Private Client Adviser Knowledge Base
Issue I
Time to make some right decisions - Nick Cann
The inflation threat - Jeremy Charlesworth
ETFs – set to ‘come of age’? - Rayner Spencer Mills
The Retail Distribution Review – Here we go again! - Clive Waller
Time to make some right decisions
Nick Cann
The FSA’s retail distribution review has really laid down the challenge to the advisory community. There can be no doubt that the regulator intends to see professional standards increase with an expectation that commission as we know it will disappear. For existing fee-based Financial Planning businesses with a clear client service proposition, the opportunities are tremendous but for most of the industry a huge amount of change is required by the end of 2012. Now is the time for advisers to seek out those organisations that can help most with these transitional issues. The Institute of Financial Planning (www.financialplanning.org.uk) is experiencing an increase in membership and number of candidates to go through the Certified Financial Planner (CFP) accreditation programme. Successful candidates regularly feedback that having gone through the CFP assessment has in many case changed the way that they deliver Financial Planning to their clients. How powerful is that.
It is reasonably sensible to split the challenges laid down by the FSA’s review into two. The first is relatively straightforward. Most advisers need to get better qualified. It doesn’t matter that the new standards have not yet been defined. The FSA is operating a no regrets policy and the basic message has to be finding a subject that you like or know, offered by an examiner that meets the current QCA 4 standards and get them out the way. There are numerous academies offering tremendous free support for these exams and there are an increasing number of study groups setting up around the country. Invest in good quality technical support or E-learning programmes depending on learning style. For relatively small costs, the likes of Technical Connection provide first class technical support and updates that make the whole experience a lot more straightforward. Whilst people look for alternatives to examination testing it is likely that these alternatives will be a lot more expensive and not necessarily easier to pass. It is easier to get on with the exams with gritted teeth or accept that the business is being prepared for sale and that there is a maximum of 5 years to get the best price possible.
Business transition actually offers the biggest challenge. This comes from 10 years personal experience of working with good Financial Planning businesses that have already undertaken this journey. The outcomes have in almost every case been hugely positive although the time frame required is a minimum of 3 years from a standing start. This will put many firms under pressure to achieve the necessary changes, particularly given the current state of the economy and parallel challenges that are being faced internally by businesses.
Transitioning a business is not about turning on a switch or moving out of one room into another. It is about creating strategic change and new business plan. It is a full scale house move or at worst a substantial home improvement or makeover to the existing model which might just end up being more expensive and not achieve the desired effect. Various different analogies can be drawn but a new business plan is undoubtedly required that captures the key elements of the transition. To help with this join an organisation like the IFP that will put you in touch with many who have made similar changes and are prepared to share best practice and mentoring throughout the journey.
As a professional body the IFP’s focus is on developing career paths and support programmes for all those involved with Financial Planning. Coupled with this is the support that is provided to Financial Planning businesses dealing with the key challenges and capturing and sharing best practice. The IFP conference (www.ifpconference.org.uk) should be a must attend event for those serious about their business. The IFP community plays a big part in the sharing of best practice and new ideas from home and abroad. If relevant to your business, now might be the time to join.
The inflation threat
Jeremy Charlesworth (Chief Investment Officer, Moonraker Fund Management and manager of the Moonraker Global Opportunities Fund and the Moonraker Commodities Fund)
The Anglo Saxon economies’ quantitative easing programme is the biggest reflationary act in history. The deflationary forces it has to counter are indeed powerful but the risk of sparking off what could be a heavy bout of inflation is very real.
Inflation will not come through straight away, of course. At Moonraker we expect to see a recovery in global stock markets for a little while yet. But there is a good chance that this will be followed by a major bout of inflation. While fighting deflation might be the governments’ primary goal at present, investors cannot dismiss the fact that a heavy dose of inflation is actually the get out of jail card for them. In the longer term, many Western governments, including the US, UK and some European governments, will have to allow inflation if they are to reduce the real value of the debts that are hampering recovery.
It is the least painful way of dealing with the credit crunch. The price is that inflation robs people of the value of their savings and pensions but it does get governments out of trouble, and has done so many times throughout history.
So if we are to have rising inflation for several years to come then what will that mean for investors? Double-digit inflation a few years from now is a distinct possibility. We will not go back to the same situation as we had in the 1970s but there are lessons to be had from that decade, not least that the assets that did best then were commodities, including gold and oil, and the worst performers in real terms were government bonds and cash. Longer term, investors should be looking to raise exposure to gold because of its in-built defensive qualities and as an alternative currency as inflation erodes the value of paper currencies.
Investors also need to distance themselves as far as possible from the effects of the credit crunch. The epicentre of the crisis is the US and the UK. The best of the opportunities will be away from there. Investors should look to where the natural resources are plentiful and where there is growth. That means certain emerging markets where the demographics are good and the population aspires to higher standards of living. Those countries with high cash levels, well-managed economies, rising middle classes and which are focused on improving their own economies should all outperform Europe and the US.
A lot of IFAs have been going back into UK equities but they need to be asking some serious questions, including what is the UK actually good at? Consumers won’t be rushing back to shops and banking will be slimmed down, yet the UK has relied for some time on both of those for real growth. Around 70% of the UK economy is unlikely to grow anytime soon.
One major oversight by markets that is particularly worrying is that they just do not seem to have conceptualised the sheer magnitude of the debt now weighing on the Anglo Saxon economies. Some estimates for the amount that has had to be set aside for bailouts by governments and corporates have been as high as $19 trillion. If after all that there is still no economic growth then there could well be an even bigger crisis in two or three years.
ETFs – set to ‘come of age’?
Rayner Spencer Mills (www.rsmgroup.co.uk)
We thought we’d take a quick look at ETFs, what they are and how they work given their increasing usage and recent mention in the FSA Consultation Paper on delivering the RDR.
ETFs, or Exchange Traded Funds have been around for a number of years now, however, despite a number of advantages over index tracker funds, they have not really become mainstream investments. ETFs are now being used increasingly in multimanager funds, and this has led to a larger number of funds becoming available.
ETFs are shares that are traded on a stock exchange and that mirror the performance of a share portfolio or an index. They can replicate a wide number of indices or portfolios, from a mainstream index to a more esoteric investment area such as private equity or commodities.
The main difference between an ETF and an index tracker is that an ETF is a share in a company which can be traded at any time of the trading day whereas an index tracker is generally only tradable once a day.
An ETF can also have a cost advantage – because it’s a share, the only cost is a stockbrokers commission; there are no fund management charges, and no stamp duty. There is however a number of low cost tracker funds which would come close to the costs of an ETF.
One of the reasons why ETFs have not become more mainstream appears to be the issue of client accessibility. Whilst these funds are very easily tradable, they are not seen as particularly easy to invest in initially, but is this about to change with the FSA’s proposal to widen the range of products to which the new independence standard will apply? No doubt this and many other questions raised by the FSA will continue to be debated for some time yet!
The Retail Distribution Review – Here we go again!
Clive Waller
I think we are on version 3 of the RDR – please note RDIP was only a temporary phase, a little identity problem. After all, RDR slips so much more easily off the tongue.
What does it mean to the retail investment industry? I say the industry because IFAs have become the major distribution arm for the industry. Certainly, in the short term, what is good for advisers is good for the industry and vice versa. On balance, I think there is little for us to moan about. The qualification issue should have been dealt with years and years ago. If in 1986, a provision of the Financial Service Act was a proposal that advanced level qualifications were to be introduced over a generous 10 years, we would not have a problem now.
There are those who feel that advisers should have gained more qualifications whatever the regulatory requirement. Maybe. If we aim to be a profession, it is the profession that sets the rules, not the individual. There is a further point. The RDR is about retail investment. Although that was stated in earlier versions, it still had the smell of the old life and pensions industry with some funds added rather than true retail investment. Version 3 makes it clear that independent doesn’t mean the ability to deal with any life company and a few asset managers; it means all retail asset classes that might be suitable.
Despite my comments above, I don’t believe an adviser should be allowed out unless properly qualified. Where investment is concerned today, that means exams. It didn’t matter when the investment choice was managed fund or with profits. Now it does. Non-restricted investment advice is just too complex.
Let’s take one simple example, all right not quite so simple, ETFs. When my firm last researched the market in 2008, less than 5% of IFAs recommended ETFs. Most didn’t know what they were. Now they probably know what they are in simple terms, but few recommend them. But, the RDR actually mentions ETFs. Oh dear, better learn a bit more! Problem is, they are not that simple. How does an ETF compare with a low load passive unit trust? What is synthetic replication and what are the risks? Should I discuss inverse ETFs with my clients? (No – don’t even think about it!).
Thing is, ETFs are just not that simple. The FSA has real challenge in deciding how much a GP type independent adviser should know, and little time to do anything about it. I guess that means that IFAs will have to stipulate their own proposition and their own training programme and hope that retrospectively the FSA doesn’t disapprove. Whilst the FSA have done a good job of prescribing necessary change, there is a challenge for the industry that has not been addressed. There has been a push from the regulator to the higher net wealth clients. The argument is that the mass affluent and less well off either cannot afford advisers fees or would get ripped off by commission driven sales.
Unfortunately, many IFA and, even more incongruously, insurers, neither of whom will benefit, have promulgated this line of reasoning. This drift to high net worth just won’t work for the majority of advisers. This may sound controversial but, if the facts are known, it is not. There are two very simple reasons why:
1 The high net worth market is big in terms of wealth but tiny in terms of numbers. Moreover, many will not deal with a financial adviser at all – they reckon they made it and are competent to manage it. Others will deal with private banks. That leaves a small but deep pond for the few very competent wealth management advisers
2 It is difficult to put this nicely, but if you are a £50k p.a. to a £100k p.a. adviser, it is improbable that someone with serious investable assets will see you as a source of advice. Would you, in his or her situation?
Yet many advisers who are in this category have shouted the case for fees and a move up market. Let me give you an example. At an adviser conference earlier this year, delegates were asked if they were successful in working on a time-based fee model. Only one adviser on my table said ‘yes’. However, when an old pro of a financial planner expressed surprise and questioned her, she eventually confessed to working on commission offset.
In similar fashion, I heard a national IFA say that they worked purely on a fee basis to delegates at a platform conference. I did wonder if I were there only client on a commission model. Unfortunately, the flawed disciples of the New Model Adviser movement have shouted the loudest!
When customer agreed remuneration was mentioned in RDR, both life companies and the ABI were in support. This does not correlate with investment bond sales in billions. Despite the change in CGT in last year’s budget that the ABI themselves said would mean life companies would be disadvantaged, sales continue at high levels. As I read recently, if no one takes to 7 – 8% initial commission on offer, why is it available? George Kinder, the guru of lifetime financial planning recently said that advisers are ignoring the middle ground – and he is right. Those who are good clients of IFA firms today are largely 50 plus. Most were in pensions schemes or were sold personal pensions; most were sold life insurance and PHI; most were sold savings plans.
Below age 50/55, there is a huge savings and protection gap. If this is not addressed quickly, the next generation of advisers will have few clients with either the money or the inclination to want a financial adviser. The only remuneration models that will work for the vast majority post RDR are commission and platform-based. If the loss of commission on investment products encourages advisers to sell bucket loads of protection, that’s great. It is almost impossible to persuade people to buy too much and insurers are too risk averse to let them anyway – FSA, please note.
The platform-based model is proven. It is transparent; the customer agrees the basis with his or her adviser; it is RDR compliant and there are no problems with unpaid invoices. The challenge, however, is top ensure our proposition addresses not only the investor who has money but also the saver who hasn’t, but needs to start and also needs income protection and life cover.
That really is a challenge for platforms and for advisers.