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A lang cat production for The Transparency Task Force
THE
TIMES
Why governance and culture need to become an integral part of analysing corporate risk 7 The need for authentic investors
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DFMs need to raise their game on transparency Is active management a commodity? MIFID 2 and the impact on trustees
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15
Embedding professional standards in banking
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3 Hello from the Editor 4 Allowing and believing: the authentic Investor mindset 6 The Transparency Task Force Teams 7 Why, and how, governance and culture must become integral to corporate risk 11 The tussle for transparency: DFMs are falling behind 12 Transparency Statements 13 Is active management a commodity? 15 Why MIFID 2 is good news for trustees 17 The directory of pro-transparency organisations 21 Driving standards
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Hello from the Editor Andy Agathangelou Founding Chair, Transparency Task Force
Understanding the work of some of our Transparency Task Force teams and the fantastic people leading them… In the Beginning In the early days of establishing our collaborative, campaigning community, at a meeting held at Dimensional Fund Advisors’ London office, we concluded that there was much wrong in the Financial Services sector that needed fixing. It seemed sensible to develop several groups, each made up of people that felt particularly strongly about issues in which they had expertise. We started with fewer than 20 volunteers but now over 250 people are involved in 10 countries. Each team has at least one campaign project underway, designed to harness the transformational power of transparency to drive the muchneeded change that the consumer deserves and the reputation of the sector needs. They are a consensus-building ‘coalition of the willing’, working together to be part of the solution. Each team has a monthly conference call and we’re always on the lookout for collaborativelyminded people that want to work with us to help fix what’s wrong in financial services – we’re obviously going to be busy for a while! So if you’d ‘rather stand up than stand by’, get involved.
Here’s an overview of 3 of the teams: The Banking Team: This has a business banking part, led by Heather Buchanan, Director of Policy & Strategy at the All-Party Parliamentary Group on Fair Business Banking; and a retail part, led by Alex Letts, Founder of U. Their work includes the publication of a well-received White Paper on why and how banks should change the way they describe current accounts and charges. This was presented at the House of Commons in June, covered by The Times and chaired superbly by Lord Cromwell. To see who’s involved in our Banking Team click here. The Foreign Exchange Team: Led by Andrew Woolmer and Xavier Porterfield of New Change FX, plus Peter Eggleston of Best X. The Team published a constructive critique of the Global FX Code in July, explaining why the Code doesn’t
go far enough to make FX costs more transparent. The White Paper drew attention from Andrea Coscelli, Acting Chief Executive of the Competition & Markets Authority and Stephen Barclay MP, Economic Secretary at HM Treasury. To see who’s involved in the Team click here. The Market Integrity Team: A relatively new but fast-growing team, led by Steve Conley, Chief Executive at Values Based Adviser and an Ambassador of the TTF. The team consists of over 50 senior executives from financial services trade bodies, professional associations, standards boards and similar, working together to improve the overall effectiveness of the UK’s FS Codes of Conduct, with a view to improving market behaviour. This will improve outcomes for consumers and help restore confidence. To see who’s involved click here.
More support needed, of all kinds, please. I’d like to think the TTF’s collaborative campaigning community is punching above its weight, particularly when it has no backing, support or funding. On that note, I’m keen to raise some money to pay an expert to seek funding for the TTF; I am told we are making a positive contribution and worthy of proper support, but I don’t have the skills or contacts to go about finding it. If you have any ideas, please contact me through andy.agathangelou@transparencytaskforce.org
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Allowing and believing: the Authentic Investor mindset ROB LAKE, FOUNDER, AUTHENTIC INVESTOR
A millennial working in finance recently told me ‘the first thing people in my generation ask when thinking about career choices is “what does the world need?”’. Another wrote ‘finding purpose in my job is essential to me (yes, I am a millennial, I can’t help it)’. A while ago I wrote that to align investment better with the needs of clients, society and the environment, we need authentic investors – investors who bring a conscious awareness of their personal purpose and values to full expression in their work. It seems to me that these two comments by people in the next generation of finance and investment professionals encapsulate the perfect starting point for cultivating an ‘authentic investor mindset’ – for people in any generation.
The urgency of pursuing this path is clear. As the CFA Institute says in its report on the Future State of the Investment Profession , ‘making a consistent … contribution to societal wealth and well-being is not just a nice goal for the investment management profession – it is quite possibly a matter of existential importance’. Yet as the CFA Institute also finds, at present just 11% of investment leaders describe the impact of the investment industry as ‘very positive for society’. Clearly something has got to change. What then might ‘cultivating an authentic investor mindset’ mean in practice? How can everyone working in investment and finance really know their ‘purpose’, or their most important values? If we do know what they are, how do we know how to act at work in a way that is true to them? What should we actually do? It is tempting to say that nothing can change until someone else does something. Until benchmarks, performance measurement practices, contract terms or bonus structures change, for example, we just can’t change the way we work. Yet one of the greatest challenges to authenticity lies within ourselves. We believe that we are not allowed to think or talk explicitly about our values while we are at work. That’s not what my training says I should do. If I think and talk like that, my colleagues will think I’ve gone crazy. In fact, I know I’m a proper investor and I belong in this organisation precisely because I don’t think and talk like that. More is possible than we believe is allowed – or than we allow ourselves to believe.
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What does the deepest part of us know is right and important? The part that looks into the eyes of a loved one and feels care, connection and compassion. The part that delights when the seeds we have planted germinate and the first leaves appear through the earth. The part that just says ‘wow’ when we are hit by the beauty of a landscape, a flower or a work of art. Who is in fact preventing us from acknowledging that part of ourselves and allowing it to stimulate more innovation and creativity in our work? We are. So how can we allow ourselves to think and act differently? Here are some questions we can ask: • Who are the real people whose money I am managing – the end beneficiaries? Can I imagine them looking out at me from my Bloomberg screen? What are they thinking? Is there more I can do to serve their interests? Deep down, what shared interests do we have as human beings? What happens if I see the investment chain as a human chain of interconnected and interdependent people, not just as a chain of transactions and contracts? • Am I bringing the whole of myself into the picture – including all the things I care most deeply about when I’m not in the office? What can I contribute? How can I best use all the talents I have?
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• Who might be negatively affected by my decisions? Whose interests will be harmed? What can I do to counter that? • Have I listened enough – to people who can help answer me these questions; and to the part of myself that knows what is really right? Investment and finance professionals are highly educated, talented, innovative and creative. These questions can help to harness their talents and abilities in new ways. Organisations can encourage and support people to ask such questions. There is huge potential waiting to be tapped. As another colleague told me after hearing Muhammad Yunus, the founder of Grameen Bank, speak at the CFA Institute 2016 European Investment Conference, ‘he called upon those present to stop working from selfishness and greed and instead to work from selflessness and use the financial system to tackle the important social problems the world is facing. It was heart-warming to see that he was really able to inspire this crowd of hard-nosed investors, who for the first time in the entire program of the conference weren’t checking their emails and thanked him with a standing ovation’. More is possible: we just need to allow ourselves to believe it is possible.
Rob Lake Rob works in the interconnected areas of sustainability, investment and people. As an advisor, Rob helps institutional investors shape their strategy to respond to the challenges of sustainability and longterm investment, ensuring that it is anchored in their purpose and values as organisations. He has worked with investors in Australia, Canada, Iceland, the Netherlands, Norway, Sweden, Singapore, the UK and the US. He has also been an advisor to UNEP and the OECD. Rob is the founder of Authentic Investor, an initiative to reconnect values and value in investment and finance. Authentic Investor holds events to enable people to rediscover what is most important to them and to explore ways to reflect this more fully in their work. Rob also works as an executive coach to support people at all levels in organisations to achieve their full potential, bring their whole selves to work and be who they really want to be. The next Authentic Investor retreat for investment professionals is being held in Oxfordshire in October. Please contact Rob for further information – rob.lake@authenticinvestor.org. You can also take a look at www.authenticinvestor.org
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www.transparencytaskforce.org
The Transparency Task Force Teams The teams are the Transparency Task Force’s collective response to what we see across the global financial services industry that needs to change. We firmly believe that those who can see problems, admit to them and are motivated to tackle them should collaborate to put things right. It’s in everyone’s interest to do so. The Transparency Task Force teams are less about individual experience and more about understanding the potential power of working together to drive much needed change.
Team
Focus
Banking
Improving transparency and professionalism.
Foreign Exchange
Challenging the opacity.
Market Integrity
Championing ethical practices.
Costs and Charges
Helping investors access better value for money.
Stewardship and Decision Making
Working to correct the ‘asymmetry of information’ problem.
Scams and Scandals
Raising awareness to help shut them down.
International Best Practise
Mutual learning to inform the Global Transparency Index.
PISCES
Purpose, Impact Investing, Sustainability, CSR, ESG and SRI
PAM
Progressive asset managers working together.
If you want to make your opinion count by joining our 250+ strong group of volunteer team members, contact andy.agathangelou@transparencytaskforce.org for more information and details of the monthly conference calls.
The Transparency Task Force Ambassadors While we value every member of our campaigning community, some go over and above. They are particularly aligned to our cause and, as such, are profoundly impactful for positive change. They are our Transparency Task Force Ambassadors. Name
Role
Organisation
Country
Jackie Beard
Director of Manager Research Services EMEA Morningstar Europe Ltd
JB Beckett
UK Lead
Association of Professional Fund Investors
UK
Steve Conley
Chief Executive
Values Based Adviser
UK
Ralph Frank
CEO (DC) UK
Cardano
UK
Ian Fryer
Head of Research
Chant West
Daniel Godfrey
Co-Founder
The People’s Trust
UK
Catherine Howarth Chief Executive
ShareAction
UK
Con Keating
Head of Research
BrightonRock Group
UK
David Pitt-Watson
Excecutive Fellow
London Business School
UK
Robin Powell
Editor
The Evidence-Based Investor
UK
Paul Secunda
Professor of Law and Director, Labor and Employment Law Program
Marquette University Law School
USA
Anna Tilba
Lecturer in Strategy and Corporate Governance
Newcastle University Business School
UK
UK
Australia
www.transparencytaskforce.org
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Why, and how, governance and culture must become integral to corporate risk STUART WOOLLARD, MANAGING PARTNER, ORGANIZATIONAL MATURITY SERVICES LLP AND CO-FOUNDER AND COUNCIL MEMBER AT THE MATURITY INSTITUTE
“Just before the crash of 2008, when S&P and other credit rating agencies, were awarding RBS a ‘AAA’, the CFO of RBS was reporting excellent profits. Yet the whole edifice of the bank had already started to crumble; ignorant of the risk that had already materialized in the form of its toxic mortgage book.” 2017 Banking Governance and Culture Report, The Maturity Institute Earlier in 2017, the US Federal Reserve ‘stress tested’ 34 banks. Most of these banks were at the centre of the Global Financial Crisis, and continued to behave badly in its wake. The news that they all passed was announced with great fanfare. Sentiment towards the banking sector appeared to shift as financial strength and growing profitability were taken as a sign that the big global banks were in a robust health – at least for investors. Are our banks as ‘healthy’ as they purport to be? By using a narrowly framed test of financial strength, the world’s banking regulators cannot provide this assurance. History has already told us that the financial health of organisations is only one, albeit critical, indicator. Whether it is credit rating, financial audit, or ‘stress tests’, these assessments have failed to identify the likelihood of corporate failures that arise on an almost daily basis. We need greater transparency but what is missing? Three years
ago, we were asked by a Standard & Poors’ affiliate company to adapt our work so that it could complement its own credit ratings, which it saw as limited in explaining and predicting corporate health. Its financial analysis could not explain the type and quantum of risk carried by companies from the way they were being led and managed – the risk from their human governance and culture.
Our Organisational Maturity Ratings (OMR) and OMINDEX (launched March 2015) were created from this work. By way of illustration, Table 1 shows the difference between OMINDEX and S&P ratings for 21 global banks, analysed as part of our 2017 Banking Governance and Culture Report. OMINDEX currently predicts that the high level of Governance & Culture
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OMR/S&P – Rating Gaps
■ S&P ■ OMR
22 20 18 16 14 12 10 8 6 4 2
ys rc la Ba
ls Fa rg M o or ga n C So ha ci se et e G en er al e JP
rd da an St
rte re d
C ha
ol H C SB
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W el
di ng s
rib as Pa
U BS P BN
C om IN m G er zb a n N k at AG io na Sa lA nt us an tra de lia r Ba nk in g M G or p ga n St an Ba Ll le nk oy y ds of Ba Am nk er in ic g a G ro up O RD Ro C ya r e lB di tS an ui k ss of e Sc ot la nd G p C iti gr ou D eu p ts ch e Ba nk
Sa
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Table 1: Bank OMINDEX ratings contrast with credit ratings as an indicator of organisational health
(G&C) risk being carried by most of these banks is presently generating a materially detrimental impact, largely through unseen dayto-day value erosion (e.g. poor customer service, decision-making or knowledge utilisation). In risk parlance, this can be described as “severe”, and in addition to value erosion, it suggests that a Wells Fargo type failure, seen in 2016, may arise again at any time, even in the absence of any visible, imminent threat. Our evidence demonstrates that conventional credit rating provides limited insight into current and future corporate health and value. Most banks remain ‘creditworthy’ despite the continued incidence of material misconduct causing damaging and potentially fatal outcomes - consider recent issues arising at Deutsche Bank (S&P A-, OMINDEX BB-) and the latest lawsuit against Wells Fargo (S&P A, OMINDEX B+). The major US banks (JP Morgan Chase: OMR ‘B’, Wells Fargo: ‘B+’, Bank of America: ‘BB’, Citigroup: ‘BB-‘) and their UK equivalents (HSBC: B+, Barclays: CCC+,
RBS: BB- and Lloyds: BB) may be deemed ‘too big to fail’ in their respective jurisdictions but this has to be set against their worryingly low OMINDEX ratings, suggesting risk to future creditworthiness. Until the gap between their OMINDEX and credit ratings narrow, the health of these organisations remains sub-optimal. The low US and UK bank ratings also have significant implications for their relative abilities to succeed against higher-rated competitors and, in risk terms, for their societal stakeholders. In the absence of any change, the evolution of more mature banks across the globe could have a similar impact on US (and UK) banking as Toyota had on US (and UK) automotive manufacturing. Our evidence highlights that banks with low OMINDEX scores are not just short-changing long-term shareholders but society itself. Here is the first extract from our report: “Across the 21 banks on this project the combined, operating income in excess of $250 billion is the result of a generally low maturity
level across the sector. This can be improved significantly. Our experience and evidence shows companies with such low levels have the potential to generate a 5-10% point operating margin improvement. If the entire group of 20 achieved the 50% operating margin of top-rated Handelsbanken it would double current operating income levels to $500bn.” What would this be worth for the whole global banking sector and how much of it would be passed on to customers and society to repay the debt it still owes for its behaviour?
Understanding G&C risk The most visible sign of governance and culture risk arises from misconduct, something firmly on the agenda of regulators and reported extensively in the media. Most organisations that have suffered from serious misconduct say this arises from “rogue” employees. In reality, they suffer from ‘rogue’ human systems, which only come to light after the full financial consequences are discovered.
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Bank Risk Factors Handelsbanken
17.40%
ING
29.75%
Goldman Sachs
30.05%
Santander
38.00%
National Australia Banking Gp
46.00%
Commerzbank AG
46.87%
Morgan Stanley
49.20%
Bank of America
51.18%
Lloyds Banking Group ORD
52.67%
Credit Suisse
52.85%
UBS
55.03%
Royal Bank of Scotland Gp
56.70%
Deutsche Bank
56.70%
Citigroup
57.47%
Wells Fargo
58.82%
Standard Chartered
59.37%
BNP Paribas
59.40%
HSBC Holdings
59.86%
JP Morgan Chase
63.17%
Societe Generale
64.88%
Barclays
76.10%
Most risk goes unseen. Each day, organisations are seeing significant value eroded by poor governance and ineffective human capital management. This might be unacceptable customer service that damages a brand, failure to use existing knowledge to improve or innovate, or ill-conceived decision-making. Our analysis provides an elegant solution to the question of balancing both sides of the value/risk coin. The OMR score (%) and Risk Factor (%) for any organisation will always come to 100%. For example, Barclays OMR score of 23.90% produces a risk factor of 76.10% (a total of 100%). The OMR Risk Factor is specifically designed to incorporate the probability of any company carrying undetected, material risk with respect to its governance and culture (G&C). It serves as a predictive, long-term indicator of risk that could manifest as catastrophic value collapse but will also identify ongoing value erosion. G&C risk arises out of equivocal, unclear or skewed organisational purpose and values that permeate all
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company systems: from decision-making, resourcing, reward, learning and performance management to quality assurance. Only by understanding risk in this context is it possible to fully understand and predict the likelihood of corporate problems and failures. One overall finding in terms of the banking sector’s ability to manage G&C risk is that banks do not understand, nor appreciate, the whole system nature of the problem. More worryingly, despite the slew of misconduct costs that have arisen since the GFC, a number of banks remain incapable or unwilling to identify and confront the underlying root causes of inappropriate behaviours. Most recently, while Wells Fargo had to acknowledge fraudulent sales practices, it should also have openly recognised that they did not happen in isolation. The bank still struggles to see or accept why these practices occurred. New CEO, Tim Sloan, pinned the blame largely on incentive compensation within retail sales and the former head of retail, rather than owning and embracing responsibility for the whole system. This is an indicator of immature leadership. It is no surprise that other risks have come to light.
8.5+8+8.59
■ Skewed value motive ■ Decision Making ■ Quality or process failure ■ Behaviour & conduct ■ Weak/poor governance ■ Reward system disconnect ■ Poor objectives/targets ■ Knowledge/learning failure ■ Brand led human governance ■ Supply chain failure ■ Trust/engagement breakdown ■ Ineffective HCM startegy
The 12 Governance, Culture and Human Capital Risk Factors: This must change. Our approach is to use a whole system G&C risk analysis, integrated as part of our OMR methodology, to identify the nature and quantum of business risk inherent in an organisation. This involves analysis of twelve core, and interrelated governance, culture and human capital factors that have causal connection to material business risk. Our full findings for the banking sector, which should be an essential read for boards, investors and regulators can be found in our 2017 Banking Governance and Culture Report.
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www.transparencytaskforce.org
Stuart Woollard Stuart is Managing Partner of Organizational Maturity Services LLP and co-founder and Council member at the Maturity Institute. Stuart leads pioneering work with the investment community to integrate human governance and human capital management capability into company valuation and investment decisionmaking. He also advises business leaders on developing insight that both enhances value and manages business risk with respect to human capital. Stuart has published research on human capital management in international mergers and acquisitions, on HCM in a global context and was appointed an Innovation Fellow at King’s College London in 2010. He was previously Director of King’s and Cornell University’s executive program on global HCM, was part of the international leadership team at E*TRADE Financial and UK MD, and led advisory businesses, both independently and at Arthur Andersen. Stuart studied Economics and Politics at the University of Warwick.
TIME FOR TRANSPARENCY: THE HAGUE 23 November 2017
Mauritshuis, Plein 29, 2511 CS The Hague We have an outstanding line up of speakers for you including Robin Finer – Head of Wholesale & Investments Competition at the FCA; Dr. Chris Sier – Independent Chair of the FCA’s Investment Disclosure Working Group; Eric Veldpaus – Founder and Managing Director of the Institutional Benchmarking Institute (IBI) and Strategy Director, Novarca Group; Frits Meerdink – Manager, Fund Management, PGGM Investments; Tomas Wijffels, Senior Policy Advisor, Pensioen Federatie; Colin Melvin, Founder and Managing Partner, Arkadiko Partners; and (hopefully) Paul Resnik, Director, Global Markets, FinaMetrica & PlanPlus.
To book your place click here. All queries to andy.agathangelou@transparencytaskforce.org
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the lang cat view Each month the lang cat shares its cat’s eye view of all things transparency-related.
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This month Mark Polson discusses DFM disclosure. And snowflakes.
The tussle for transparency: DFMs are falling behind It’s about this time each year that the lang cat, along with our friend Clive Waller of CWC, publishes a guide into adviser behaviour in terms of outsourcing investments, which we call Never Mind The Quality, Feel The Width. In particular we look at the usage of and characteristics of multi-asset funds and discretionary model portfolios. Clive does the adviser qualitative research, and we crush the numbers on the portfolios and funds. What results is poetry, of course. Anyway, this is our third go-round, and for the last two years we’ve been pointing out that there is a massive asymmetry of information between multiasset propositions and DFM model portfolio services (we’ll use MPS as shorthand). The former aren’t as transparent as many of us would like them to be, but they are clear as an azure summer’s day compared to the model portfolios operated by the guys with the big wristwatches. Every year, we tussle with the DFMs about getting in-depth data on portfolios; every year the shutters come down. And it’s not just for us; data supplied to investment data warehouses is locked down every which way, so troublemakers like us, or, y’know, advisers or clients, can’t go to work on it. If we’re lucky, we get performance, a TER and a topten holdings list. If we’re very lucky we get basic volatility measures in the form of Sharpe or Sortino ratios. If we’re not so lucky we get what is known in Scots financial services technical parlance as ‘hee haw’. All this means that it is virtually impossible to perform a whole-market analysis of the DFM model portfolio
space, and with some estimates placing this market at £40bn or more of client assets, it needs that analysis. We have no deity-given right to demand data from these guys; I completely understand if they want to tell Leith’s leading independent platform, investment and pension consultancy (probably) to do one. But the situation is exactly the same for advisers placing client assets, and that’s not good enough. We see this in the findings of our latest study – when asked about usage of model portfolios, about half our sample of about 80 adviser firms said they were using DFMs for these. The most common method of selection was ‘cost’ and the second was ‘performance’, despite the fact that both are remarkably hard to interrogate. We are seeing some good work from FE with its Transmission product, but in too many cases the DFM model portfolio sector asks advisers to sign up to what are remarkably like non-disclosure terms before sharing any data at all. We have seen some ask for advisers to sign actual terms of business before they’d share what they are up to. Imagine Vanguard asking you to sign ToB before you could do some basic analysis on LifeStrategy, and you get the idea. DFMs will tell you that this is about protecting intellectual property; that special sauce that makes them beautiful, unique snowflakes, unlike the 40 or 50 others who presumably are ugly, commoditised snowflakes. Fine. I’ve got a solution. Give the ‘market’ data that’s one rebalance old. Some DFMs already do this (applause) and guess what? The republic stands. I have a theory that advisers reward transparency and honesty with greater shares of new business and asset flow. Right now the DFM sector is a long way behind other areas of the industry; who themselves have a way to go. It’s time for more to step up and do the right thing.
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Transparency Statements Transparency statements are a great way for individuals and organisations to show support for our international campaign for improved transparency in financial services. We believe that higher levels of transparency are a pre-requisite for fairer, safer and more efficient markets that deliver better value for money and better outcomes for consumers. Transparency breeds trust. By fostering greater transparency across financial services, together we can positively impact the reputation of the market as a whole. Which is good for everyone. You can add your transparency statement by completing this sentence: ‘I believe there ought to be higher levels of transparency in financial services because…’ and sending it to andy.agathangelou@transparencytaskforce.org
Here are some examples from thought leaders showing their support. Remmy Biggins
Julia Dreblow
Pensions Technical Officer, TISA
Founder, sriServices and Fund EcoMarket
‘I believe there ought to be higher levels of transparency in financial services because the industry is currently perceived as confusing by consumers. In order to promote engagement, we need to break down those barriers and make it easier to understand. However, we should be mindful that too much information will confuse consumers.’
‘I believe there ought to be higher levels of transparency in financial services because investments are what shape our future.’
Edward Smythe Pension Board Member, London Borough of Barking and Dagenham
‘I believe there ought to be higher levels of transparency in financial services because the incumbent system is not fit for purpose in terms of delivered outcomes for savers or its impact on the ‘real economy’. Only with higher levels of transparency can we identify those areas that can be radically improved.’
Gavin Palmer Shareholder Nomination to the AGM committee
‘I believe there ought to be higher levels of transparency in financial services because trust and ‘my word as my bond’ generates win-win situation. Without transparency in the internet world reputations will be shredded with their organisations.’
Robert Reid Readers Editor, Money Marketing
‘I believe there ought to be higher levels of transparency in financial services because people have a right to know what happens to their money.’
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Is active management a commodity? RORY MAGUIRE, CEO FUNDHOUSE
Active fund managers believe they are better than average and yet most also believe they are all the same. This paradox is explained by their fees: they charge a premium for their services, yet their fees tend to be indistinguishable from each other. This equivalence of fees could suggest a few things, which we can explore further: perhaps they operate as a cartel, maybe they lack self-belief, or they see what they do as a commodity. Cartels, of course, have similar hallmarks – undifferentiated pricing and high margins being the obvious overlaps with active asset managers. That is probably where the analogy with cartels should end. Cartels are price setters and active managers – today, anyway – are certainly not price setters, they are price takers. Yes, their margins are high, too high, but they aren’t able to hold their line anymore. We are seeing an indiscriminate collective climb down on fees across the active management industry and expect this trend to continue. If anything, the active fund management community is behaving the opposite to a cartel today – their actions suggest that what they offer is more like a commodity that is widely available, than a rare, closely guarded proposition. As well as being reflected in their indiscriminate fee cuts, it seems embedded within their self-imposed M&A activity too. The number of mega active manager mergers is unprecedented, creating behemoth firms that seem to signal from the inside that active management is
commoditised. Is it not broadly true that active management is better suited to having less assets, fewer products, more investment focus, good cultural alignment, owner management and long-term shareholders? Many of these traits are up for sale in the mega mergers, rather than being protected. To our mind, this suggests asset gathering is their mantra and this means price comes down further. Another issue is the organisational structure: if genuinely skilful investors reside inside a mega organisation, they lose pricing power too. Sales teams need many products to sell and if one stands out as higher fee compared to similar ones, it is not easy to sell. Relationships need to be protected – will the head of sales in a large firm turn away business from a really important customer on the basis of fees? Probably not. Holding the line on fees inside the larger firms is hard for these reasons and so it feeds a system that ends up pricing active management like a commodity. Fee structures are also culpable. By linking fees to asset growth, it is no surprise that assets grow and
new products are invented. Some managers we see run five different strategies at a time – are they not portfolio administrators then? It seems inevitable, if incentives drive behaviour, that fees that encourage size will also encourage the average. This, in turn, will also encourage lower fees, of course. There is a further nuanced issue at play here too. Active managers have seldom been able to explain their value proposition to us – and, of course, the onus is squarely on them to do this: Active managers back themselves to have skill, not luck, to drive the added value they hope to deliver. This means they should also have an idea of what a skill-less outcome would look like; otherwise their definition of skill is unsubstantiated. So, all we ask is for them to explain both a skilful and skill-less outcome to us and, in so doing, back out their value proposition. This discussion of a value proposition may seem like semantics, or perhaps us trying to quantify what is inherently unknowable. Not at all, it is critically important to do, even if it is difficult. This is because the key
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piece needed is for active managers to link their fee to their concept of added value. The higher the value (the skill), the higher the fee and so it should be in their interests to do this exercise. We get few good answers on this and so we have little to tie the fee back to – is it fair, is it in proportion to the added value? We don’t know. Few managers end up holding their line on fees when they really should. We believe deeply in the role of active and passive investment strategies and have no real bias either way. That said, we also agree, on average, active managers need to reduce their fees and margin quite materially – because our evidence is that the average active
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manager struggles to add value after fees. Equally, we would like to see more self-belief from those in the minority who do add good value and therefore end up in a world where active management has real price discrimination. A commodity type pricing, where bigger is better, will be a poor development for clients and active managers alike. Developing clear assessments of their skill and added value are critical remedies. As is the ability for smaller firms to thrive. We also need to innovate on fees. Our fear is that the current trajectory is towards a world of the mega firm, where commodity type fees pervade and active skills are dampened.
Rory Maguire Rory is CEO of Fundhouse, an independent, owner-managed, FCA-regulated investment consultancy providing manager research, asset allocation and portfolio construction services to institutional investors and wealth managers. Rory has been in the investment industry since 1997. Prior to co-founding Fundhouse in 2007, he was CEO of a fund management firm. He has had various executive roles at large and small fund managers and has significant experience inside both active and passive fund management firms. At Fundhouse he focuses his efforts on fund research, asset allocation and overall business strategy.
THE CAPE TOWN TRANSPARENCY SYMPOSIUM 24 January 2018
Huge thanks to Allan Gray for hosting this Transparency Symposium. We’re looking for speakers, panellists, delegates, media partners and sponsors. If you’re interested or would like more information, please contact andy.agathangelou@transparencytaskforce.org. If you don’t yet know about the services provided by Allan Gray you can check out their website here
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Why MIFID 2 is good news for trustees of investment portfolios in UK and Europe SAUL DJANOGLY, FOUNDER & CEO, BEST INTEREST CONSULTANTS
As the saying goes “When a man with experience meets a man with money, the man with money gets the experience and the man with experience gets the money’’. This continues to apply to the investment management industry and its clients. Caveat emptor is clearly not enough. Regulators worldwide are acutely conscious of the problem and are increasingly demanding higher standards of transparency and value for money for clients.
In the UK, the industry is coming under twin pressures from the local regulator, the Financial Conduct Authority, and the European Commission. At the same time as dealing with the FCA’s highly critical report of UK investment managers, fund managers are having to implement stringent EU legislation from January 2018 - MIFID 2. Which aspects should assist trustees in fulfilling their duty of care to clients? MiFID 2 stands for the “Markets in Financial Instruments Directive 2”. This directive is a key part of a package of European Union laws aimed at creating a single, more competitive market in financial services across all EU member states. In spite of Brexit, the UK is enforcing the EU legislation in full. As a result, the UK and EU will operate financial services under the same rules even after Brexit and the City hopes that this will insulate it from a regulatory challenge to its primacy in financial services in Europe. How does MiFID 2 help trustees of investment portfolios when it comes to acting in their clients’ best interests? As highlighted in the recent FCA report1 , professional trustees - in common with retail clients - have suffered from a lack of transparency from their investment advisers around fees
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7% Return before charges on initial investment of £1m
After 10 Years Fund Would be Worth
Lost Investment due to charges
% of profit consumed by charges
Total Annual Charge 1%
1,790,484
176,292
18%
Total Annual Charge 1.5%
1,708,137
259,003
27%
Total Annual Charge 2%
1,628,889
338,251
35%
5% Return before charges on initial investment of £1m
After 10 Years Fund Would be Worth
Lost Investment due to charges
% of profit consumed by charges
Total Annual Charge 1%
1,480,242
148,648
24%
Total Annual Charge 1.5%
1,410,602
218,288
35%
Total Annual Charge 2%
1,343,925
284,965
45%
and charges and in particular, hidden fees. Trustees seem to be unaware that high fees and charges (due to their compounding effect) are one of the best predictors of future poor returns. Consequently, they have rarely tackled this issue head-on with their advisers. MiFID 2 addresses this problem explicitly. From January 2018 clients will be entitled to receive an itemised breakdown both in percentage and monetary terms for all annual costs including one-off charges, ongoing charges, all costs related
to transactions, any charges related to ancillary services and incidental costs. This is an excellent first step which many conscientious trustees have already taken on their own initiative. Where MiFID 2 gets even better for trustees is on its insistence that ‘firms have to provide clients with an illustration to show the cumulative effect of the costs on the return’2. As can be seen from the above example, trustees will now be able to see in black and white, the pernicious effects of
annually compounding charges on returns. There is another area where MiFID 2 can be of great help to trustees. This is in making them aware of conflicts of interest that may arise as a result of an investment manager using their own in-house funds or products in the portfolio. As a result of MiFID 2, firms will now be required to ensure and evidence that no such bias exists, both when the initial investment is made and on a continuing basis. Clients will be entitled to receive this evidence. If a firm routinely recommends its own products this will suggest that it is deficient in the provision of advice on an independent basis3. In conclusion, the enforcement of MIFID 2 presents trustees with a great opportunity to receive far higher levels of meaningful and jargon free information from their investment advisers. Trustees who fail to ask for this highly relevant information from their investment advisers to which they are legally entitled may well be doing their clients a disservice. 1. FCA Asset Management Market Study Final Report June 2017 2. European Securities and Markets AuthorityQ and A on MIFID 2-10 July 2017, ESMA35-43349, Page 60. 3. European Securities and Markets Authority- Q and A on MIFID 2-10 July 2017, ESMA35-43-349, Page 40.
Saul Djanogly, Founder & CEO, Best Interest Consultants Member of the Vanguard Wiseman Academy - an elite group of 12 high quality advisers from the UK, handpicked by one of the world’s leading fund management groups to advise on how to deliver greater value to private investors, regular contributor to STEP, author of the best-selling book ‘’Investing in Funds – The Good, The Bad and The Ugly’’. He says: “Best Interests Consultants represents both the distillation and evolution of everything I have learnt in my investing career over the last 30 years”.
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f o y r o t c e r i D The ncy e r a p s n a r T o r P O r g a n i s at i o n s
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A business shouldn’t stand out because it’s ‘pro-transparency’, it should be the norm. If you lead a pro-transparency organisation, join those already advertising in our directory. The more firms are seen here, the more weight gathers behind our argument that transparency is a commercial virtue and not a threat.
We’re happy to consider classifications beyond those shown here. Please contact andy.agathangelou@transparencytaskforce.org for more information.
ACADEMIC INSTITUTIONS Prof. Dr. Heinz-Dietrich Steinmeyer University of Muenster, Germany School of Law, Universitätsstrasse 14-16D-48143 e: steinmeyer@uni-muenster.de Muenster phone: 49-251-8329744 m: 49-171-8384816 I am a professor for Social Security Law, Labour Law and Civil Law at the University of Muenster Law School. My special field is pensions – occupational/ supplementary pensions as well as public pensions. I am doing consulting work nationally and internationally including international organizations (EU etc.). I am the Chairman of the European Network for Research on Supplementary Pensions.
AUTO ENROLMENT Steve Conley, Managing Director, Workplace Pensions Direct e: Steve.conley@wpd.email w: www.workplacepensionsdirect.co.uk t: 0113 457 4563 m: 07850 102070 Since 2015, Workplace Pensions Direct has made auto-enrolment simpler for small businesses, enabling employers to focus on running their companies without having to worry about pension law, and the cost of poor pension decisions. Workplace Pensions Direct offers an affordable, end-to-end, autoenrolment solution that guarantees compliance with the law. With professional expertise, a century of payroll and pensions experience, and professional indemnity insurance – Workplace Pensions Direct has removed the worry and risk of autoenrolment for thousands of small businesses and their advisers.
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Gavin Perera-Betts, Chief customer officer, NEST e: Gavin.Perera-Betts@nestcorporation.org.uk w: www.nestpensions.org.uk t: 020 3056 3719 NEST has been set up by the government especially for auto enrolment. We’re here to make sure that every employer has access to a workplace pension scheme that meets the requirements of the new pension rules. But we do more than just meet the regulatory minimum. NEST comes packed with the sort of high-quality features you need, whether you’re saving with us, using us for your workers or helping your employer clients.
COMMUNICATIONS CONSULTANTS Lesley Alexander, Managing Director, Ferrier Pearce e: hello@ferrierpearce.com w: www.ferrierpearce.com t: 020 3772 5360 Transparency – clarity, straightforwardness, honesty. As communications consultants, we support transparency in financial products, especially long-term savings. This applies not just to charges, but to the way we describe the products and their benefits to consumers. We believe the language we use should be clear, unambiguous and direct, helping people to make the most out of their money.
DATA SERVICES Larry McLaughlin, CEO | GSAV Ltd e: larry.mclaughlin@gsav.io w: www.gsav.io t: +44 203 655 2182 m: +44 7771 978 118 US m: x+1 646 946 5272 GSAV Ltd is Reg Tech/Fin Tech company exclusively serving the Buy-Side and delivering pricing solutions in the Collateral Lending Market to benefit Beneficial Owners and enable Managers to meet their Fiduciary and Regulatory obligations. GSAVr is a specialist pricing, tracking and regulatory tool and provides an independent price for collateral lending transactions that defines rate and use in a manner that the Regulators feels meets the test of both price and use. GSAVr is the only solution available today that addresses the current challenges of any form of collateralized lending, full price discovery and full price transparency.
David Rich MIod, CEO | Accurate Data Services e: david.rich@accuratedata.co.uk w: www.accuratedata.co.uk t: 01603 813366 m: 07919918623 David is Chief Executive of Accurate Data Services, a specialistdata quality and positive people tracing business that is focused on unclaimed assets in the financial service sectors. ADS traces lost members, clients and policy holders for a variety of organisations including Life and Pensions funds, Banks and Asset Managers. The goal is to help businesses reunite their customers / members with their assets and deliver positive consumer outcomes. David is an active campaigner for transparency and action around the large unclaimed assets issues present in the UK.
FIDUCIARY MANAGERS Ralph Frank, CEO DC (UK), Cardano e: info@cardano.com w: www.cardano.com t: +44 (0)20 3170 5910 Cardano was founded in 2000 and now has over 150 staff with backgrounds in the areas of risk management, investment management, research, actuarial and investment advisory. Cardano studies the causes and impact of risk and costs in order to significantly improve financial performance and resilience. We currently provide Investment Advisory or Fiduciary Management services to over 1.3m pension fund beneficiaries with assets totalling over £120bn.
FINANCIAL PLANNING Mike Stafford CFP, Director, Stafford Wealth Management e: mas@staffordwealth.co.uk w: www.staffordwealth.co.uk t: 01992 501601 Stafford Wealth Management was formed in 1986 to provide bespoke lifestyle financial planning and investment services to private clients. It is one of a small number of elite firms in the UK that is accredited by the Chartered Institute for Securities and Investment. Stafford Wealth Management is authorised and regulated by the Financial Conduct Authority for investment business.
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INVESTMENT CONSULTANTS Marcus Whitehead, Head of Investment Consulting, Partner, Barnett Waddingham e: marcus.whitehead@barnett-waddingham.co.uk w: www.barnett-waddingham.co.uk t: 0333 11 11 222 Barnett Waddingham has grown to become the UK’s largest independent provider of actuarial, administration and consultancy services. Our total headcount is now over 850 – with offices in seven locations around the UK. The investment consulting practice provides bespoke, independent investment advice to over 360 pension schemes with assets from the millions to billions. We continue to provide the personal, quality, tailored approach that has made us successful and has led to high levels of client retention.
INVESTMENT GOVERNANCE CONSULTANTS James N Meenan, Principal | JNM Investment Governance e: james@jnmresearch.com w: www.jnmresearch.com t: +353 (0)1 687 1027 m: +353 (0)86 257 2646 JNM Investment Governance gives trustees independent coaching and support to develop strategies and techniques to stem the overwhelming resource handicap they face in discussions with investment professionals. JNM’s objective is to facilitate a constructive two way dialogue with attendant benefits for all parties.
Henrik Pedersen, Managing Partner & Co-Founder, Clerus LLP e: henrik.pedersen@clerus.co.uk w: www.clerus.co.uk t: +44 20 3356 2845 m: +44 7767 656234 We partner with pension schemes and other asset owners to review and improve investment decisions, governance and value-for-money, through independent and informed investment analysis. As a result, investment outcomes can be improved without the need to change service providers or taking on more investment risk. We offer a free initial assessment, so why not try us out?
INVESTMENT MANAGEMENT Robin O’Grady, Head of Business Development, Hawksmoor Investment Management e: Robin.ogrady@hawksmoorim.co.uk w: www.hawksmoorim.co.uk t: 01392 410180 m: 07468 697900 Hawksmoor specialises in providing high quality discretionary investment management services for private clients including trusts, pension schemes and charities. We are a privately owned business with no ties to a bank or any other financial institution. Our experienced and well qualified team of investment professionals is focused solely on providing clients with the best service and consistently good performance.
NOT FOR PROFIT Dr. Kara Tan Bhala, President & founder, Seven Pillars Institute for Global Finance and Ethics e: kara@sevenpillarsinstitute.org w: www.sevenpillarsinstitute.org t: +1(785)865-8824 (mobile) Seven Pillars Institute (SPI) for Global Finance and Ethics is an independent, nonprofit 501(c)(3), nonpartisan, organization whose mission is to highlight and analyze issues of moral philosophy in global financial markets with a view to enhancing ethical practice and policy.
PENSION ADMINISTRATION Margaret Snowdon OBE, Chairman, Pensions Administration Standards Association e: info@pasa-uk.com w: www.pasa-uk.com m: 07983 565955 The Pensions Administration Standards Association (PASA) is a not-for-profit organisation which acts as a focal point to engage with industry and government on pensions administration matters. It was created to provide an independent infrastructure to set, develop, and provide guidance on pensions administration standards. It is an independent accreditation body, assessing the achievement of good pension administration standards by schemes and providers.
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RESEARCH Jackie Beard, Director of Manager Research Services EMEA e: Jackie.Beard@morningstar.com w: www.global.morningstar.com/UK Morningstar is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar provides data and research insights on a wide range of investment offerings including managed investment products, publicly listed companies, private capital markets, and real-time global market data. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than USD $200 billion in assets under advisement and management as of 31 December 2016. The company has operations in 27 countries.
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Launches Financial Stability Team At a special Transparency Symposium held on 13 September at Morningstar’s London office, marking 10 years since the collapse of Northern Rock, the TTF launched a new team of volunteers who will be focusing on what more can be done to mitigate the risk of another Global Financial Crisis. The event “was like a thought leadership masterclass on what causes markets to crash and even more importantly what more can be done to prevent another one”. The TTF is not at all convinced that the interests of business and the public at large have been fully protected against all the risks that are out there and may combine to cause another crash. The very next step for our new Financial Stability Team is an inaugural conference call, taking place on 3 October, during which we will begin the production of a White Paper which is to be presented at the House of Commons on 7 February. The White Paper will be a solution-orientated set of ideas for the Government and Regulators to consider and respond to. In keeping with the TTF’s approach to encouraging change the White paper will be constructive, consensus based and, we think, rather compelling. To get involved please email andy.agathangelou@transparencytaskforce.org
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Driving standards BY HELEN BOGAN, HEAD OF PROFESSIONAL STANDARDS, CHARTERED BANKER INSTITUTE
Nearly six years since its inception in late 2011, the Chartered Banker Professional Standards Board (CB:PSB) continues to be the driving force in progressing and embedding professional standards across the industry. The initiative’s Progress Report 2017, its fifth annual report, shows how it continues to act as a catalyst for putting professionalism on the agenda during a period of change in the banking industry. When the CB:PSB was formed, discussions about professionalism in banking were few and far between. The Institute and CB:PSB founder firms were the only ones discussing this agenda as a collective. Today, a new regulatory regime is in place and there are other bodies focusing on professionalism. The CB:PSB is no longer a ‘special project’, but part of a much broader, richer landscape of initiatives and individuals working to drive the professionalisation of the banking industry.
A step change The drive to develop and enrich the professional agenda is moving into other areas. Firms are now looking to integrate their approach to professional standards and qualifications – this is a very positive development. The CB:PSB has helped to make professional standards a mainstream issue, and that is a success in itself. As CB:PSB Chair Lady Susan Rice notes in her welcome to the Report: “I believe there is potential
for a step change – to genuinely be able to call banking a profession, not because we want to talk about it in those terms, but because the hallmarks of professionalism are evident across the industry – a common Code of Conduct, Professional Standards, where gaining professional qualifications and being a proud member of a strong professional body is the norm for everyone.” The Report notes particular highlights for the past year, including an expanding membership of 10 firms following the addition in April of Shawbrook Bank; the publication of five years’ worth of research on trust and confidence in banking; and the encouraging fact that over a third of the UK’s banking professionals met the Foundation Standard in 2016, despite structural changes in the industry.
Now there are ten The CB:PSB’s new member, Shawbrook Bank, was founded in 2011 to serve the needs of UK SMEs
and individuals with a range of lending and saving products. This takes the total number of member firms to 10 and demonstrates the continuing desire within the industry to work collectively to raise and maintain standards.
Improving confidence Since its inception, the CB:PSB has worked to quantify both its impact and changing public perceptions of the industry. Five years’ worth of research has been published this month in a new report entitled ‘Building Professionalism in Banking’. The research reveals growing levels of confidence and trust in individuals, banks and the industry, as well as improving views on professionalism in the industry. It found that 40% of UK adults believe that staff meeting professional standards would make them trust the UK banking industry more. Among the other key findings, over half of banking employees believe that the Foundation Standard helps them provide a better service to customers.
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Career-long commitment The flagship Foundation Standard remains an important focus for the CB:PSB. In 2016, nearly 145,000 individuals – 36% of the UK banking workforce – met the Foundation Standard. For many this will be the third consecutive year that they have demonstrated their commitment to professionalism. Achievement figures are lower than in 2015 due to restructuring and ring-fencing, which impacts both the size and shape of UK banking. The Intermediate Standard, launched in March 2017, complements the CB:PSB’s existing professional standards and completes its initial suite. It is intended as a next step for individuals who have achieved the Foundation Standard. The Intermediate Standard can provide a bridge between the Foundation and Leadership Standards for individuals who want to demonstrate a career-long commitment to professionalism.
Independent oversight The CB:PSB Independent Monitoring Panel (IMP) was set up in October 2016 and is fully independent of the CB:PSB and its member firms. Its aim is to monitor the effectiveness of CB:PSB standards implementation and whether the CB:PSB is delivering its aims. “The Panel independently reviews, provides challenge, and, where we believe there are shortcomings, recommends
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improvements to the CB:PSB Board,” writes IMP Chair Dr Ian Peters, who is Chief Executive of the Chartered Institute of Internal Auditors. “It consists of myself and four leading experts in their fields. Collectively we bring a passion for ensuring that the external scrutiny of the CB:PSB is robust. This is vital to strengthen public trust in this important work – to set, implement and maintain professional standards – and to confirm that the CB:PSB is delivering on its aims.” The IMP will publish its first annual report in September 2017
Forum for external challenge The Stakeholder Forum facilitates engagement with a broader range of ‘end users’, including consumer groups, regulators and industry bodies. It provides an opportunity to cascade information and, more importantly, to seek external feedback, opinions and advice. This year’s Stakeholder Forum event took place in June. “It was another lively and engaging session,” says Forum Chair Professor Robin Jarvis, Professor of Accounting at Brunel University. “We are keen to continue our engagement and challenge to the banks and CB:PSB – to further the professional standing of individuals in banking and to win over the respect, confidence and trust of the public in the long term.” This article was first published in the June/July edition of Chartered Banker magazine
Helen Bogann Helen Bogann has been involved in the CB:PSB since its inception in 2009. While at Lloyds TSB Scotland, Helen worked with Lady Susan Rice and the Chartered Banker Institute to create the original Board and worked with the Development Group to shape and define the CB:PSB. As Head of Professional Standards (since 2012), and working with the Board and Professional Standards Committee, Helen sets the strategic direction of the CB:PSB and has oversight of all CB:PSB functions from the development of professional standards to their implementation, monitoring and evaluation. Helen is also responsible for managing each of the CB:PSB structures: the CB:PSB Board; Independent Monitoring Panel; the Stakeholder Forum and Professional Standards Committee.
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