks to customers from financial incentives produced a number of responses which are now summarised, together with finalised guidance.
The paper also confirms the final rules, except in one area - relating to the funding of costs that exceed FCA FSCS funding class thresholds, via the FCA retail pool. On this one issue, the FSA decided to undertake a further one-month consultation, which closed on 18 February 2013.
Removing the Simplified ILAS BIPRU Firm Automatic Scalar and Other Changes Policy Statement Ref: PS 13/01 18th January 2013 20 pages
Of interest to all BIPRU firms. Sets out the responses received by the FSA to Consultation Paper 12/31 (Removing the Simplified ILAS BIPRU Firm Automatic Scalar and Other Minor Changes to BIPRU 12), which was published in November 2012. It also sets out the rule changes and amendments that are being made as a result. In CP 12/31 the FSA consulted on three different areas of liquidity policy: the simplified ILAS BIPRU firm automatic scalar, the BIPRU 12.7 liquid assets buffer eligibility restrictions
Risks to Customers From Financial Incentives 16th January 2013 34 pages
The FSA says its research had shown that most firms had incentive schemes that could encourage staff to mis-sell, and that most firms did not have effective controls in place to manage these risks. This Paper, therefore, sets out the FSA’s guidance to help firms meet the FSA’s requirements when developing incentive schemes, and to mitigate the risk of mis-selling created by such schemes.
Financial Conglomerates Directive Technical Review Amendments Consultation Paper Ref: CP 12/40 21st December 2012 80 pages
A joint consultation with HM Treasury, setting out how the UK intends to transpose amendments made to the Financial Conglomerates Directive following a European Commission led technical review of the directive. Implementation of the rules transposing FICOD1, and changes to the Handbook rules, must be in place by 10th June 2013. Consultation period ends 21st March
www.IFAmagazine.com
22/03/2013 12:40
I WANNA BE LIKE YOU
HAPPY EVENT WHAT WILL THE NEW BABY TURN OUT TO BE LIKE? GILL CARDY WONDERS WHAT LIFE WILL BRING FOR THE NEW ARRIVAL With levels of anticipation close to what we encountered before the last royal wedding or the Olympic opening ceremony, we now sit on the edge of our seats waiting for the new baby. What will it look like? Slim and athletic, or corpulent and inactive? What sort of character will it have? Ethical and respectful, or shallow and inconsistent? What sort of grown-up will it get to become? Respected and admired, or mocked and excoriated? Will it meet our hopes and expectations? Or will this new baby turn out to be just another expensive disappointment? Will it become a valued member of the family? Or will it be a nightmare child, born of the worst components of its genetic heritage? Its Mother’s Looks, its Father’s Nose… Regulated and regulators each have a place, and in our regulatory family, every single one of us has rights and responsibilities. Children learn from what they see around them. And they are taught how to be, or become, good citizens. Parents cannot expect certain behaviour from their children whilst demonstrating the opposite. Parents getting it wrong does not necessarily condemn children to inevitable failure. We know how easily children pick up words and patterns of behaviour from their parents, but they are not condemned to being replicas of their parents because they can make their own decisions. Equally, parents getting it right is no guarantee that the children will turn out right either, simply because they have chosen their own path. …Its Uncle Martin’s Wise Guidance I saved Hector Sants’s valedictory speech, and Martin Wheatley’s first speech. I’m not usually one for that sort of thing, but on this occasion both are well worth keeping and re-reading from time to time. As we anticipate excitedly the birth of the FCA I would like to quote two paragraphs.
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First Mr Sants’s: “Should there not be some level of expectation that people entrusted with the leadership of financial services organisations ultimately are driven by the desire to ‘do the right thing’? It is called integrity, and it is what we all, as users of the financial services, expect of the leaders of the sector. It should not solely be about how much we earn, but also about how much we care for the markets’ users and their well-being.” Now for Mr Wheatley : “ …it is about the customer being able to trust you and know the advice process is working for them. This is the culture that I want running through your firm and through the industry – we all have to be working for the consumer.” Quite so. Setting An Example We are all leaders. We should (must) all behave with integrity. The regulator too is a leader, with its own rights and responsibilities, holding each and every market participant, including themselves, to account for the part they play in making financial services what it has been, what it is now, and what it will become. The trust that consumers, investors, clients place in each and every single one of us - the regulated AND the regulators - is a deep one. This time, when they say “I’m not going to tell you again…” they will mean it. For more comment and related articles visit...
www.IFAmagazine.com March 2013
59 22/03/2013 12:44
magazine... for today ’s discerning financial and investment professional
NEW STANDARDS THE EARLY DAYS WERE RIP-ROARING AND RESTRICTION-FREE, SAYS RECRUIT UK’S JOHN ANDERSON. THAT’S ALL CHANGED, THANK GOODNESS I have many friends who are, or have been, IFAs. In fact I ventured into it myself back in the late eighties, when pension deregulation and contracting out of SERPS was a good source of income. (Can I say that nowadays?) The people I knew in the industry were from different backgrounds, and some of them were in it purely for the money. It was hard, too - I remember being given the phone book on my first day and told to phone clients, and I couldn’t leave the office on a Friday unless I had ten appointments booked in for the following week. Yes, financial services was a very different world then, and whilst most friends complained about regulation because of all the extra work it generated, there was always a tacit recognition that it was not going to go away, and that they would just have to knuckle down.
A Changed World Wind forward 26 years, and the profession has been transformed - particularly
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from a recruitment perspective. Roles and responsibilities which are now very much to the fore were almost unheard of back then. Compliance and Risk was only just starting to emerge, as the Securities and Investment Board began to oversee more and more of the industry. And then, in 1994, of course, the SIB became the FSA and we were moving into the modern phase. One thing which hasn’t changed over the years is the need to recruit candidates with the skills and competencies to fit. I have learnt that not all clients are great recruiters, and they often need some guidance through a process that is simple in essence, but which can become time consuming and complicated. I am sure most IFA practices will want a gold standard candidate: experienced, highly qualified, with a strong business development ethic, and with clients who will follow him or her. These candidates are out there, certainly, but they need a good argument to move jobs even in a normal market, and they can cost a premium.
But there are other options which you may wish to consider. There are less experienced IFAs who may meet your business model with desire and ambition but who are uncomfortable with a restricted proposition. And there are also Bancassurance IFAs who have what it takes to make the transition.
First, Decide What You Want Here are a few points to consider: n Look at the reason why you wish to recruit, and the numbers you want. Review your present situation to see if there are any of your team ready to move into a new role? n Look at the impact that each type of candidate will make have on your business in terms of financial cost and the devotion of time and resources. Put a figure in mind, add a timescale to this, and review the outcomes, as this will help you to streamline your process.
www.IFAmagazine.com
22/03/2013 12:48
THE HUMAN RESOURCE
n Ask friends and business associates if they know of anyone who fits your criteria? If you draw a blank, do the same with recruiters, and get a referral if you can. n Talk to an experienced recruiter. Understand what they will do for their fee, and understand their experience and background. n Set out the parameters of service you want and what you wish to pay. n To help the process, it is worth giving feedback so the recruiter can hone their search further. n Keep the process simple. Include psychometric testing as an option, and aim to get as much ground as possible covered in the first two interviews Once you have gone through this, depending on your success, review the process again and see if you could have improved on anything. Hopefully, you’ll have the person who can help your business grow. For more comment and related articles visit...
IFAmagazine.com
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“I remember being given the phone book on my first day and told to phone clients, and I couldn’t leave on a Friday unless I had ten appointments booked in for the following week” March 2013
61 22/03/2013 12:48
Financial Services Recruitment Specialists
Financial Adviser
Employed IFA
Independent Financial Planner
Basic salary or self employed opportunity – Generous business splits and support in building a strong portfolio.
Completely independent firm
Watford
Competitive salary and bonus structure
Competitive basic or self employed
My client is a successful firm who offer a wide range of financial services to private and business clients. They are currently looking for a financial adviser to join their expanding team in swadlincote.
We have a rare opportunity available to join a leading Asset management firm who are completely independent and regulated by the FSA. Run by 2 senior partners, this professional Firm has a fascinating culture and there is a certain amount of prestige associated with working for a business like this.
My client is a fee based financial planner, they specifically work with clients that hold 250k+ of investable assets. The business is run by two successful partners who also advise and is supported by Para planners and a strong administration team. The business is set up to offer passive advice not active, so the IFA that comes on board needs to fit this criteria they also no longer advise corporate clients.
My client is offering a generous 75% split on the first 75k and it is negotiable thereafter. The IFA will be working alongside the Estate agents staff, opening up opportunities with clients looking for mortgages and investments and there is a lot of opportunity to generate leads through high footfall and enquiries through phone. The firm is whole of market and directly authorised with a state of the art back office system, an in-house compliance manager and administration support. The right IFA will be looking to service their existing clients but require a new source of leads/client opportunities. This would suit a DipFA qualified mortgage adviser or IFA or Bancassurance adviser who can bring clients with them. My client will consider a basic salary for the right person in the range of 18k but they also have self employed opportunities available. This is a great opportunity to improve on your split and generate new business through a fantastic in house introduction option.
Our client wears many hats, they are discretionary fund managers, they can set up and run their own SIPP’s and SSAS’s and they are Independent financial advisers. They utilise the most up to date research tools available, working on a boutique basis of providing high quality financial advice to affluent clients. One of the key benefits of this proposition is the excellent relationships our client has in place with a series of introducers, including a firm of chartered accountants which maximises the level of quality leads available. However, to succeed in this role, it is essential that you have your own clients to bring with you and a strong hunter approach towards attracting new investors whilst maintaining your existing portfolio.
My client is working with top accountancy firms and has a strong presence within the local area; a large amount of business comes through personal recommendations. To be a fit for this client you need to have your own client bank, and advising private clients with 250k minimum investable assets. Clients below this are accepted but need to be paying fees of £2500 per year to meet the business model. Professional and secure my client is a great home for an already established IFA that is able to win new business, requires the backing and support of an administration team and a competitive basic salary.
You will have a proven record in face to face regulated advice with experience in SIPP’s and SSAS’s and you will be able to demonstrate strong performance and personal development. You will be diploma qualified and have a desire to obtain chartered status in the near future. This is an attractive opportunity where you will be provided with the support of a dedicated admin team and depending on what you want to bring to the business you will receive a generous bonus structure and a competitive package circa £60k which includes Pension and Company car allowance.
Thinkers.indd 62
22/03/2013 12:52
Contact us to discuss our latest opportunities:
T 0844 371 4031
Self Employed IFA
Employed and Self Employed IFA
E HR@ifamagazine.com
Employed Financial Planner
Nottingham location
Great Central London location
Prestigious office in Bristol
Superb opportunity to join a whole of market IFA that provides excellent support
Excellent relationships in place with introducers )
Competitive basic and bonus structure
My client is a whole of market IFA, they offer true holistic financial advice to their clients. They have excellent support in place for compliance, a very attractive website that generates 20,000 hits per month and a huge amount of new enquiries per week for at retirement business, annuity, SIPP and Flex draw down business. All leads are passed onto the self-employed advisers and generate £1750+ in fees per case.
Our client is a leading financial firm who is looking to strengthen their presence and become a leading player within the market and they are looking to do this by attracting a number of proactive diploma qualified IFA’s to join their existing team.
My client is focused on supporting IFAs, with experienced administrators, REAL LEADS and the backing of a truly whole of market proposition along with on the job training and support. My client will offer up to 70/30 splits without any on-going charges, a fantastic office, computer desk etc, advertising and marketing that truly works! All FSA fees and PI ongoing costs are covered by the client. We understand how hard it is to become an IFA, with very limited opportunities to enter the market, especially when you are unlikely to have any existing clients of your own. This role would suit an existing IFA who is perhaps disillusioned with their current home, requires a fresh challenge or is not receiving market support, however our client is also eager to meet other financial professionals such as Bancassurance advisers, Paraplanners, Trainee IFA’s or Mortgage Advisers who are qualified to Level 4 Diploma and see this as their next step in their career. Our client has an existing team of IFAs who have all held a variety of positions before they joined, so they have a proven transition model for individuals who are not currently in a financial adviser position. They require an ambitious and client orientated professional who can embrace the constantly changing environment that is financial services today.
Thinkers.indd 63
They have an office based within a fantastic Central London location and they have a fun, energetic team who believe in a share environment, so the successful individual must have similar views of working within a team. One of the key benefits of this role is the great relationships our client has in place with numerous introducers, including a leading accountancy firm, lawyers and estate agents and with their regular network events, they have earned a well founded reputation within the Private and corporate market and especially within the entertainment industry. This is a superb opportunity to join an expanding firm and would suit an individual who has their own sufficient client bank yet who is now in a position where they cannot generate any further and seek the support and brand that will maximise their business. Although our client wont place leads into your lap, they will provide you with the route towards building your business as well as the full support of a dedicated admin team and up to date systems and research tools. It is also essential to be able to demonstrate strong performance and personal development.
Our client is a truly independent and honest fee based IFA firm who are seeking to employ a high calibre IFA on an employed basis. Our client has a unique and personal approach to offering independent financial planning and this enables them to have close relations with many of their clients leading to a fantastic reputation and a level of prestige in working for the company. One of the key benefits of their proposition is the excellent level of structure and support they provide to their IFA’s, maximising time spent with clients. Having your own client bank isn’t required for this role, our client is more interested in individuals who have the right kind of ethos and desire to succeed and make a difference, someone who wants to be involved in the growth and development of the business. However, you must be Diploma qualified and have a proven track record in delivering compliant independent advice to a range of clients in areas including Investments, pensions, retirement, IHT and Tax. Our client is proud of their fun and motivational office, so you must have similar views on team work and be able to show empathy to individual styles of working. Salary will be dependent on experience and what you want to bring to the company, plus there is a performance and profit related bonus on offer.
Our client offers employed and self employed opportunities with a generous basic salary of circa £40k or competitive business splits..
22/03/2013 12:52
magazine... for today ’s discerning financial and investment professional
Get your skills up to date the easy way
the financial services e-learning specialists
Wanted: Quality financial advisers ....Only those with Level 4 Qualifications need apply More and more large groups are demanding that candidates have already achieved at least Level 4 qualification. In fact, many haven’t even picked up a book yet. Without large numbers of qualified advisers the FS sector has a difficult future to say the least. The BWD Group, an established search & selection firm, have taken action to help with the launch of a new service - BWD development. • Advisers and others taking the Level 4 exams can now access e-learning programmes and on-line mock exams. • This allows candidates to learn at their own pace - at a time and place to suit them • They can take on-line assessments along the way and take up to five mock exams to make sure they are on track to pass the live examination
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www.IFAmagazine.com
22/03/2013 12:52
THINKERS
PINSTRIPE REBEL “The only truly revolutionary figure in the post-war history of British fund management” George Ross Goobey Born in London, May 1911. Died March 1999. Revolutionary spirit It takes a pretty radical life to be dubbed, at your funeral, “the only truly revolutionary figure in the post-war history of British fund management”. And all the more so if you started out by mere bean-counting. But Ross Goobey changed the assumptions of the pensions industry forever - and in the process he forced a re-evaluation of the entire equity market in a way that added to its desirability and drove up equity prices across the board. Beat that, Soros. A modest start Ross Goobey’s start in life wasn’t stellar. His family’s financial pressures didn’t make university a possibility, and so he moved into pensions management as an actuary – a relatively humble profession at that time, largely because it was so dull and predictable. In the 1950s, every pension fund wanted government bonds to the exclusion of almost everything else. The memory of the 1930s depression had scarred the collective memory with an expectation that equities would prove far too volatile to offer the security which pension fundholders were thought to require. Riding the rollercoaster Ross Goobey thought differently. As the manager of the Imperial Tobacco pension fund in Bristol, he concluded that pension fund orthodoxy was completely mismatching its time frames by avoiding equities. The supposed safety of bonds was actually tailored toward the short term, he decided - whereas most pension investors were in it for the long term and could easily afford to ride out a few switchback experiences. Perceiving that inflation would soon rise and that corporate profits would follow suit, he launched his fund definitively into equities. And in a groundbreaking address to what is now the National Association of Pension Funds, he publicly declared www.IFAmagazine.com
Thinkers.indd 65
in 1956 that it was no longer acceptable to settle for the relatively low yields of government bonds when attractive capital gains were on the table. Facing the storm Ross Goobey had lost no time in putting his own fund’s money where his mouth was. By the late 50s nearly all of Imperial Tobacco’s cash was in shares rather than bonds. And, unsurprisingly for a revolutionary, his viewpoint had made him enemies who were to dog his career for decades. One by one, however, they all came round to his point of view. And as the pension funds’ appetite for equities grew, so the prices of equity were boosted and dividend yields were driven down. The so-called “reverse yield gap” was born. And by 1993 it was estimated that 81% of all UK pension funds were in equities. Could it last? No it couldn’t. By the advent of the 21st century the dotcom crash had forced many pension fund managers to reconsider their punt on equities - by 2007 the equity sector accounted for only about 60% of funds. And by 2011, according to the Pension Protection Fund, defined-benefit pension schemes in Britain had scaled back their equity exposure to just 38.5%, while bonds accounted for 43.2%. Were there other possible reasons why Ross Goobey’s theory had gone wrong? Indeed there were. The ageing of the workforce, especially in DB schemes, has shifted the optimal risk balance of funds, so that it has become more logical for managers to want the security of bonds. That’s something that hadn’t been an issue in the fifties. But it wasn’t the reason why bond demand soared in 2008, of course. The equity crunch sparked a stampede for low-risk, and we spent the next four years paying too much for the vanishingly small yields from government paper. But, now that shares are resurgent, are we about to see the pendulum swinging into Ross Goobey’s territory? It seems very possible. March 2013
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T H E OT H E R S I D E. . .
magazine... for today ’s discerning financial and investment professional
OVERLOADED AND OVERBOARD DO CONSUMERS REALLY WANT ANNUITY CHOICE, ASKS RICHARD HARVEY? SOMETIMES IT’S QUITE HARD TO TELL Eeny Meeny Miny Mo Is that a gleam of light on the horizon, a harbinger of Spring and sunlit uplands? Or is it just the headlights of an onrushing juggernaut, threatening to flatten the fragile hopes of savers? The announcement that the FSA is launching a review of the annuity market is mighty welcome to all those counting up their retirement savings and wondering why a sixfigure pot will only buy a monthly income roughly equivalent to the earnings of an illegal immigrant washing the dishes in an East End greasy spoon. The review seems likely to result in insurers being compelled to offer savers a full-market review of annuity options, rather than simply flogging their own deals.
In a bid to pre-empt this, the Association of British Insurers is introducing a new code of conduct to ensure that their members do offer a choice of annuities, however nominal. But it does look as though the FSA initiative is good news for financial advisers. For surely, only the most blinkered of savers will accept an annuity offered by their insurers, rather than finding out from an IFA if a few more bob is on offer elsewhere? But there’s no accounting for ingrained habits. It’s been reported that about two thirds of the 400,000 people purchasing an annuity each year take the deal on offer from the insurer holding their savings. In a statement of the blindingly obvious, the otherwise admirable Ros Altman, director general of Saga, is quoted as saying that “people need to get the right type of annuity as well as [just] the best rate.” You betcha, given that the range of annual income from an annuity purchased with a £200,000 pot can vary between £9,400 and £11,300. Personally, I’m holding off from buying an annuity in the not-entirely-confident anticipation that the Bank of England will stop printing money, and that yields on gilts, which are so crucial to annuity payouts, might be on the rise. And just hoping that that far distant light really is the sun coming up, and not the midnight express to genteel poverty.
The Shipping Forecast Strange, isn’t it, that while the insurance industry frequently cites longer life expectancy as one reason why pension payouts are depressed, they ignore the same argument when it comes to offering travel cover? Take the case of an 80-year-old relative of mine, who retired to the sunshine some years ago, swims 40 lengths a day, spends hours labouring in his garden, walks at least 20 miles a week, doesn’t smoke, and has the drinking habits of a cloistered monk. He’s just booked a Mediterranean cruise, but found it nigh-on impossible to get insurance cover. It would appear that insurance companies think he’s likely to keel over as soon as he sets foot on the sun deck. I felt it would add insult to injury if I reminded him that the less-than-impeccable safety record of the cruise industry means that he should keep his life jacket as close to hand as his anti-cholesterol pills.
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22/03/2013 12:53
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Very good in its make up and content. Sets itself tfoaside from other publications in the marketplace. l i o oo mph Excellent. Thank you. Really refreshing. High quality production with some good thought provoking articles useful information. Good useful content. Up-toMonand thly inco m , eaudate tifully ba einfo useable, very good and easily read. Very lanced good articles, relevant to my work. Very interesting, extremely useful. Very impressive read and lots of S N nice to see it in “magazine” style format useful articles Monthly incIoG me, S beautifullythan rather balanced usual newspaper. A comprehensive read. Very good layout and informative. Good content, appealing to the female reader as many TAXSvery publications are ISE driven and focused. IUNRmale Thank you. A quality magazine for ’s. Good paper with good content which is plain talking. Good layout and easy to read. Not seen anything like this for IFA market. Really good. Worth reading. Interesting content. Very professional and upmarket, exactly what is needed in the ifa community. Absolutely fantastic. Not cluttered by endless comparison tables. Punchy contemporary style.. More of the RED please. A very readable same in the months to come publication. It looks likeC an interesting and enjoyable D AR read that I would be happy to have delivered to the office - not something I could Tsay about HE PAIN IN magazine manyThe financial publications! Great - look forward to subsequent editions. Brilliant! Very impressive the top IFAs and all interesting publication. Looked and felt like SIS a proper magazine rather than E Vother N T A N A LY E cheaper M M O C are talking about... W IE EWSR looking publications. Breath of Nfresh air and topical get your chunks. free subscription in biteTosimply size I’m going get it instead of the fill out the form online at: professional adviser papers and financial adviser www.ifamagazine.com/content/subscribe papers. Enjoyed the read. Keep up the good work! 2 0 12
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A HYBRID SOLUTION FOR ADVISERS?
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THE MOD EL ISN’T IT’S JUST EVO LVIN DEA D G
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For today’s discerning financial and investment professional
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SEPTEMBER 2012 ■ ISSUE 14
BU Y CO MPAN IES , NO T CO UN TRI ES
HOUSE OF TH E RISING SUN
Make your incom e seeking clients smile. Be the first to get on board.
S E T E M B E R 2 0 12 ■ I S S U E 1 4
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Sparkling investments || JULIUS BAER LUXURY BRANDS FUND
S T JA M E S ’S P L A CTHEE WH AT ’S N? AT TR AC TIO
Swiss & Global Asset Management (Luxembourg) S.A. UK Branch 12 St James’s Place, London T +44 (0) 20 7166 8176 funds@swissglobal-am.com www.swissglobal-am.com The exclusive manager of Julius Baer Funds. A member of the GAM group.
S NISH EYE B L U E S PA
of Julius advice. It is given for information purposes only. Julius Baer Multistock - Luxury Brands Fund is a sub-fund Important legal information: The information in this document constitutes neither an offer nor investment from Swiss & in the UK. Copies of the respective prospectus and financial statements can be obtained in English Baer Multistock (SICAV according to Luxembourg law) and it is admitted for public offering and distribution the Financial Place, London, SW1A 1NX, as a distributor of the aforementioned fund (authorised and regulated by Global Asset Management (Luxembourg) S.A., UK Branch, UK Establishment No. BR014702, 12 St James’s Baer Group. London, SW1A 1NX, United Kingdom. Swiss & Global Asset Management is not a member of the Julius Services Authority) or by the Facilities Agent: GAM Sterling Management Limited, 12 St. James’s Place,
PUTIN RUINS A PROMISING OPPORTUNIT Y
NEWSREVIEW
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|| JULIUS vestments Sparkling in ND BRANDS FU embourg) S.A. agement (Lux al Asset Man Swiss & Glob UK Branch London e, Plac 12 St James’s 7166 8176 T +44 (0) 20 om global-am.c funds@swiss obal-am.com www.swissgl r Funds. of Julius Bae e manager The exclusiv group. of the GAM A member
RY BAER LUXU
BANKS KERS A F TESRANVD IC DI SA STE RS BU NG LE IM AG E SP OI L TH E
05/09/2012 11:33
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Julius Baer is a sub-fund of Luxury Brands Fund in English from Swiss & Baer Multistock ed ents can be obtain ment advice. Julius the Financial not qualify as invest tive prospectus and financial statem (authorised and regulated by Group. ses only and does ed fund respec er of the Julius Baer the aforemention for information purpo ution in the UK. Copies of the of memb a utor given not is is distrib ent a distrib docum 1NX, as Management information in this is admitted for public offering and St James’s Place, London, SW1A Swiss & Global Asset information: The 12 United Kingdom. Important legal bourg law) and it nt No. BR014702, London, SW1A 1NX, Place, ’s according to Luxem S.A., UK Branch, UK Establishme James (SICAV St. tock d, 12 ) Multis ement (Luxembourg g Management Limite Global Asset Manag by the Facilities Agent: GAM Sterlin or Services Authority)
07/10/2012
17:00
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IFA15_Cov
magazine
N E W S R E V I E W C O M M E N T A N A LY S I S Cover 19.indd 3
22/03/2013 13:14
AVIVA INVESTORS MULTI-ASSET FUNDS
5 RISK-TARGETED FUNDS FOR EVERYONE FROM JOGGERS TO SPRINTERS. Guiding your clients through risk profiling is simple. Finding a mix of funds and assets that match their needs – and checking the funds regularly – is not. By offering your clients our Multi-asset Funds, you’re leaving the monitoring of the funds to us, freeing a substantial part of your working day. Each fund is actively managed to aim to stay within a risk range whilst maximising returns over the medium to long-term through unconstrained asset management. So finding an investment solution that keeps pace with both regulation and your clients’ expectations is now easier. Harnessing investment intelligence for the outcome you need.
avivainvestors.co.uk/maf fund&salessupport@aviva.co.uk 0800 015 4773*
For investment professionals only. Not to be viewed by or used with retail clients. * Calls may be recorded for training and monitoring purposes. Calls are free from a BT landline. Call charges will vary from other networks. The value of an investment can do down as well as up. Investors may not get back the original amount invested. Aviva Investors is a business name of Aviva Investors UK Fund Services Limited. Registered in England No. 1973412. Authorised and regulated by the Financial Services Authority. FSA Registered No. 119310. Registered address: No. 1 Poultry, London EC2R 8EJ. An Aviva company. www.avivainvestors.co.uk MC2753-V001-262050-CI062359 10/2012
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