IFA Magazine January 2013

JANUARY 2013 ■ ISSUE 17

For today’s discerning financial and investment professional

THE INTEREST RATE

SWAP SCANDAL

JAPAN’S DIFFICULT

PRIME MINISTER DFM

OUTSOURCING

NEW

HORIZONS

LIFE AFTER RDR

N E W S R E V I E W C O M M E N T A N A LY S I S

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Contents.indd 3 C31418.007_SP_RDR_IFA mag_15 Jan_297x420_v1.indd 2

@Investec_SP_UK

15/01/201315:14 09:41 09/01/2013

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.

01.13

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

THE FRONTLINE: All ready for RDR? No, neither is the regulator

17

News

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

Editor’s Soapbox

Interest rate swaps are the banking industry’s next big PR problem

42

8

32

This Year’s News

Where are we going, asks Brian Tora?

And why are we in this handcart?

Garbage In, Garbage Out Newspapers can be bad for your brain, says Steve Bee.

52

Pick of the Funds

Small Company Funds. Nick Sudbury looks at some mighty midgets

Compliance Doctor Lee Werrell of CEI Compliance on today’s important issues

57

54

FSA Publications

Our monthly listing of FSA publications, consultations, deadlines and updates

The IFA Centre

Some of us assume clients understand too much of the lingo, says Gill Cardy. Wrong

60

48

58

Recruitment

Take your courage in both hands, says John Anderson of Recruit UK.

Thinkers: Ben Bernanke Mr Fiscal Cliff himself. Pictured as you’ve never seen him

65

The Other Side

Editor: Michael Wilson

editor@ifamagazine.com

Art Director: Tony Merlini

tony.merlini@ifamagazine.com

Publishing Director: Alex Sullivan

alex.sullivan@ifamagazine.com

Flipping heck, says Richard Harvey, where’s all this belt-tightening then?

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

N E W S R E V I E W C O M M E N T A N A LY S I SN Contents.indd 4

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Japan’s Problematic Premier

Nationalistic, spiky, and with a failed track record. Monica Woodley asks why the markets have welcomed Shinzo Abe?

28

GUEST INSIGHT

Equity Income Strategy

34

Asset allocation is all about being in the right classes at the right time, says M&G’s Steven Andrew.

All you have to do is make the right moves before everyone else. Easy

CONTENTS

features 22

Don’t expect any sudden movement, it’s all going to take a while.

But we’ll get there eventually

Discretionary Fund Management Kam Patel on the pros and cons of outsourcing investment management to a specialist

40

INSIDE TRACK

Keep It Simple

There’s no secret to success, says Vanguard’s Neil Cowell. Just cut costs, stay physical – oh, and it helps if you’re a mutual

44

COVER STORY

The Truth About RDR It’s not a lightbulb moment, says Stephen Spurdon. More of a slow-burning fuse

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

I SN E W S R E V I E W C O M M E N T A N A LY S I S Contents.indd 5

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Ed's Welcome.indd 6

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WORDS OF WILSON

ITCHY FINGERS

2013 IS PROVING TO BE ONE OF THE HARDEST YEARS EVER TO CALL. AND YET, AFTER A WEAK 2012 AND A HORRIBLE 2011, WE’RE ALL SUFFERING FROM ITCHY TRADING FINGERS AND WE’RE SIMPLY DESPERATE FOR SOME ACTION The big objection is that this is exactly the time of year when Santa Claus rallies often expire in a cloud of angry steam. And on the macro level there’s no reason why this year looks like being anything but more hard work. But then, the markets haven’t been playing by the normal rules recently.

When President Obama’s team reached its new year deal with the Republicans on... ooh, spending the spare $200 billion that they’d found in their back pockets, rather than fixing the deficit... we might have expected the markets to scoff and wander off muttering angrily. Instead, the S&P put on a nice little turn of speed, the commodities markets picked up, and, wonder of wonders, my Chinese trackers were back in the money. You never can tell.

Then there’s the new Japanese prime minister Shinzo Abe. A real recipe for trouble, that one, with his nationalistic views and his complete refusal to reduce the government debt pile. The Chinese and the Koreans hate him deeply, and boycotts of Japanese goods are very much on the cards. So what caused the 25% jump in the Nikkei that followed his election?

The counter-intuitive Mr Abe had instructed the Bank of Japan to turn up the money supply, so that the yen could weaken and the government’s debt pile could be naturally eroded by inflation. Who needs tax rises when you can fix things the easy way?

And what about fixed interest yields? Everyone knows that they’re unsustainable and hideously overpriced. Why, investors have no option but to turn back to equities – I mean, it stands to reason, doesn’t it? And with German bonds on negative real returns you’d have to be an idiot to buy those at the moment.

Except that people do. People who believe the conspiracy stories about bombing raids on Iran. People with no faith in the Eurozone’s latest fiscal cobble-up. People who are retiring and de-risking their portfolios.

You never can tell. But the trouble is, we have to act anyway. Even though the words of John Maynard Keynes still ring like alarm bells in our ears. The market really can stay irrational longer than you can stay solvent. Thanks a bunch, Mr Keynes.

M ik e

Michael Wilson, Editor IFA magazine

www.IFAmagazine.com

Ed's Welcome.indd 7

Write to Michael at editor@ifamagazine.com

Januar y 2013

7 14/01/2013 17:13

shorts

magazine

Hector Sants

, the former chief executive of the FSA, was awarded a knighthood in the new year’s honours.

Within a week, 1300 people had signed an online petition calling for the honour to be revoked because he had been ‘asleep at the wheel’ during the financial crisis. Mr Sants is moving to Barclays, where his public halo will be eagerly appreciated.

MEEP! MEEP! Well, you’d hardly have expected us to open the first News section of the year without focusing on the US fiscal cliff, would you? Or rather, the last minute scramble that might – just might – have saved the situation Readers with long enough memories might remember a cartoon character called Wile E Coyote, who would often find himself running headlong off a cliff - and then turn around in mid-air, realising with horror the situation he was in, and lunge desperately back toward the cliff. (Don’t try this at home, kids.)

Obama’s Treasury ‘discovered’ $200 billion and brought the US temporarily back from the brink

The result, inevitably, was that gravity would get there first, and that Wile E Coyote would end up digging his coyote claws into the cliff-face – whereupon he would descend into the canyon below leaving a long and terrible trail of scratch-marks on the rock face, all the way down to the bottom.

That, for some of us, was how Barack Obama’s truly desperate deal with the House Republicans looked when the negotiators from the Democrat and Republican sides finally settled on an interim fix that would stave off the awful package of mandatory benefit cuts and tax rises that we now call the fiscal cliff. (Copyright Ben Bernanke, by the way.) And in case there’s any uncertainty on this point, the deal included barely a word about word about taxes or expenditure – mostly just the deficit. It was, in short, a facesaving exercise for both sides One reason why the deal resembled Wile E Coyote’s last lunge for safety was that the House was already over the cliff-edge at the time. It was finally signed off by the Senate at 2am - a couple of hours into the New Year - which meant that in theory the automatic strictures should have kicked in, and that should have been that.

The fact that it didn’t reflected the fact that neither party could afford to be pilloried by the electorate for having let the situation fail. By the time that Vice-President Joe Biden had sealed his deal with the Republican Senate Minority Leader Mitch McConnell, nobody was in any doubt that they had

N E W S R E V I E W C O M M E N T A N A LY S I SN News.indd 8

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Switzerland’s

oldest bank, Wegelin, closed its operational doors as a bank on 4th January after being fined $57.8 million by the US authorities.

Wegelin had confessed to helping around 100 Americans to conceal $1.2 billion of taxable money and assets over a 10 year period.

campaign against tax fraud moved up another gear, as HMRC published photographs of around 30 convicted evaders on the photo sharing website Flickr. The individuals had received sentences totalling 155 years and 10 months.

You can see the cons in person at http://tinyurl.com/aohvc6f

done anything more than kick the deficit can another three months down the road.

Let’s explain. Nothing in the run-up to the deal had suggested that any convergence was possible on this matter. The Republicans haven’t voted for a tax rise since the days of George Bush Snr, and they’d shown no signs of wanting to change their ways now. Even after the Republican Senate leader John Boehner had reached a tentative deal that would put only the million-dollar earners into (slightly) higher taxes, his party had refused even to put the proposal to the vote and he’d had to step out of the ring.

All of which left the Grand Old Party facing a state of simple internal deadlock. And no amount of reasoned argument had been enough to persuade the Reps that any compromise on tax could justify the defusing of the fiscal cliff. Pride mattered.

It still does. With only minutes of brinkmanship time left, Obama’s Treasury Secretary turned the clock back by saying that he could see a way of creating (or rather “discovering”) another $200 billion of wiggle room that would mean that the deficit wouldn’t, after all, go over the edge at $16.394 trillion on the stroke of New Year. Instead, he said, it would give the two parties about two months in which to sort out a better deal. And the world wouldn’t now need to contemplate the prospect of losing 6% of America’s GDP in 2013, and the

NEWS

The £917 million

commodities markets and emerging markets wouldn’t now crash.

The deficit-watchers didn’t believe a word of it. But they also couldn’t work out whether to laugh or cry. The ‘fiscal cliff’ deficit imperative was actually laid down two years ago, when an exhausted President Obama had finally given way and had allowed a two-year extension of George W Bush’s tax cuts that would otherwise have expired at the end of 2010.

And Congress has had 24 months since then in which to negotiate a better settlement, and it hasn’t made any serious attempt to find one.

We could argue indefinitely about why the Republicans and the Democrats are so resolutely unable to sit down and talk together, but it’s doubtful whether it would get us anywhere. But the financial markets welcomed the deal fairly wholeheartedly, with the S&P 500 gaining 4% in the first week of January alone.

There are those who say that the prospect of a fiscal cliff failure was already in December’s price, and that events since then had taken risk off the table. And then there are the pessimists who mutter darkly that few New Year rallies last much beyond the third week of January. And that Wile E Coyote’s claws must be getting quite well worn down by now.

And that the canyon is still a long way down.

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News.indd 9

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NEWS

France’s

75% tax rate on people earning €1 million or more was struck down by a court. President François Hollande declared that he would press ahead with it nonetheless.

The PPI compensation

programme may cost £25 billion, according to a study by The Times. Using projections based on the current state of payouts, combined with an unexpectedly strong rate of new compensation claims – about 100,000 per month in 2012 - the study arrives at approximately double the £13 billion that the banks have currently set aside. The Bank of England’s lasr recommendation was for £10 billion of provisions.

A Brush with Basel Boom boom, as my children would have said The Basel Committee on Banking Supervision, which is working hard on the implementation of the forthcoming Basel III agreement, pulled yet another rabbit out of the hat on 6th January when it announced the final “liquidity coverage ratio” - the minimum shortterm liquidity ratios that international banks will be required to achieve by 2015. And the announcement contained significant concessions to the banks, which have been fretting about what sorts of assets should or should not be eligible.

BASEL HAS ANNOUNCED THE FINAL “LIQUIDITY COVERAGE RATIO” OFFERING THE BANKS SOME SIGNIFICANT CONCESSIONS The issue here is that the ‘second plank’ of the deal calls for international banks to hold substantial volumes of liquid assets, which can be sold off at very short notice if anything like the Lehman Brothers collapse should ever rear its ugly head again. By keeping short-term assets like these, the banks will have their own self-contained automatic fire-sprinkler systems that should prevent any local fires from turning into a global conflagration, as in 2008.

Now, nobody should think this change is likely to be an answer all on its own. The

reason why the earlier Basel II deal (2004) didn’t head off the 2008 crisis had more to do with the fact that it allowed the banks to base their flexible capital asset bases on the assessments of credit rating agencies like Moody’s and Standard & Poor’s, which they themselves employed. And that the rating agencies obligingly failed to enforce sufficient honesty from the banks about their own risk.

What’s new, and better, about the new Basel deal is that it represents a concession about how much of those assets should be held in sovereign bonds, and how much in cash and so forth. For the first time, the regulators have agreed to include certain equities, topquality mortgage-backed securities, and even corporate bonds rated as low as BBB(i.e. well below ‘investment grade’) – but only in respect of 15% of the new reserve requirements, and even then at a discount.

You won’t need reminding of the reason.

Ten years ago, government paper was as good as gold in the Basel Committee’s books – whereas today, of course, it’s nothing of the kind. The banks for their part will be glad to have their lower-quality assets counted toward their capital bases, because that will be good for lending, and it’ll be generally less restrictive as well. The new Basel deal should be coming into force in 2015, but the capital ratios will probably be stepped in between now and 2019.

In fact the situation probably isn’t as problematic as it looks. Basel says that 91% of the assets it wanted to see were already in place when the draft arrangements came into place on 31st December. Now for the tough part – getting the curbs on bank borrowing, and reducing dependence on dodgy shortterm lending. Watch this space.

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IS News.indd 11

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NEWS

NYSE EuroNext accepted an $8.2 billion takeover offer from Intercontinental Exchange, an Atlanta-based electronic exchange. The offer puts an end to American agonising about an earlier approach from Deutsche Börse, which had in fact been blocked by Brussels on competition grounds.

Italy’s business scene was cheered by the news that the retiring prime minister Mario Monti would after all be willing to serve another term, if he were asked by the winner of the country’s election on 28th February. His decision may have been prompted by the news that the disgraced Silvio Berlusconi was planning to stand again.

Tokyo Talks Tough Japan’s relationship with China doesn’t look like it’s going to improve very much during the coming Year of the Snake Not with the return of Shinzo Abe, an unbridled nationalist, to the Japanese premiership, who won a convincing victory in the December election.

And given that the new man’s first actions have been to welcome Japan’s purchase of a group of islands that China claims as its own, you can’t exactly blame the pessimists for fretting.

There’s more. Abe is a firm denier of the historical consensus that Japanese troops inflicted atrocities on the Chinese during the Manchurian occupation of the 1930s, and subsequently on Indochina during the second world war. He is inflaming South Korea with his claim that reports of Japan forcing women in these countries to become ‘comfort workers’ (sex slaves) for his country’s troops are untrue.

His father’s career was wrecked by a financial scandal, and his grandfather was a former ‘enforcer’ in occupied Manchuria. Diplomatic pedigrees don’t get much worse than that.

Yet Mr Abe’s return to power has been warmly applauded in Tokyo, where the Nikkei 225 soared by an astounding 25% between midNovember and the first week of January. For some, the new man’s arrival means the end of government vacillation by his predecessor, the well-meaning Yoshihiko Noda – who had tried his best not to

“WE WILL RESOLUTELY PROTECT JAPANESE TERRITORY”

Shinzo Abe reiterates Japan’s sovereignty over the Senkaku Islands inflame public sentiments with his plans to double the sales tax (from 5% to 10%), but who had only succeeded in slamming the lid shut on any prospect of a consumer revival that the country badly needed.

Abe’s plan might not be better, but it’s certainly different. Like Mr Noda, he has no very good ideas about how to reduce a government debt that’s now well over 200% of GDP. But he does have a plan to end Japan’s crippling deflation.

By instructing the Bank of Japan to aim at a 2% inflation rate, he hopes to entice consumers back into the shops. If you think that new car’s going to get more expensive soon, you’re less likely to try and postpone your purchase. At the same time, of course, a higher inflation/lower deflation rate ought to weaken the yen, which is exactly what Japan’s exporters need at the moment.

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N E W S R E V I E W C O M M E N T A N A LY S I SN N News.indd 12

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Long term care costs

are to rise for consumers, with the government fixing a lifetime contribution cap of £75,000 instead of the £35,000 recommended by the Dilnot Commission. Dilnot had also recommended that the present £23,250 threshold below which people had to fund the whole cost of their care should be raised to £100,000.

NEWS

GDP growth

worries for 2013 are preoccupying the adviser sector, according to the latest Barings Investment Barometer. 31% of its sample said negative or stagnant growth would be the biggest investment challenge this year. Fears about inflation are worrying 55%. And 80% said their customers were concerned about inflation’s impact on cash portfolios.

Jam Tomorrow Older and pre-retirement workers don’t need telling that they’ve got to carry on working for longer than they used to, according to a new report from Aviva The Real Retirement Report for Winter 2012 says that 23% of all 65-74 year olds were still earning a wage in December 2012, compared with only 18% in February 2010.

And that among the 55-plus age group the proportion with a wage rises to 39%.

The reason, as you’d expect, is that the financial pressures are closing in on all sides. A quarter of all 55-64 year olds still have a mortgage, averaging £55,804, and their savings pots are a mere £13,783 these days. 13% say they are in financial debt, and a third owe money on credit cards.

The demands from children, especially with regard to getting a start on the housing ladder, are starting to tell. But they themselves own property worth an average £219,726, so it’s not all gloom.

The extra earnings come in handy too.

These days the typical over-55 household has an income of £1,444 per month, on top of total savings of £14,544 – compared with £1,239 and savings of £11,590 in February 2010. Those figures would have been higher, the report says, but for the fact that older people are paying off their mortgages while interest rates are low.

But it’s not all about financial pressure. Aviva’s head of retirement, Roger Marsden, says in the report: “What we are seeing is

the first baby boomers setting out a new model for later life, and getting the most out of their improved physical health and the freedom to continue working for longer.”

Many people find that staying active in a job helps to keep them young at heart,” he goes on – “with the bonus being that it boosts their earning and savings potential in the process.” And the delayed gratification element is certainly important - around 44% of the over-55s intend to plan to use their retirement for travelling, and 66% say they plan to help out with charity work.

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I SN N E W S R E V I E W C O M M E N T A N A LY S I S News.indd 13

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NEWS

The Financial Ombudsman Service is to

clarify the rights of claimants to whom it has awarded compensation, making it plain that they can still take offenders to court as well for legal redress. A court found that the FOS’s phrase “full and final settlement” had been misleading.

The case in point had involved advisers Focus Asset Management.

UK house prices fell

by 0.3% during 2012, the Halifax says, but this trend obscured a 0.6% uptick during the final three months. Sales in the three months to November were 2% up on year-earlier levels. And other sources confirmed that first-time mortgage offers had become more numerous.

Child Benefit – More Heat Than Light A million wealthier households with children will be up to £3,000 a year worse off Thanks to the graduated withdrawal of child benefit from households where one partner is earning £50,000 or more. Well, that’s what the papers say, so it must be true.

But a closer look at the details reveals a more finely shaded picture, say some experts.

Yes, the new arrangements, which came in on 7th January, do seem to be unfair on those households where one partner earns £51,000 and the other earns nothing – perhaps because he or she has taken an active decision to stay at home with the kids. Whereas households where two earners bring in £49,000 each can keep all their child benefit.

(A “huge assault” on families, says Labour.)

The benefit is worth £20.30 a week for a first child, and £13.40 a week for any subsequent children, and it normally lasts until the 18th birthday. But let’s remember that the initial loss of benefit at £50,000 is only partial – it doesn’t all disappear until one partner is earning £60,000. And even at that point, there may still be some wiggle room.

Although 191,873 higher earners had formally opted out of child benefit by this year’s deadline, another 500,000 or so who didn’t opt out will be able to continue with the benefit provided that they declare it on a self-assessment form. (The 500,000 is a provisional estimate by the Institute of Fiscal Studies.) It does seem as though this course of action will be a fruitless exercise if, as promised, HMRC imposes hefty tax charges on the benefit. But for those whose income fluctuates

unpredictably between £49,000 and £60,000 plus, there will be some point in the opt-out exercise.

Naturally, there has been some rumbling among these 500,000 about the increased administrative burden of filling in self-assessment returns. Although, for many wealthier households, the existence of second homes, share portfolios and so forth have always made self-assessment a necessity anyway. But from an adviser’s point of view, the change might not turn out to be so bad after all.

Firstly, of course, there’s the increased business from the self-assessment forms themselves.

Then there’s the prospect of helping better-off parents to sidestep the new provisions by legal means. In some cases, salary sacrifices and other trade-offs in the workplace will presumably be enough to bring nominal incomes within the £50,000 limit; and in others, changes to the individuals’ balance between capital gains and income may be felt to be worth considering.

Will HMRC be stepping up its efforts to close these ‘aggressive avoidance’ loopholes?

You can bet your portfolio on it.

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14/01/2013 17:18

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N E W S R E V I E W C O M M E N T A N A LY S I S Inside Track - Creechurch Capital.indd 40

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ED ’S SOAPBOX

Bully Boy Tactics SMALL BUSINESSES ARE MAD AS HELL, SAYS MICHAEL WILSON. AND THEY’RE NOT GOING TO TAKE IT ANY MORE

Move over, mortgages. Pipe down, PPI, and listen up, Libor. The next tidal wave of trouble to hit Britain’s overweening banks is building up somewhere near you. Indeed, there’s a good chance that some of your best small business customers are already among the plaintiffs in what promises to be a long and bitter battle for compensation for mis-sold interest rate products. Many billions of pounds of compensation are at stake - and that’s all going to come off the bottom lines of the high street banks in the next few years.

And that’s not all. Many of the liability battles have already been won, in principle at least. Last November the Financial Services Authority told Barclays, HSBC, Lloyds and RBS in no uncertain terms that the onus is now on them to set up a checking process whereby they are to contact any ‘non-sophisticated customer’ to whom they may

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ED ’S SOAPBOX

magazine... for today ’s discerning financial and investment professional have mis-sold interest rate hedging arrangements or ‘caps and structured products’ - all the way back to 2000. Ouch.

In fact the regulator has done more than that. The FSA has already written the “Dear Sir” letter that will alert the potential claimants to their rights and entitlements. You can read all about it at www.fsa.gov.uk/static/pubs/other/irhp.pdf And it has explicitly told everybody that the banks – not just the big four, but also other miscreants – will have to answer to an independent scrutineer when it comes to reimbursing the aggrieved.

Unfortunately, the deal-clincher for the banks, back in 2000, was that many of the small businesses of the day weren’t even given the choice as to whether or not they went for these swap arrangements. As the pressure group Bully Banks (see below) points out, very many of them were told flatly that they would be denied any more business loans unless they agreed to the swap hedging arrangements. Some were even threatened with the loss of their existing credit arrangements unless they went along with the swap deals. They were being held by the short and curlies, and no mistake.

A Good Idea at the Time?

The Turn Of The Screw

How did we get into this mess? It’s a long story, but the beginning is usually a good place to start. So cast your mind right back to the time when the Bank of England base lending rate was a heady 5% - the lowest it had been in two decades – but had suddenly risen to 6% in the space of six months, as worries about excessive consumer demand had prompted central banks to pull in the fiscal reins. Yes, that’s right, in the early months of 2000.

Now let’s remind ourselves that, back in 2000, businesses still remembered the 15% base rate peak of 1990 all too clearly. And that they trembled at the thought of any return to those devastating levels.

Imagine, then, how eagerly these small businesses might have responded to the kind offers coming in from their local friendly banks, which they said would help them limit their exposure to any rise in bank rates by hedging their risks through something called interest rate swaps. The general idea being that, if rates rose, these leveraged derivatives would kick in disproportionately so as to mitigate their suffering.

Never mind the fact that many banks failed to alert their customers to the downside of derivative investing – namely, that when things turn against you they can turn very fast indeed.

In this case, since they were betting against higher rates, the cost of an unexpected decline in rates could be correspondingly immense. No, the proposition would still have looked attractive to a business sector that was on the brink of the 2000 dotcom crisis - to be closely followed, of course, by the financial crash of that year.

Let’s remind ourselves that many of these businesses – indeed, probably most – were smalltime operations, including family firms, running pubs, hairdressers’ salons, care homes, petrol stations and family garages. And that none of them were what you’d call financially sophisticated.

The last sorts of people, in short, to be mixing it with caps and rate collars and so forth.

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A quick look at our chart confirms the inexorable horror of what happened next. That 6% bank rate quickly collapsed down to 4%, then 3.5%, and the poor beleaguered borrowers were screaming with pain as the leveraged downsides kicked in. Those who attempted to close down their swap commitments with the banks were often threatened with impossibly onerous termination settlements, and many were effectively denied all opportunity to escape the situation.

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ED ’S SOAPBOX

Many claimants report that they were told that only their banks could terminate the arrangements – they could not. Even if they sold off their assets and paid off the underlying dents in full.

Now, think about that for a minute. If you’ve paid off the loan but you’re still tied to the hedge, then you’re hedging a loan that doesn’t even exist.

That wouldn’t have worried the banks, because they were sometimes making more money from the hedge than from the underlying loan in any case.

The FSA doesn’t disagree with Bully Banks’s unsurprising claims that hundreds of firms got into terrible debt – some of them being forced right out of business as they struggled to cope with the demons in their derivative deals.

Then it got worse. After an all-too-brief rise in the bank rate during 2004-2007, the bank rate crashed backward from 5.75% to an all-time low of just 0.5% in March 2009, where it’s stayed ever since. The pain for the banks’ captive borrowers has been as immense as you probably imagine. But as long as the lenders continued to stand by their assertions that a deal was a deal and a commitment was a commitment, there seemed nowhere to go.

So how many wronged borrowers are out there? It seems nobody has any very good idea, but as many as 40,000 deals are believed to have been sold since 2000. Not all of those deals went wrong, of course – and anyway, many of the

The Campaign for Restitution

Nowhere, that is, until December 2011, when the Bully Banks pressure group was formed to take the fight directly to the FSA. At the last count the organisation had 1600 members representing 800 mis-sold swap arrangements, but you can safely assume that they’re just a tiny proportion of the total. Bully Banks (http://bully-banks.co.uk) insists that it is a commercially independent, nonpolitical body that seeks to explain, campaign and run discussion forums for its members. The FSA has had no problem with dealing directly with the group, and it makes no secret of its agreement that financial restitution is widely required.

Bank of England Base Rates 1973 to 2010 Source: Bank of England

16% 14% 12% 10% 8% 6% 4% 2% 0% 1973

1977

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1981

1985

1989

1993

1997

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2005

2010

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magazine... for today ’s discerning financial and investment professional swap arrangements were sold to large and sophisticated corporate borrowers who don’t get very much sympathy from the FSA for having misread the downside risks at the outset. Instead, it’s the small companies who deserve the regulator’s sympathy.

What can we say about the probable cost of the bank compensation schemes? No-one is even hazarding a guess yet, but the initial £750 million being set aside by the banks (of which £650 from Barclays) is just an opening offer. The eventual outcome is thought likely to be as much as four times this amount. But it’ll be the damage to the banks’ public image that will be the most difficult to handle.

That, and an immense amount of paperwork.

The Mill Still Grinds Too Slowly

The FSA’s decisive move began in earnest last June, when the regulator drew up a set of proposals that essentially conceded the wrongs that had been done by some banks, and when it created a scheme to compensate customers who had been mis-sold swaps and similar contracts. By November, eleven major banks, including Barclays, Lloyds Banking Group, HSBC, and Royal Bank of Scotland, had signed up to the deal. And in November it published the report we referred to earlier in this article.

Speaking of the sale of interest rate swap and hedging arrangements to small and medium sized businesses (SMEs), the regulator said that its concerns included: (i) inappropriate sales of more complex varieties of interest rate hedging products (such as structured collars) and (ii) a number of poor sales practices used in

selling other interest rate hedging products. We also found that sales rewards and incentive schemes could have exacerbated the risk of poor sales practice. Practices varied across banks, but we found sufficient evidence of poor practices to justify action by the FSA. It went on: Interest rate hedging products can be an appropriate product when properly sold in the right circumstances. However, when sold to customers who are likely to lack expertise and understanding of the product (i.e. ‘nonsophisticated customers’), some interest rate hedging products may be inappropriate.

So far, so bland. But the June proposals also placed blanket restrictions on certain types of existing arrangements which the banks have claimed aren’t wrong or immoral at all – for example, contracts with large and sophisticated borrowers who have never been eligible for the FSA’s sympathy and support in the first place. Some say that these blanket bans have prevented them from their normal activities.

At the same time, the regulator has come under fire for failing to get specific about exactly what its proposals do and don’t include. As a result, claimants allege, some businesses have been forced to carry on making payments under swap contracts that have already been clearly identified by the FSA as examples of mis-selling. And others have had no option but to take their banks to court on their own because they say the regulator isn’t far enough down the road to be able to save them from bankruptcy. One such case, a £12 million claim brought by Guardian Care Homes against Barclays, will now have to be heard in the high court rather than being settled through the rather vague process that the FSA had laid out.

Things came to a head in mid-December, when a group of 24 MPs wrote to the FSA and the Treasury demanding that the banks immediately suspend the collection of all payments on interest rate swaps in the eligible cases. Although, to be fair, the eligibility question itself is still something to be decided on a case-by-case basis.

In short, it’s a shambles. And the only good news is that it’s unlikely to affect you as an adviser directly, unless you were actively brought into the sale process by the bank.

In the vast majority of cases, the offending products were directly sold by the banks to their customers. Which, in this turbulent year, may just offer some small crumb of comfort.

S B

S U 1 T fu w

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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T A

Im M G S

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Sparkling investments || JULIUS BAER LUXURY BRANDS FUND 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.

Important legal information: The information in this document is given for information purposes only and does not qualify as investment advice. Julius Baer Multistock Luxury Brands Fund is a sub-fund of Julius Baer Multistock (SICAV according to Luxembourg law) and it is admitted for public offering and distribution in the UK. Copies of the respective prospectus and financial statements can be obtained in English from Swiss & Global Asset Management (Luxembourg) S.A., UK Branch, UK Establishment No. BR014702, 12 St James’s Place, London, SW1A 1NX, as a distributor of the aforementioned fund (authorised and regulated by the Financial Services Authority)www.IFAmagazine.com or by the Facilities Agent: GAM Sterling Management Limited, 12 St. James’s Place, London, SW1A 1NX, United Kingdom. Swiss & Global Asset Management is not a memberyof2013 the Julius Baer Group.

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

JAPAN’S NEW GOVERNMENT LOOKS LIKE BAD NEWS FOR THE RELATIONSHIP WITH CHINA, SAYS MONICA WOODLEY...

IN THE MIDST OF CHAOS, THERE IS ALSO OPPORTUNITY SUN TZU, THE ART OF WAR

...BUT IT MAY STILL TURN OUT WELL FOR BOTH COUNTRIES

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New Assertiveness

For one thing, China-watchers hope that the long-term plan to emerge from the

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new leadership will contain financial-sector reforms, such as interest-rate and exchangerate liberalisation, which will be needed to shift the economy towards domestic consumption.

Other hoped-for changes include extending the CCP’s anti-corruption drive, as well as strengthening checks and balances on officials. With supporters of a more marketbased approach coming into positions of power, these changes could happen.

And then there’s the political significance to think about. During the last three years China has been increasingly asserting its strategic and military dominance in Asia – culminating in last November’s successful inauguration of its

China’s new president, Xi Jinping described Japan’s purchase of the disputed islands as “a farce”

C H I N A A N D J A PA N

It isn’t particularly surprising that last November’s Chinese Communist Party (CCP) congress, which selected the next leader of one of the world’s biggest countries, attracted much less international attention than America’s own nail-biting, too-close-to-call campaign.

The five-yearly event in Beijing left a lot less to chance than the US election – in fact, to be honest it was something of a foregone conclusion - but that doesn’t mean that its significance and impact for the whole world – especially in Asia – should be underestimated.

The 2012 Beijing congress was of particular importance because seven of the nine members of the politburo standing committee (PSC, China’s top decisionmaking body) were retiring - including the CCP general secretary and president, Hu Jintao, and the premier, Wen Jiabao, both of whom had been in their posts for a decade.

And then there was the critical timing of the congress itself. Chinese congresses are when the party assesses the past five years and lays out its plans for the future. And with the world economy still slowed by the financial crisis and subsequent recession, with Europe consumed by the eurozone crisis and with the US preoccupied with its own fiscal cliff, how China manages its economy is of vital importance.

only aircraft carrier, which successfully launched a series of jet fighters from Chinese waters. The fact that the Liaoning was an ancient handme-down from the Ukraine navy, and that it had no steam catapults but relied solely on the planes’ engine power, had done nothing to quell fears all the way down to Australia about Beijing’s growing militarism.

But the latest focus has been on Japan, which tweaked the dragon’s tail by purchasing three of the Senkaku islands (known as the Diaoyu islands in Chinese), all of which China claims as its own. China’s newly-chosen president, Xi Jinping, always one of the strongest voices in the islands dispute, lost no time in describing Japan’s purchase as “a farce”. But last month’s election of a nationalist Prime Minister, Shinzo Abe, looks set to take the strained relationship into still more difficult waters.

Most people are aware that Sino-Japanese tensions are nothing new – Japan has invaded and militarily occupied significant parts of China during the last century - but until recently Japan for its part had generally accommodated China’s own geopolitical rise.

With a much more developed economy and significantly higher per capita income, Japan was always more concerned with its own problems, from a stagnating economy to the tsunami. But all that changed last year as China formally overtook Japan as the world’s second largest economy.

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magazine... for today ’s discerning financial and investment professional That problem would have been bad enough without Japan’s own internal political problems – Tokyo has had eight prime ministers in nine years. But as it was, the lack of political assertiveness from Japan’s leaders in recent years had created an opening for more nationalistic politicians who have been urging a tougher line with China.

Desperate Measures

Those voices calling for a stronger opposition to China had been piling up the pressure on Japan’s then Prime Minister, Yoshihiko Noda, until finally, in August 2012, he had pledged to hold an early election - by August this year - in return for opposition support of legislation allowing for a doubling of the consumption tax rate. That would have helped to pay for the remainder of the 2012/13 fiscal year, and thus to reduce Japan’s crippling government debt.

Well, that was the idea anyway. By making passage

of a deficit-financing bill a precondition for calling the election, Noda had issued a bold challenge to his rivals.

But it didn’t work out very well. Negotiations between Noda and the opposition party over the deal soon turned fraught, forcing Mr Noda into dissolving the Diet, Japan’s parliament, in November.

It was all downhill from there for Noda’s Democratic Party of Japan (DPJ). The election duly took place on 16th December, and his government was soundly defeated by the

TACTICS WITHOUT STRATEGY IS THE NOISE BEFORE DEFEAT SUN TZU, THE ART OF WAR

Liberal Democratic Party (LDP) of Shinzo Abe which had ruled Japan for most of the last sixty years. And that return to LDP rule was in itself significant, for reasons we’ll examine shortly.

When the DPJ came to power three years ago, there were high hopes for a change to the country’s divisive politics and weak economic management. For too long, the LDP had been known for cronyism, obscurantism and frequent corruption which had brought down any number of LDP governments. (It had also destroyed Mr Abe’s own father Shintaro, who had fallen to an insider trading and corruption scandal in 1988.)

Sadly, however, the DPJ simply didn’t measure up to expectations, and in particular its ineptitude in handling last year’s tsunami had damaged public confidence.

Meanwhile, of course, Japan’s economy had been suffering.

Figures show that the economy contracted in the

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Historical Objections

There are some very nasty skeletons hidden away in the Abe family closet

So both China and Japan are at turning points politically and economically – and they’re potentially at each other’s throats. There’s a pronounced shift to the right in the rise of the nationalist Japan Restoration Party, which will now be the third largest party in the lower house, and in the return of Abe as prime minister. And Abe has pledged a tougher foreign policy stance - raising concerns that the government will adopt a more militant stance in its approach to China.

Mr Abe would have been an unwelcome face in Beijing even if he hadn’t already been a loud denier of Japanese atrocities in China and Indochina during the second world war – in particular, he denies that Japanese troops forced women in Korea and China to become ‘comfort women’ during the occupation, an issue that still causes enormous resentment in South Korea.

C H I N A A N D J A PA N

third quarter of 2012 by 0.9% (quarter-on-quarter), following growth of just 0.1% in the second. That meant that Q3 had been the weakest quarter since the Sendai earthquake in the first quarter of 2011.

Japan knows that it needs to break the rollercoaster cycle of economic growth and contraction. In the past 10 years, GDP has grown by an annualised rate of just 0.7%, and if GDP growth also turns out to be negative in the last quarter of 2012, it will be the third recession to hit the country in five years.

The victorious LDP has called for an increase in public spending and more aggressive monetary policy in order to kickstart the economy. And with the two-thirds majority that the LDP will now have in the lower house of the Diet, along with its ally, Komeito (the ‘Clean Government’ party), it will be able to push through legislation even if it gets opposed in the upper house where it still does not have a majority.

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FE_MM

magazine... for today ’s discerning financial and investment professional But it was worse than that.

His grandfather, Nobusuke Kishi, had spent the years between 1936 and 1940 helping to enforce the industrialization of Manchuria and China during the Japanese occupation. And from then until 1944 he had been minister of industry in Tokyo, and – wait for it – munitions. Not a happy pedigree for the new man, then.

The Chinese state media responded predictably to the Japanese election results, insisting that “an economically weak and politically angry Japan will not only hurt the country, but also hurt the region and world at large.” And that “the new Japanese leadership should take a more rational stand on foreign policy”.

As long as a diplomatic solution to the islands dispute remains out of reach, economic relations between China and Japan are bound to suffer. Signs have already been seen - an unofficial boycott of Japanese goods has hit sales of Japanese

Goldman Sachs Asset Managment chairman Jim O’Neill says, “Japan’s moment is finally here” 26

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cars in China, and the numbers of Chinese tourists numbers in Japan have experienced a corresponding fall.

This would be bad news anyway, at a time when Japan’s economic recovery depends on improvements in export demand and industrial production. The Bank of Japan’s half-yearly macroeconomic outlook, released in late October, had reported that a brief economic respite in Q2, due to reconstruction work in the northeastern areas hit by the 2011 earthquake and tsunami, had subsided in Q3.

And moreover, that sluggish import demand from China and Europe had become more significant. Japanese exports had fallen by 5% in Q3, while household consumption and business investment also slipped.

A Mutual Need?

But the pain goes both ways.

Japanese companies are important sources of investment and providers of employment in China, and if they reduce investment because they believe that the local business environment has worsened, then China will also feel the effect.

And it’s not just businesses that could turn off the tap.

Some households in Japan are responding to the unofficial Chinese boycott of Japanese goods by checking flows of investment into Chinese stocks, bonds and bank accounts.

Several Japanese asset managers recently planning to launch Chinese funds have cancelled due to lack of interest.

So where do we go from here? Well, the hope is that the deep trade and investment links between China and Japan will eventually encourage them to reach a compromise over the

islands. And then there’s Abe’s announcement that he favours a kind of quantitative easing, which he hopes will reflate the deflationary economy and weaken the yen, is being seen as a potential plus point. So there are opportunities for investors in both countries, despite the political tensions and upheaval.

And yet, despite the economic situation being stronger in China - with GDP growth of 8.5% in 2013 being predicted by the Economist Intelligence Unit - the view on equities really is not clear. The Shanghai Composite dropped below the 2,000 mark in November, and it has barely outpaced the S&P 500 over the past decade.

Now, it’s possible that capital flight, due to uncertainty over the political transition, may have been partly to blame for recent underperformance.

If so, the smooth transition and the plans that come out of the party’s economic work conference in December should help allay concerns during the Year Of The Snake, which starts on 10th February.

Meanwhile, the prospect of more aggressive monetary policy in Japan - and current bearishness on the yen has also got some investors eyeing Japan’s undervalued equities, particularly exporters.

According to Alliance Bernstein, in recent years a falling yen has often accompanied a rally in Japanese stocks. Goldman Sachs Asset Management chairman Jim O’Neill has been quoted as saying that Japan’s moment is finally here.

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METHOD IN YOUR MANAGEMENT STEVEN ANDREW, MANAGER OF THE M&G EPISODE INCOME FUND, ON WHY IT’S IMPORTANT NOT TO OVERLOOK THE MARKET’S WEAKNESSES. OR YOUR OWN, FOR THAT MATTER If this is the year to be back into higher yield equities – and all the signs from the financial markets say it is – then income funds such as the M&G Episode Income Fund ought to be up there in the lead.

The global markets are being torn in two directions at the moment – on the one hand, an awareness that the sovereign bond market is well past its bull phase, and on the other a general wariness among investors about the ability, and even the will, of some governments to get their economies back on a smooth track to recovery.

If this is the year to be back into higher yield equities – and all the signs from the financial markets say it is – then income funds such as the M&G Episode Income Fund ought to be up there in the lead. The global markets are being torn in two directions at the moment – on the one hand, an awareness that the sovereign bond market is well past its bull phase, and on the other a general wariness among investors about the ability, and even the will, of some governments to get their economies back on a smooth track to recovery.

Last year the worries were all about the euro zone. This year, the raging political war between America’s Democrats and Republicans, which have effectively trashed President Barack Obama’s hopes of getting the fiscal cliff issue settled. In the UK, David Cameron’s apparent wavering about Britain’s EU membership

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has brought a sharp rap across the knuckles from Obama, who thinks Britain would be a better ally within the EU than outside it.

And so on, and so on. But to M&G’s Steven Andrew, who manages the group’s relatively conservative Episode Income Fund, this is all the stuff of opportunity. If investors aren’t happy to take on the full risk of an all-out capital gain, then buying into a higheryielder is an excellent way forward.

“We are clearly in an environment beset by anxiety and fear and pessimism,” he says, “and although there is always an upside optimism somewhere, it is frequently the case that the market ignores it until it’s gone. And there will eventually be a day when the market will decide to justify the price racing away.”

Examples? “There’ll be a day when investors say ‘oh look, the US is going to be self-sufficient in energy, and the EU has got its fiscal union sorted

“The key element here is looking in the mirror, and saying why?” www.IFAmagazine.com

14/01/2013 20:29

GUEST INSIGHT and everyone will love each other, and so on’.” And when that day comes, all the heady expectations of bull-market revivalists will be justified.

“But at the moment we’re as far away as we can be from that sort of situation. And the trouble is, it’s always hard when you’re in midfog to see your way out of it, and especially if you’ve already had a negative experience after poking your neck out. You’re going to be happier staying where you are and seeking safety.”

“And for a medium-term investor, you’re safer in equities and in accessing those earnings in dividends than if you were lending money to governments at knock-down rates.”

So much for gilts and treasury bonds, then – unless, of course, you’re using them simply to provide solidity to your forward planning and reduce the potential for volatility. (An essential stabiliser for an income portfolio, obviously.)

But that’s not to say that fixed interest is a non-starter for an income investor. There are still opportunities to be had in the emerging markets if you do your sums correctly. And Andrew has about 10% of his fund invested in such opportunities – South Korea, Australia, South Africa, Philippines, Malaysia, Mexico.

“These guys are perfectly well funded, printing their own currencies, and running their books very conservatively,” he says. “And the market is simply not willing to price them realistically.”

One of the main drivers, for Andrew, is the observation that equity prices have largely failed to keep up with the growth in corporate earnings over the last three years.

As the accompanying chart suggests, the worldwide loss of equity market confidence has distracted us from the fact that earnings have been getting on quietly with doing a good job for investors. And we’re already hearing that equity income portfolios are high on the list of what private investors expect to buy this year.

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GUEST INSIGHT

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Modesty in the mirror

Spotting anomalies is one thing, but a little modesty is also in order, he says. “The key element here is looking in the mirror, and saying why? What makes me think the market is offering this to me at a good price? And understanding that we too need to make our decisions with consistency. “ “And that’s harder than it sounds, because unless you are diligent in recording your views, in saying “what yield do I think is a fair yield?”, then when you revisit that situation six months later, you might not come to the same answers.”

Memos to yourself

The answer, he says, is to strive for diligence, and to be constantly making notes to yourself.

“Financial behaviour is a curious branch of human behaviour, in that you treat prices differently from other goods. If somebody offers you a television at a 20% discount, you’ll grab it. But if it’ an equity you’re looking at, suddenly it’s less easy to take the decision to get in there. Suddenly you’re a contrarian. And the received wisdom is that this isn’t a good thing to do! So it’s essential to make sure you examine the way you

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“The greatest driver of returns is being in the right asset class at the right time” make decisions, and look in the mirror and ask yourself challenging questions, and to get your colleagues to query you as well.”

So you’re going beyond the Ben Graham thing, simply looking at prices and searching for opportunities? “Yes, we’re asking ‘where are the corporate profits, and how is the market pricing them?’ And if you focus on the price you’re paying, then you’ve already stacked the odds in your favour. The rest of it is about managing the journey.”

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T H E C U R AT E ’ S E G G

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

BRIAN TORA HOPES WE’RE OVER THE WORST

Looking back on a tumultuous year with all the blessed benefit of hindsight, 2012 turns out to have been a bit of a curate’s egg. Indeed, if you’d taken a snapshot of the year as we finally got into Christmas week, you might have felt it was a rather better ride than it seemed to be to those who are involved in the investment business.

Most major indices were up on the year – the Footsie was up 7%, which wasn’t bad for a start. But it concealed an altogether bumpier journey along the way.

The year had started full of promise, with both the Olympics and the Queen’s Diamond Jubilee expected to boost the UK economy. Shares were suitably upbeat – but not for long.

As dissent and concern unsettled the Eurozone and the race to the White House introduced uncertainty into the US, equity markets lost their way.

China didn’t help matters, with its growth slowing noticeably and with the prospect of a new hand on the Leviathan’s tiller before the year was out. In

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the end, neither the announcement of who was to lead the People’s Republic or the final outcome of America’s Presidential election produced any surprises. But it didn’t always feel that way, as polls in the US and scandals in China introduced an element of uncertainty for investors.

It has been America, though, that has produced one of the best end results for those entrusting their savings to equities. The S&P 500 Index was up by 14% during the 51 weeks to Christmas 2012, compared with the aforementioned 7% on the Footsie. Even after allowing for the modest slide in the value of the dollar the American benchmark index is more than 11% up.

Sterling has, in fact, appreciated against other major currencies.

Perhaps the rise against the Euro – actually a relatively modest 4% - is unsurprising, but it has also risen against the dollar, the yen and China’s renminbi.

Indeed, sterling’s performance would have made a serious dent in the 18% gain in Japan’s Nikkei 225 index,

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T H E C U R AT E ’ S E G G

IN PARTS and it certainly took the shine off a 23% gain in the Hang Seng index over in Hong Kong.

And who would have thought that Germany would have done so well, given Europe’s problems?

The DAX index was up by a third – just a little less for a UK investor once the fall in the Euro had been factored in. Mind you, 2011 was tricky for all the European bourses as well, and the largest economy in the single currency zone has really been doing quite nicely, even if its southern neighbours are exerting something of a drag right now.

Looking at the bare numbers, it comes as a little of a surprise to discover that UK index linked gilts were actually down on the year, despite signs that inflation might be picking up.

Conventional gilts were little changed in value overall - but then, investors still remain wary, and as the year ended they were still prepared

to accept a sub-inflation return for the seemingly rock-solid security of UK government debt.

All this is fine and good, of course. But the real question must be, what does the future have in store? As it happens, recent news has been painting a rather brighter picture. Europe has inched closer to a deal with Greece, our own economy did receive the predicted boost from the London Olympics.

Why, even house prices are starting to tick up again. Whether the improvement in sentiment will continue is in the lap of the gods. But as we get into a 2013 that will be no less eventful, investors and their advisers can take some comfort from a rather calmer situation than a year ago.

For more comment and related articles visit...

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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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33 14/01/2013 21:04

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

THE OUTSOURCING

No, we don’t need telling that the last couple of years have been a major headache. Advisers up and down the country have been battling with mountains of compliance and regulatory issues associated with RDR. Exams, capitalisation, disclosure and reporting requirements –and, just to add to the burden, a wholeof-market requirement that means the smallest IFAs now have to be as good as the big boys when it comes to knowing the ropes.

All this, what’s more, at a time when the pressure is on to keep fees attractive and contain costs. Is it any wonder that growing numbers of advisers are choosing to contract out the provision of

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Statistical Proof

advisers now make use of DFMs in some way. And a quarter of the IFAs polled said that they outsource more than half of their clients’ portfolios to a DFM for bespoke management, up from 22% in 2011.

The research, an annual snapshot by IW&I of intermediary attitudes towards DFMs, also showed that 47% of

Meanwhile, around 20% of the IFAs questioned in the survey said that they intended to increase their level of outsourcing of client portfolios after RDR, with fewer than 4% intending to cut such exposure. Interestingly, however, three quarters of the IFAs surveyed still said they envisaged making no changes at all. Now, compare that with the year-earlier figures which had shown only 37% predicting no change in their outsourcing as a result of RDR. Or, in other words, the pace at which IFA

their investment activities to specialist DFM providers with the skills and expertise that they themselves don’t have the resources to acquire?

Indeed it isn’t. And there’s plenty of evidence to show that advisers are making steadily greater use of DFMs as they look to get to grips with life in a post-RDR world. Just before Christmas, a survey of 249 IFAs by Investec Wealth and Investment revealed that the average proportion of portfolios outsourced to an external manager rose to an impressive 34% in 2012 versus 28% the previous year.

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firms are migrating towards DFMs seems to have slowed.

What do advisers say when they’re asked the most important criteria for when they’re choosing a DFM? 92% say that quality of service is an issue; 91% cite investment performance; and 89% say that personal relationship and trust are important. It’s a bit surprising to find that the least important factors, according to the survey, are compliance (50%), the size of the DFM’s assets under management (50%), and the use of explicit non-compete clauses (62%).

When they were asked about the key benefits from outsourcing to a DFM, IFAs rated access to an investment professional as the main advantage (85.6%). Delegation

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OUTSOURCING DFM

ERA

MORE AND MORE ADVISERS ARE INTERESTED IN OUTSOURCING THEIR BURDENSOME INVESTMENT RESPONSIBILITIES TO DFMS, SAYS KAM PATEL. WE EXAMINE THE KEY ISSUES

of the day-to-day investment management process was cited by 82%, and an added-value client service was mentioned by 78%.

Quality is Key

“2012 clearly shows a continued rise in the use of DFMs for bespoke investment management,” Mark Stevens, head of intermediary services at IW&I told IFA Magazine, “with DFM relationships a core component among most IFA business models. The RDR has increased the flight to quality among advisers looking to build strong links with DFM partners.”

“Having worked with advisers for over 20 years, what has been clear to us is that delivering high quality investment performance needs to be supplemented with a

commitment to developing a personal relationship and a high degree of trust that their core relationship will not be threatened. We have seen a sustained increase in both the quantity and quality of our DFM partnerships in the past 12 months, and we predict that 2013 will see this trend continuing.”

But such optimistic expectations of a much greater take-up of outsourcing still tend to jar somewhat with the IW&I survey’s own finding that more advisers anticipate a stall in the level of migration to DFMs this year. That, and the fact that the number of IFAs outsourcing more than half of their client portfolios to DFMs has risen by only 3%. How does all this square with the usual

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OUTSOURCING DFM

magazine... for today ’s discerning financial and investment professional expectation of the RDR as a driver?

A Tailored Approach

Mike Mount, director of intermediary solutions at JM Finn, isn’t fully convinced by the rosy scenario either. He points out that, although the number of advisers using DFMs may have gone up during 2012, the actual level of business being handed over is debatable.

On the basis of his own direct communication with firms, Mount believes that the reason for the rather modest increase in use of DFMs is simply that many advisers have decided to take stock of their situation, during this very early phase of the regime change: “Advisers are opting to spend some time ensuring their own houses are in order with regards to strategy, product offerings, expertise and capabilities first before making decisions on the way forward and whether to outsource,” he told us.

One of the key issues here is the worry among advisers that using a DFM might mean relinquishing control of the allimportant personal relationship with clients. JM Finn’s response was the late-2011 launch of its Tailored Platform Solution (TPS), which he says enables advisers to specify and control the relationship with the DFM. TPS was developed specifically in response to what IFAs wanted, says Mount, stressing that being “very flexible” and building solutions according to an intermediary firm’s specifications are central to Finn’s ethos and reflect its governing principle: independence of thought. “We only sit down with those who seriously want to integrate us into their proposition and, just as importantly, actually need it,” he says.

Mount is convinced that DFMs have much to offer the advisers as well as their clients.

While smaller concerns are likely

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to be weighed down by post-RDR compliance and by regulatory issues, larger concerns are more likely to be worried about the exposure to risk that may result from having, say, 20-30 advisers, each of whom develops his portfolios independently. Even if the decision is taken to run model portfolios, the attendant administrative demands, including those associated with fund switching, can mean a very rapid rise in costs for large firms.

For clients, says Mount, the bottom line must be that with the involvement of the DFM they benefit from a higher level of service and performance - through, for instance, specialist expertise in portfolio construction. “It’s a case of allowing financial planners to focus on planning, leaving us to focus on underlying portfolio construction and management.

It’ss about developing costeffective ways of operating.”

Access to Expertise

David Cowell, chief executive of the Yorkshire-based discretionary investment manager Myddleton Croft, also stresses the need for better efficiency and effectiveness from an adviser. Cowell believes that the growing interest in outsourcing among advisers reflects a similarly growing realisation that, post-RDR, their ‘value-added’ is in the personal relationship and financial planning, and that many of them will simply not have the time and resources to commit in meeting the demands of the new regime.

The growth in outsourcing, he says, is also an implicit recognition that they cannot charge properly for investment management if they’re not qualified and/or authorised.

Like Mount at JM Finn, Cowell is convinced that the access to full-time, experienced, professional investment management services DFMs can be a key advantage to advisers. Partnering with DFMs can typically free up at

least 30% of an adviser’s time, he says - time that can then be used to meet existing and prospective clients. The client, for his part, benefits from the DFM’s economies of scale and - if truly discretionary - a bespoke and personal service as well.

Established in 2006, Myddleton Croft’s philosophy is based on Warren Buffett’s famous two rules of investment: “Rule 1: Don’t lose money. Rule 2: Don’t forget Rule 1.” The firm lays stress on the importance of having an independent thought process, and on “not being slavishly tied to industry benchmarks or outdated investment dogma - too often, the touchstones of discretionary portfolio management”.

Cowell says his firm offers advisers three ways to access its expertise. “We can introduce clients directly to the full, bespoke service, secure in the knowledge that we will not ‘poach’ their clients - as, unlike most of our competitors, we don’t have a separate financial services arm.” Secondly, if appropriate, advisers can use Myddleton’s expertise to run their own-label service.

They can also access its model portfolios through a platform.

Cost Crunch

Cowell is certain that, despite the relatively modest increase shown up by the Investec study, partnering with DFMs will continue to grow “as advisers realise that offering a less-than-comprehensive investment management service is an inefficient use of their time, and that it is not in their clients’ best interests”.

Like Mount, he too believes that the growth in outsourcing has been held back recently by advisers having to concentrate more on first getting their houses in order – and in particular, securing those Level 4 qualifications.

Controlling costs could certainly be a major issue for

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OUTSOURCING DFM

some advisers - but Cowell believes that only those who either sell on price alone, or who wish to charge too much for their own services, will feel the heat on this front. “One option for these people might be to buy in cheap, so-called ‘discretionary’ services that will usually put all clients into a few model portfolios – often at the cost of performance.”

Over at Rathbones, one of the largest investment managers in UK, with a history dating back to 1742, investment director Robert Hughes-Penney counsels advisers who might be considering outsourcing that they should first be clear what services they offer that their clients will value - something that can only be ascertained by asking the clients themselves: “If a client values something, they will be prepared to pay for it,” he says. “Therefore it is vital for the adviser firms to understand whether their clients fully appreciate and value the work that has to be put into research, selection, monitoring and reporting as part of a defined investment process.”

Despite the complexities of the investment process, and its critical importance in achieving client expectations, Rathbones’ own experience that suggests many clients see the existence of a process as a given.

They are therefore unlikely to be prepared to pay much for it, even though it can be very time consuming and costly for firms.

“Once an adviser firm recognises that efficiencies might be better achieved elsewhere in terms of research, asset selection and monitoring, then they may well choose to outsource these elements of their process to a discretionary manager,” says Hughes-Penney.

Hughes-Penney agrees with Mount and Cowell that outsourcing can help advisers reduce business risk, cut administration and gain access to what he calls “a robust, repeatable investment

“If a client values something, they will be prepared to pay for it” Robert Hughes-Penney, Rathbones investment director, counsels advisers who might be considering outsourcing model and an enhanced client proposition, with the time saved managing client portfolios available instead for them to work on their business rather than in their business”.

Segmentation Challenge

Importantly, Hughes-Penney points out that engaging with a DFM on behalf of clients also changes the dynamic of the relationship between adviser and client: “The adviser adopts a position where he is seated at the same side of the desk as the client, rather than continually having to justify and potentially be challenged on their own asset selection decisions.”

Rathbones’ own offerings for advisers include its Bespoke Portfolio Service, which requires a minimum of £100,000 and is therefore suitable for clients with larger sums to invest. The service involves a personalised portfolio which is designed to accommodate client circumstances and personal preferences, and it is available directly via Rathbones, as well as within a wide range of external product wrappers.

At the other end of the scale, the Rathbone Multi Asset Portfolios are designed to accommodate sums as small as £1,000. The portfolios are built around three well-diversified

multi asset funds, which were designed to act as core holdings for clients who seek to generate a level of return within defined levels of risk. The funds are available directly from Rathbone Unit Trust Management Ltd, but there is also full availability on the Cofunds, Transact, Ascentric, Novia, Nucleus and Aviva Wrap platforms.

In the middle ground, Rathbones’ Unitised Portfolio Service caters for clients with portfolios of £25,000 upwards.

Like the Multi Asset Portfolio Service, it provides access to the three multi-asset risk targeted funds mentioned above, but with many of the hallmarks of bespoke discretionary portfolios that would normally be the preserve of wealthier clients.

Rathbones says it has seen significant growth in both interest and actual new business from IFAs. In 2011, it says, 44% of new business was referred via financial advisers. And at the end of November 2012 Rathbones was managing an impressive £2.9 billion of funds in its bespoke discretionary services for clients of financial advisers.

Friends not Foes

But Hughes-Penney is convinced that growth in partnerships across the industry could still be

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OUTSOURCING DFM

much stronger. “I think some firms see DFMs as a potential threat to the relationship with the client,” he says. “But we want to be viewed instead as part of the adviser firm’s team - to help it, work with it, and enhance its relationship and reputation with the client - not to threaten it.”

“Many adviser firms view a DFM as an expensive option, but we don’t believe this is the case. The cost compares well with the use of collectives with a platform charge, for example.

“By carefully selecting direct equities and fixed interest stock combined with the use of ETFs and Investment trusts, for example, the costs can be kept down. And we believe the enhancement to the adviser proposition and direct access to the person managing the money is worth paying for.”

No Stopping Now

Despite the many distractions

advisers have had to contend with as a result of the RDR, not least the time devoted in gaining required qualifications, and notwithstanding their worries over costs and threats from outsourcing, Hughes– Penney is convinced that going forwards they will look to work more and more with DFMs for appropriate clients: “If the level of due diligence requests we are receiving compared to previous years is anything to go by, then it is apparent that adviser firms are considering formalising their relationships and increasing the use of DFMs.” Looking at the challenges ahead for providers and advisers, he believes a major task for DFMs will be educational. “We must explain more clearly to adviser firms how we can help them overcome the perceived barriers to engaging with a DFM and articulate better our proposition and the benefits it can provide to adviser firms.”

And for the adviser firm the challenge comes back to that clarity of proposition. “If you are clear on what your clients value and what is absolutely core to your proposition, that will help you to decide whether you should consider outsourcing or not.”

“The other big challenge is having the ability to do the job yourself. For a small or mediumsized adviser firm, the ongoing due diligence - and even the mere access to the information required to build and manage your own portfolios - may well prove to be too onerous. The regulator has made it clear that it expects to see a robust and repeatable process that is clearly documented. No doubt many adviser firms will look to a DFM to help them meet those requirements.”

.

For more comment and related articles visit...

IFAmagazine.com

ETFs. You may know a little. You may know a lot. To become an ETF expert, visit our e-learning centre and discover the A-Z of ETFs in plain and simple terms. Complete the learning modules at your own pace, in a way that best suits you:

How can I check my ETF knowledge?

(Simple - visit our e-learning centre)

• Face-to-face workshops • Videos • Guides • Online tutorials As well as building your knowledge, you can earn CPD credits too. Visit the address below to test your ETF know-how. www.vanguardlearning.co.uk 0800 917 5508

Learning. It’s the Vanguard Way.™

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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SIMPLICITY

VANGUARD’S NEIL COWELL TALKS TO IFA MAGAZ It almost comes as a surprise that America’s foremost low-cost provider took until last year to get its first ETF offerings listed on the UK market, but the wait seems to have been worth it. By the end of December, after just seven months, the group’s first five ETF funds had already notched up £171 million of AUM, and the newcomer was heading fast toward the top of the UK table.

Not that that ought to surprise anyone who compares the group’s costs to those of its competitors. The five Vanguard ETFs (FTSE 100, S&P 500, FTSE All-World, FTSE Emerging Markets and UK Government Bond) include wafer-thin costs that run from only 0.09% for the S&P and 0.10% for the Footsie. And, according to MorningStar, that compares with an average industry ETF TER of 0.53%.

How can these cost levels be possible?

Neil Cowell, head of UK retail sales, explained to IFA Magazine that it has a lot to do with the mutual ownership structure of the Vanguard Group’s parent company in the United States.

But also that Vanguard’s cultural roots are deeply into the US market, where both advisers and retail customers are simply more accustomed to the fee-based model than their European counterparts. A fee-based model brings a lot more investor focus and downward pressure on costs.

“America had a fee-for-advice model before we did in the UK,” says Cowell. “And that really has been one of the drivers in the adviser world, where it’s been very much a fee for a service orientation. Within this low-cost/ fee-based world, using core building blocks (ETFs and mutual funds that track core market indices) is not just effective – it makes sense.”

Which brings us back to why Vanguard has chosen this particular time to attack the UK market in ETFs. The company has been running a range of funds in Britain since June 2009, but RDR proved to be a particular incentive to step up the pace.

“It’s not just that many advisers are learning about ETFs for the first time,” he says. “It’s also that the fee based principle is changing the environment and that the RDR requires them to consider ETFs as part of their whole of market proposition.”

“First, let’s bear in mind that ETFs are, in the main, passive instruments that don’t pay

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commission or rebates. Secondly, in the RDR environment, advisers will need to offer a feefor-service model going forward, and within this model they will need to decide (i) how much they will charge and (ii), more importantly, what they are charging for. There is no doubt that clients are happy to pay fees, but that they will need to see a consistent and meaningful exchange of value.”

The physical preference

Then there’s the matter of physical replication, as distinct from synthetic products. In the UK, Vanguard’s entire ETF range is currently 100% physical, and Cowell is at pains to stress the clarity and simplicity of this model. “With Vanguard’s physical ETFs, the securities are purchased, they’re ring-fenced and they are held in custodianship outside of Vanguard’s business. In that sense they’re no different to traditional mutual funds.”

Vanguard is not anti-synthetic, but it feels that the simplicity of physically replicated ETFs is more in keeping with the group’s ethos of complete transparency. He adds: “Synthetic ETFs introduce potential swap counterparty risk and, perhaps, less transparency. It’s for that reason that we favour physically replicated ETFs over synthetics.”

What about the wider European scene?

“Europe has largely been the driver for the growth of synthetic ETFs,” he says. “Globally, the majority of ETF assets (80%-85%) track core and broad market indices. This is where the majority of the money goes.”

“But synthetic ETFs tend to track more niche commodities or markets, and a lot of them don’t reach critical mass and therefore don’t survive.”

“Synthetic is fine, as long as people understand what’s under the bonnet.”

Active versus passive And so to the debate about whether passive funds can consistently outrun actively-managed funds.

60-65% of Vanguard’s $2 trillion global AUM is passively managed, and 35% in active mandates, but at present the UK funds are 100% passive.

Any thoughts about changing that passiveonly policy? “We have no immediate plans for active strategies in the UK,” he replies. “Although that’s not something that’s lost on us as an opportunity, or that we would discount in the future. We’re absolutely not anti-active, we’re just anti high

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I N S I D E TR A C K

IS THE KEY

INE ON A MOMENTOUS YEAR cost active. If we do come into the UK as an active provider, it’ll be as a low-cost active provider.”

The joys of being mutual Cowell adds that the Vanguard Group’s mutual ownership structure helps. A rarity indeed. Not having to keep shareholders happy means that there’s less pressure on managers to deliver strong short-term returns, he says, and a greater incentive to take a longer-term view.

“We have absolute transparency around our products,” Cowell explains. “We don’t pay for distribution, we don’t pay commission anywhere in the world. There’s also the fact that we offer the same transparency to every generation of fundholder. We don’t take decisions because they might be beneficial for new flows of business if that would detrimentally affect existing fund holders. That is a real differentiator.”

Whatever it is that Vanguard’s doing, it’s clearly catching the mood of the moment.

This month it was announced that the group achieved $141.4 billion of net cash inflows during 2012 – easily smashing JP Morgan’s previous record of $129.6 billion in 2008, and representing a massive 76.5% annual growth.

As chief executive Bill McNabb told the FT, the mutual issue is the basis of Vanguard’s whole advantage. “Vanguard now has 25 million investor accounts. And we are very clear that this is not our money, it is our clients’ money and it requires good stewardship.”

And for this year? More cost-cutting, probably. As McNabb wrote in his November newsletter to the group’s mainly-US investors: “A few years ago, when we announced our intention to begin providing mutual funds to investors in the United Kingdom, a British investment firm lowered their fees in anticipation of our arrival. We took it as a compliment. Members of the financial press called it the “Vanguard effect.”

So despite the claims of some, we feel strongly that running an investment firm at-cost—where we provide the services it takes to run the funds and support our clients for the same cost we pay to do it—is a great thing for all investors. And you, as loyal clients, should know that we don’t think our work is finished.”

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THE BEE LINE

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

TOMORROW’S CHIP PAPER

THERE’S STILL TOO MUCH ECONOMIC ILLITERACY ABOUT, SAYS STEVE BEE. ESPECIALLY WHEN IT COMES TO PENSIONS I try not to read newspapers these days, because I find them too depressing. They’re also expensive. I guess I just can’t see the point in paying to get depressed I suppose.

That in itself is depressing too; I mean, the whole thing’s like some kind of vicious circle.

That said, I read a newspaper the other day. I didn’t buy it though, it was lying around in someone else’s house – and, as I was doing much the same thing, I picked it up and read it just to pass the time.

Despite this thing I read that called itself a newspaper, I was struck by the number of ‘news’ things in it that haven’t happened yet - and which, for all I know, never will. Whether something that’s not happened is news or not is a train of thought that’s troubled me ever since - and it’s left me thinking I won’t read another newspaper ever again even if someone else has paid for it. Confusion on top of depression is even worse. Take it from me.

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One of the things I read about is a proposal that the Labour Party has made to sort pensions out if it gets elected as the next government in 2015. The proposal, if I read it right, is to restrict the ‘tax relief’ that highearners get when they save in a pension. Well, as soon as I read that, I started talking to the newspaper in just the same way that normal people talk to their TV screens when someone on the box says something they don’t agree with.

Slack on the Facts Look, Mr Balls, there’s no such thing as ‘tax relief’ when you save in a pension. Surely everyone knows that, apart from the people who write about stuff, or who go on about it on the telly.

The deal with pensions is you only pay tax once on your money when you put it away for the long-term in a pension scheme. You pay tax on it when you draw it as income. Not when you put it in. www.IFAmagazine.com

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THE BEE LINE

The idea that high-earners, or anybody else for that matter, should be taxed on the money they put into a pension, and then also taxed on the income when they receive it as a pension, is plain nonsense. The existing system of paying tax just once on your money when you save in a pension is, quite frankly, not really that generous a concession on the part of those who know what’s best for the rest of us.

“So I only pay tax once on my money if I save for the future?” “Yep, that’s the deal.”

“Thanks, that’s really nice of you, I’ll start piling the cash in then.” That sort of thing.

Paying tax twice on the money you put away for your future would, I think, not be particularly attractive as an option for sane people. Sure, it’s only high earners who’ll be affected if this ever happens, but wedges have thin ends. To set a precedent that double taxation is fine for some people but not for others would fundamentally undermine the pension system it has taken us a century to build.

Back to reading the Beano, I think...

Steve Bee, a well-known campaigning pensions activist, is the managing pensions partner at Paradigm and the co-founder of www.jargonfree pensions.co.uk

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

LOOKING AT THE

BIG PICTURE

YES, WE’VE HEARD ALL THE THEORY, BUT WHAT’S THE REALITY ABOUT THE STATE OF THE RDR TRANSITION? STEPHEN SPURDON GOES IN SEARCH OF THE TRUTH 44

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R D R O U T LO O K

It is assumed that RDR will be a super-highway for those who are established on the ‘new model adviser’ fee paying basis.

But SBG’s George Higginson begs to differ,

“The irony is that I think the new model advisers may be worst affected by the new rules” Okay, so the bright new world of RDR officially started at the turn of the year. From now on, consumers will get better advice because the adviser is no longer being remunerated by product providers. And do on, and so on. It’s a lofty aspiration, certainly, but how does the reality stack up?

The straight answer is that we really don’t know yet how it’s going to turn out.

That’s partly because not every single regulatory ‘i’ has been dotted and every ‘t’ crossed. And partly because we still have absolutely no idea how many clients will vote with their feet, or what sort of responses we’ll see from the advisers and the service providers themselves.

That would be a recipe for disaster if the regulator tried to enforce all its halfbaked and half-completed projects from Day One. But fortunately the FSA has shown an accommodating attitude with regard to both advisers and product providers who have struggled to meet all commitments by the due date.

What’s more, some leeway is being given to advisers who started the year with one model of business and who then decide that another one would be better for the emerging marketplace.

Then there’s the complicating factor of the imminent departure of the FSA to think about, and the arrival of the FCA at some

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RDR Outlook.indd 45

point in the new year. Although legislation establishing the new regulatory structure is still in Parliamentary ‘ping-pong’ as I write, no commentator seemed to be expressing undue alarm at the thought that such a change was taking place during the handover shift.

Timing...

But just how long will it be before a recognisable ‘shape’ appears?

Well, most commentators are steering clear of the “it’ll all be over by Christmas” argument.

(Neither last Christmas, nor the coming one.) Indeed, many of the experts we’ve been talking so say that we may be looking at a rolling implementation that will take two or three years to complete.

Peter Mann, managing director at UK Skandia, notes that there was an intrinsic delay from the start - with an R1 day (adviser charging and re-registration) on December 31 2012, followed by an R2 day in December 2013. And Peter Hall, chief executive at Bestinvest, dismisses the whole concept of RDR as a ‘Big Bang’ and expects a gradual process over 12-18 months.

But Nick Eatock, CEO of practice management solutions provider Intelliflo, reckons on a longer period of two to three years. “In the first two quarters we will see a range of interpretations of the rules emerge,” he says, “with the regulator issuing further guidance as this occurs.” Tony

Stenning, head of UK Retail at BlackRock, concurs, believing that “the full ramifications of RDR will not become apparent for two to three years – in terms of both intended and unintended consequences – and that is being optimistic, frankly.”

Russell Warwick, distribution change director, Prudential, says our only experience of a similar degree of change was with the Financial Services Act which came into operation in 1988.

And that, he says, “led to a whole decade of change. I think [RDR] will be similar.”

Trouble...

In all this, it is commonly assumed that RDR will be a super-highway for those who are established on the ‘new model adviser’ fee paying basis.

But George Higginson, CEO of Sesame Bankhall Group, begs to differ. “The irony here is that I think the new model advisers may be worst affected,” he says, “by being disturbed by the new rules while others are starting with a new slate.”

And Delay

One element that has certainly caused concern has been the non-appearance of some regulations before the start of RDR - balanced, perhaps, by a correspondingly perceived laxity among certain product providers in implementing the required measures.

Anna Sofat, the managing director of Addidi

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R D R O U T LO O K

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

“It’s not the cost that concerns the client. It’s the value. And if advisers continue to provide value, then they will prosper” Peter Mann of Skandia warns against slack thinking

Wealth – a firm that has been fee-based since starting in 2006 - expresses exasperation mainly at the FSA. “The regulator has a lot to answer for,” she said in December. “It’s hardly following its own TCF rules in its treatment of Ifas.

And with only weeks to go before the start of the RDR, lots of things are still not in place and advisers are still awaiting the final rules on a number of issues.”

The result, she says, is an administrative nightmare as clients have to be informed of changes. But her mood isn’t helped much by the lack of consistency among product providers, some of whom she says are dragging their heels about issuing updated terms and conditions in good time.

It isn’t just the advisers who are drumming their heels in frustration. There are similar concerns on the product provider side - such as the non-appearance of the Platform paper, which should have arrived well before Christmas. We could, of course, object that, rather than being a symptom of laxity in the FSA, the delay in getting these regulations out actually reflects the regulator’s desire to consult over such changes – implying that the delays may result in a better outcome and fewer ‘unintended consequences’. But it’s frustrating all the same.

Like many advisers, Sofat has experienced a “sizeable” increase in professional indemnity insurance premiums this year as well as the

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introduction of exclusions. As we reported in our November issue, many insurers are either raising their premiums substantially, in the face of fears that RDR may create new and retrospective ‘long-tail’ risks, or else they’re pulling back altogether from writing new business.

Segmentation

Another anxiety amongst advisers is what business model to adopt for the new regime.

Andy Beswick, intermediary director at Aviva, notes some concern amongst advisers at how to service mid-market customers profitably, while Russell Warwick thinks that the process of client segmentation has been in progress for some time. He notes that Core Data reports show a reduction in the average number of clients per adviser in from 300 in 2010 to 200 in mid-2012.

Both commentators think that restricted advice will grow as the independent multi-tie model becomes more popular.

As Russell Warwick says: “This may arise where greater efficiencies are shown in business models that enable the adviser to extract better prices from providers. Also, restricting advice means inherently that there are savings in terms of research.”

Some suggest that product providers have attempted to coerce advisers into this model by deliberately generating media scare-stories. But George Higginson does not see that trend.

Rather, he says, “what I am seeing is them trying to migrate advisers to their [own] technology

and platforms, while not paying as much attention to revamping old products.” That’s another one against the providers, then.

Charging Structures

And so to the charging structure itself. And here, Russell Warwick concludes that the actual outturn in most cases will be a sort of graduated progression based on the client’s own situation. “The dominant charging structure will be based on typically a percentage of assets as an initial charge and a percentage of assets in ongoing charges,” he says. “Rather than a charge cap, I think there will be a tiered structure such as 2-3% up to £100,000, then 1.5% and so on.”

This seems a reasonable assumption, as it is in fact a well-established model amongst private client and other firms who service HNW individuals.

But Peter Mann of Skandia fires a warning shot against slack thinking. “It’s not the cost that concerns the client,” he says. “It’s the value. And if advisers continue to provide value to people, then they will prosper. There is no evidence to show that the appetite for advice is decreasing.”

Another factor is the size of the marketplace that advisers will be working in over the coming years. The worst fears appeared to have been confirmed by a Deloitte report on RDR which appeared in November.

Entitled Bridging the advice gap: delivering investment products in a post-RDR world (available from http://tinyurl.com/ c8ueokn), the report claimed www.IFAmagazine.com

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R D R O U T LO O K

to have identified 5.5 million ‘disenfranchised customers’ who it says will either choose to cease using financial advisers (so-called ‘orphan clients’) or will lack access to them altogether. And it’s a mistake to suppose that they’ll all be lowbudget operators. They include 2.4 million from the mass market, 2.5 million of the ‘mass affluent’, and 600,000 ‘affluent’. So there.

The White Label Challenge

Some orphaned clients are expected to go DIY with execution-only platforms and so forth. Accordingly, some advisory groups are rapidly bolting on such services, generally whitelabelled, from existing providers.

Nut it doesn’t have to be an either/or situation. Bestinvest, for instance, has been offering an execution-only platform for years while also servicing a client base successfully. Certainly, it agrees, there is client migration between the two models within the firm – but the upshot is that it has sustained a business model that many think will be suited to the coming landscape.

Peter Mann thinks that the growth of execution-only services – white labelled or otherwise – reflects an increased desire in people to be closer to their money.

But, Anna Sofat believes that

IFAs who offer such services are abnegating their responsibility. “ I question just how that delivers the FSA’s objective of better outcomes for consumers,” she insists. “In effect, it’s just passing the buck to clients.”

Bill Vasilieff, ceo of Novia Financial, doesn’t think that the execution-only experiment will be successful for most advisers.

Okay, he says, Hargreaves Lansdown has managed to make it work because it’s a big brand selling direct to the public. “But I don’t see how other advisers can replicate that. I do not see what it will add to their business.”

Bestinvest’s Peter Hall agrees with Vasilieff: “Many clients will require educational materials, research and tools,” he says. “That implies a degree of scale and investment. So I think some will struggle to offer a competitive service in that space.”

Outsourcing

Outsourcing of investment management is expected to be a major feature of the coming year, as advisers respond to the daunting size of the wholeof-market imperative. By letting specialists control and direct their clients’ portfolios, they reason, they can focus on advice. And as you’d expect, some investment management companies have formed specialist services to meet this demand.

Substantially intermediated companies such as Blackrock and Octopus are already offering core allocation multi-asset funds of funds to meet adviser needs for a centralised investment proposition. But Oliver Wallin, investment director on Octopus Investments’ multi-manager team, argues that regulatory demands on both assessment of client risk profiles and on adviser understanding of risk itself are far more subtle and demanding than just using a set of tick boxes.

He says that the risk rating approach only provides a third-party snap-shot of a fund - whereas Octopus works on a risk targeting basis utilising a risk profiling tool developed with specialists Barrie & Hibbert to ensure greater alignment of client risk profiles with the asset on an on-going basis.

“Here, we get under the bonnet of all underlying funds in the portfolios and take an informed decision on all parts of the portfolio on a daily basis,” says Wallin. “This is a lot of work and that is something that advisers appreciate as being something they would want to outsource.”

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Oliver Wallin, Investment Director at Octopus, argues that regulatory client risk profile assesments are far more subtle and demanding than just using a set of tick boxes,

“We get under the bonnet of all underlying funds in the portfolios and take an informed decision” www.IFAmagazine.com

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PRODUCT REVIEWS

magazine...

LITTLE DOG SYNDROME

Mighty Blighty

A SMALL CAP FUND CAN GENERATE HIGHER RETURNS THAN THOSE CONCENTRATED ON THE BLUE CHIPS. NICK SUDBURY TAKES A LOOK.

Marlborough UK Micro Cap Growth The well respected Giles Hargreave is the brains behind one of the most consistent performers in the smaller companies sector, the Marlborough UK Micro Cap Growth fund. The fund has consistently outperformed the associated indices since its launch in 2004, despite the fact that it often runs a relatively large cash weighting.

Indeed, that’s an essential part of its success.

The Marlborough fund aims to generate a total return in excess of the FTSE Small Cap FUND FACTS Index over the medium to long-term. To Name: Marlborough achieve this, Hargreave UK Micro Cap Growth and his co-manager Type: Unit Trust Guy Feld employ an active approach that Sector: UK Smaller targets UK companies Companies with a market cap of Fund Size: £111.5m £100 million or less at the time of purchase.

Launch: Oct 2004 The Small Cap Portfolio Yeild: 0% benchmark that it Charges: Initial: 5%, follows comprises the Annual: 1.5% 250 or so stocks in the All-Share that are Manager: outside of the FTSE Marlborough Fund 350, and between them Managers they represent around Website: 2% of the UK market marlboroughfunds.com by capitalisation.

Accordingly, the

fund currently has an amazing 232 separate holdings – of which many are listed on AIM. More than 80% of the portfolio is invested in the micro cap end of the spectrum, with the main sector weightings being Technology (30.1%), Industrials (22.9%) and Consumer Services (12.9%). There is also a 7.3% exposure to cash, which is mainly a precaution in case of redemptions but which also serves to avoid two-way transaction costs when making an investment.

This is an eclectic portfolio, then, and it’s driven by a bottom-up stock selection process rather than by reference to any index or sector. That’s a function of the need to find good quality niche businesses that can withstand the tricky macro environment. No individual stock will normally exceed 2%: Hargreave says that the resulting diversification counters the additional risk associated with these small and often illiquid holdings.

The strategy has certainly worked, because the fund has considerably outperformed its benchmark over the last 3 and 5 years - although in the last year or so it has largely mirrored the index. During the five years to the end of October it was up 57.5%, despite the higher costs implied by a portfolio turnover rate of 34%. All in all, the fund’s ability to add value via stock selection marks it out as an excellent option for clients who may be looking for a long-term exposure to UK smaller companies.

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PRODUCT REVIEWS

Je Nais C’est Quoi European Assets Trust Smaller companies are inevitably more risky than their equivalent blue chips, so it is little wonder that those based in Europe have been going through a difficult time in the last couple of years. The crisis engulfing the single currency still seems a long way from a satisfactory resolution, but many of the businesses in the region now look as though they offer decent value.

Adventurous clients might want to take advantage of the situation by buying the European Assets Trust. This Continental European small cap investment company has a decent performance record relative to its peers, and it is offering an attractive dividend yield of 5.9% while trading at an 8.8% discount to NAV. The fund was launched way back in 1972, although there was a significant change in the strategy in June 2010 when the management was eventually taken over by Foreign & Colonial’s London team. Since then the share price is up 45%, compared to an increase in the European small cap index of less than 1%. Not bad.

F&C focuses on capital preservation by buying high quality businesses at significant discounts to their intrinsic value, and then holding them for the long term. Unlike the Marlboro fund, this is a concentrated portfolio, with the 10 largest holdings accounting for 32%

of the fund. The mandate allows for up to 20% to be held in a single stock, but at the moment the biggest weighting is just 4.2%.

It’s an interesting portfolio, with almost 22% invested in Germany and a further 21% in Ireland. The main sector weightings are Consumer Goods (28.5%), Financials (20.9%), Consumer Services (16%) and Industrials (15.4%). The managers have plenty of leeway, as they can invest in any European ex UK company with a market value below the largest in their small cap index, or €2.5 billion, whichever is the greater.

Unusually for a small cap fund, this one pays an attractive dividend yield. This is calculated as 6% of the year end NAV with the distributions taking place in January, May and August. Most of this cash actually comes out of the reserves, so it should be sustainable.

In his latest report the manager says that European small and mid cap stocks are cheap on a relative and absolute basis - while institutional ownership is at record low levels, which bodes well for longer term investors.

This could make it a good buying opportunity, but only for those clients who can tolerate the high volatility created by the macro economic uncertainty.

FUND FACTS Name: European Assets Trust (EAT) Type: Investment Trust Sector: European Smaller Companies Market Cap: £105.3m Launch: 1972 Portfolio Yeild: 5.9% Ongoing Charges: 1.64% Manager: F&C Investment Business Website: fctr.co.uk/ european-assets-trust

This Continental European small cap investment company has a decent performance record relative to its peers www.IFAmagazine.com

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

Lassie Come Home iShares Russell 2000 index The re-election of President Obama could be good news for the US stock market with lots more quantitative easing helping to push up share prices. If it is positive for the main blue chip S&P 500 index it should have an even greater impact on the small caps as measured by the Russell 2000.

Clients who want a passive exposure to this part of the American market might be interested in the iShares Russell 2000 index, which trades under the ticker IWM. This US listed ETF has an incredible $15.6 billion in assets under management and a remarkably low TER of just 0.23%. The upshot is that there will always be plenty of liquidity whenever you want to trade it.

IWM invests in each of the 2000 small caps that are included in the underlying index. These have an average market value of $1.28 billion, and they vary from $4.5 billion down to $500 million. So they’re not the absolute minnows that you might expect!

Obviously this makes it incredibly diversified, with the largest holdings typically only accounting for around 0.3% of the fund.

The main sector weightings are Financial Services (23%), Consumer Discretionary (15%), Producer Durables (14%), Technology (14%) and Health Care (12%). As a whole the portfolio is currently yielding around 1.5%, but it looks pretty expensive with a PE ratio of 25.6. By comparison, the S&P 500 is yielding 2% and has a PE of 20, with less volatile historical returns.

IWM was created back in May 2000, and it’s had its share of ups and downs along the way, with sharp falls in 2002 and 2008 followed by significant recoveries. Overall, though, it’s up 6% since inception. And over the last 5 years it’s interesting to note that it has managed to outperform the S&P 500 by almost 10%.

If you’re bullish on the prospects for the US stock market, a small cap fund like the iShares Russell 2000 index should provide better returns than the blue chips. The gain will be further enhanced if the dollar strengthens against the pound, although a lot will depend on the recovery of the American economy and the impact of the additional QE by the Fed.

FUND FACTS Name: iShares Russell 2000 index (IWM) Type: ETF listed in the US Sector: US Smaller Companies Fund Size: $15.6bn Launch: May 2000 Portfolio Yeild: 1.5% Manager: Blackrock TER: 0.23% Website: us.ishares.com

This US listed ETF has an incredible $15.6 billion in assets under management and a remarkably low TER of just 0.23% 50

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PRODUCT REVIEWS

Chin Ups M&G Japan Smaller Companies It’s hard to think of a market that has suffered more than Japan. The boom of the 1980s took the main Nikkei 225 index to within touching distance of the 40,000 level, but 22 years later it’s still languishing at less than 10,000. There have been many false dawns along the way – and yet a number of respected investment managers now believe that the country offers compelling value.

If this is true of the blue chips in the Nikkei, then it should also apply to the small caps. There are only a handful of funds operating in this niche area of the market, but one of the most consistent is M&G Japan Smaller Companies. This was launched way back in May 1984; the current manager, Max Godwin, took over in March 2007.

The fund is unusual in that it has a concentrated portfolio of just 49 holdings chosen using a value approach. Godwin relies on fundamental analysis to identify undervalued stocks in which he has a high conviction, and then he holds them for the medium to long-term to give the market time to correct itself. Examples include the industrial pump and environmental

engineering company Ebara and the data processing service company NSD. The top 10 holdings account for 29.7% of the portfolio, although none of them are worth more than 3.5% of the total exposure so it still offers a reasonable degree of diversification. In terms of the sectors, the largest exposure is Technology at 24.5%, followed by Industrials (21.8%), Consumer Goods (18.9%) and Financials (15.7%).

It’s a small fund at just £47.4 million, but it has to be said that this is after all a rather obscure area of the markets.

Performance is benchmarked against the much more diversified Japan Second Section Index, which has outperformed the Nikkei 225 by around 10% over the last 5 years, with a reasonably close dayto-day correlation between the two.

So M&G Japan Smaller Companies has comfortably beaten the handful of other managed funds in the sector, as well as its comparative index. On a 10 year view it has actually doubled investors’ money, albeit with a great deal of volatility. The fund offers an unusually concentrated value-orientated exposure to a niche area of the markets and could be a useful diversifying holding for clients who are comfortable with the higher risk.

FUND FACTS Name: M&G Japan Smaller Companies Type: UK OEIC Sector: Japanese Smaller Companies Fund Size: £47.4m Launch: May 1984 Portfolio Yeild: 0.92% Charges: Initial: 4%, Annual: 1.5% Manager: M&G Website: mandg.co.uk

It’s a small fund at just £47.4 million, but it has to be said that this is after all a rather obscure area of the markets www.IFAmagazine.com

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

Lee Werrell, Managing Director of CEI Compliance Ltd, gives his personal round-up of the key issues that are currently shaping the compliance agenda.

Combating Financial Crime: Key themes and Priorities for 2013 A meeting of the APCIMS (Association of Private Client Investment Managers and Stockbrokers) heard a speech by Tracey McDermott, Director of Enforcement and Financial Crime Division, of the FSA, whereby she gave an update on aspects of the regulator’s financial crime-related ongoing work, including the thematic review into AML (Anti Money Laundering) controls in asset management firms and the FSA’s expectations of firms. http://tinyurl.com/cjxuaaz Initially addressing the new FCA (Financial Conduct Authority), which is due to start work in April, Ms McDermott made the comment that their approach will be “more forward looking and judgment led.” And she added: “This means we will be more proactive, more directive, and be more prepared to intervene and intervene earlier. This requires judgment, confidence and good analysis. We will be prepared to take on more risks, although we recognise we won’t always get it right. And we recognise that will, at times, be uncomfortable for us and for you. But history has simply made it clear that simply sitting back and waiting to see how things evolve is not an option.”

She then moved on and confirmed that enforcement, in its traditional sense, will remain a core priority under the FCA. There was no surprise to hear that the ‘credible deterrence’ strategy will remain, with the new regulator “taking tough and meaningful action” against firms and individuals who fail to meet or lapse the regulatory standards or just simply break the rules.

As expected, the new regulator will also take on all of the FSA’s current financial crime responsibilities, and in line with its predecessor, will not hesitate to take a robust stance. Tackling financial crime will be a key task for the FCA. Ms McDermott explained that “Thematic work such as our review into AML controls for high risk customers or ABC (anti-bribery and corruption) controls

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in investment banks will be a key part of the FCA’s approach in relation to financial crime as in other areas.

Then, moving onto the issues of investment fraud, the Director said that an important part of the regulator’s work is to shut down illegal investment scams, including boiler rooms and bogus companies using identical or similar names and copycat web addresses to those of long-established City firms.

“Criminals, both here and abroad, defraud investors in Britain of hundreds of millions of pounds a year through schemes such as share-sale (or ‘boiler room’) frauds, landbanking scams, rogue carbon-trading firms or fraudulent collective investment schemes. Investment fraud remains one of our top financial crime risks. Those who invest their money in such schemes are not protected by the Financial Services Compensation Scheme if they invest with businesses that are unregulated, and all too frequently lose all their money. We receive almost 5,000 calls each year from people who think they are victims, although, of course, not all victims will contact us. So we do not have hard data about the scale of the problem, but our best estimate is that UK consumers pay out over £500 million every year to these fraudsters.”

Touching on the imminent thematic review of asset management firms, McDermott advised that the regulator will look at firms’ systems and controls to counter money laundering, sanctions breaches, and bribery and corruption The FSA will consider issues that are specific to the asset management industry, and it plans to publish the results of the review in the third quarter of 2013.

Impact:

The rhetoric throughout all the speeches and other activities by the regulator are consistent with the theme of; ‘get your procedures up together’; ‘Make sure you are doing the right thing’. This will not only impact IFAs but also the asset managers and discretionary fund managers that IFAs deal with.

www.IFAmagazine.com

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

FSA’s ‘Dear CEO’ letter to a sample of firms re RDR inducement and advisor charging rules ‘distribution agreements’ between provider and distributor firms) may indicate that firms were seeking alternative ways of preserving features of the market that the RDR intends to erase. The regulator has previously said on a number of occasions that during the transition to the RDR implementation date it would supervise for signs of firms seeking to do this.

The regulator’s letter sets out the following examples of inducements that are causing them concern;

In case you missed the letter and the furore it produced, The FSA sent out one of its ‘Dear CEO’ letters to a selection of life insurer and network/ IFA firms, spelling out their key concerns about some areas of distribution agreements it has seen in the market, and requesting confirmation that any such agreements in place, or currently being negotiated, are compliant with the regulator’s rules. http://tinyurl.com/blknxuq

■

Cost contribution from a provider for distributor training / conferences / seminars etc – the FSA considers that a provider organising, subsidising or paying for distributor training, conferences or seminars (involving costly social and entertainment events unrelated to the training) may be a prohibited inducement.

■

Payments to a distributor for assisting in the promotion of the provider’s retail investment products – the FSA considers that any such payments should generally reflect the costs incurred by the distributor in the promotion, otherwise the payment may impair the firm’s ability to pay due regard to the interest of its clients.

■

Payments to a distributor for the development of software necessary to operate software supplied by the provider – the FSA states that it has seen payments from providers to distributors for the costs incurred by distributors to update and enhance IT hardware and software as part of an overall development of an integrated provider/ distributor IT solution. Where the costs incurred by the distributor go beyond those which are necessary to operate software supplied by the provider, that part of the costs may impair compliance with the inducement rules.

The impact to most IFAs is negligible, but some of the bigger firms who thought they can change the rules to maintain the status quo have been found out. The intelligence system from the FSA is vast and in all organisations; it’s called Principle 11; many firms and individuals who feel marginalised by these organisations are using it to level the playing field.’

The letter says that one of the central aims of the RDR is to address the potential for adviser remuneration to distort consumer outcomes. The FSA’s adviser charging rules ensure that advisory firms are only remunerated by adviser charges for the advice and related services they provide in connection with retail investment products, these charges being agreed with, and paid for, by their clients.

Impact:

The regulator is concerned that some firms may be looking for ways to circumvent the adviser charging rules by soliciting or providing payments that do not look like traditional commission, but are generally intended to achieve the same outcome. The FSA is also concerned that certain non-commission payments and benefits (typically included within

Remember: If you have any concerns regarding these issues, please contact your compliance department or an independent consultant who is a member of the Association of Professional Compliance Consultants (APCC), recognised as a trade body by the FSA.

See also the listings of FSA publications on Page 54 of this issue

www.IFAmagazine.com

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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.

The PRA’s Approach to Enforcement: Consultation on Proposed Statutory Statements of Policy and Procedure Consultation Paper Ref: CP 12/39 20th December 2012 76 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.

Consultation period ends 28th February 2013

Mutuality and With-Profits Funds: A Way Forward Consultation Paper Ref: CP 12/38 19th December 2012 44 pages

Discusses the concerns of the mutual with-profits sector, which is faced with a decline in new with-profits business with the potential to lead to the closure of these firms as their with-profits funds run off.

Consultation period ends 19th March 2013

The Financial Services Bill: Implementing Markets Powers, Decision-Making Procedures and Penalties Policies Consultation Paper Ref: CP 12/37 18th December 2012 188 pages

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Proposed changes to the regulatory requirements needed to create the new rulebooks and policies for the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). These changes are intended to be in place for when the new regulators acquire their legal powers in 2013.

Consultation period ends 1st February 2013

Consumer Redress Scheme in Respect of Unsuitable Advice to Invest in Arch Cru Funds Policy Statement Ref: PS 12/24 14th December 2012 26 pages

Clarifies and tightens the rules relating to the sale of packaged accounts to consumers, with particular regard to bundled insurance policies that may not be suitable for clients and may therefore have been mis-sold.

Client Assets Regime: Changes Following EMIR Policy Statement Ref: PS 12/23 14th December 2012 40 pages

Rules on client assets have had to be changed to accommodate the European Market Infrastructure Regulation (EMIR). This statement relates (only) to Part I of Consultation Paper 12/22

(CP12/22), and contains feedback and final rules making changes required under the European Market Infrastructure Regulation (EMIR).

Feedback on Parts II and III of CP12/22 will appear at a later date

Packaged Bank Accounts Policy Statement Ref: PS 12/22 25th September 2012 20 pages

The Paper sets out the FSA’s proportionate approach to implementing the Remuneration Code and the Pillar 3 remuneration disclosure rules.It also clarifies how firms may comply with the Code and disclosure rules in a manner that takes account of their size, internal organisation and the nature, scope and complexity of their activities.

The new framework replaces the original four-tier structure (based on capital resources) with three new ‘levels’ (based on total assets).

The Regulation and Supervision of Benchmarks Consultation Paper Ref: CP 12/36 5th December 2012 78 pages

Proposed approach to enacting recent government policy for the regulation of benchmark submission and administration in the future.

(Beginning with Libor.)

The FCA’s Use of Temporary Product Intervention Rules Consultation Paper Ref: CP 12/35 3rd December 2012 36 pages

Consultation on when and how the Financial Conduct Authority (FCA) may make temporary product intervention rules.

Consultation period ends 4th February

Regulatory Reform FCA Handbook Consultation Paper Ref: CP 12/34 29th November 2012 41 pages

Updates to the FCA Handbook relating to supervision and threshold conditions, as well as a statement on the FCA’s new power of direction over qualifying parent undertakings.

Consultation period ends 29th January

A New Capital Regime for SelfInvested Personal Pension (SIPP) Operators Consultation Paper Ref: GC 12/33 22nd November 2012 49 pages

Concerns prudential requirements for SIPP operators to be broadly equivalent to those (where relevant) for investment managers and

www.IFAmagazine.com

14/01/2013 22:00

Operators are required to hold an amount of capital, which is the higher of £5,000, six weeks of expenditure or 13 weeks of expenditure if they hold client money.

Consultation period ends 22nd February

Implementation of the Alternative Investment Fund Managers Directive Consultation Paper Ref: CP 12/32 14th November 2012 232 pages

The first of two on rules and guidance to transpose the requirements of the Alternative Investment Fund Managers Directive (AIFMD) into UK law. This means making changes to primary and secondary legislation (which the Treasury will consult on) and to the FSA Handbook.

New rules for transposing AIFMD must be in place by 22nd July 2013.

Consultation period ends 1st February

Large Exposures Regime – Groups of Connected Clients and Connected Counterparties Policy Statement Ref: PS 12/21 2nd November 2012 44 pages

Contains responses to Consultation Paper 12/1(January 2012), relating to the definition of connected counterparties and the basis for aggregating exposures to connected counterparties when applying large exposure (LE) limits.Also guidance on the treatment of LE to structured finance vehicles, and changes to the Handbook guidance in BIPRU 10.6.33G on the institutional exemption.

www.IFAmagazine.com

FSA Publications + IFA Cal.indd 55

Client Assets Firm Classification, Oversight, Reporting and the Mandate Rules Policy Statement Ref: PS 12/20 1st November 2012 72 pages

Summarises responses and new rules on client assets policy, CASS firm classification, oversight and reporting, and the mandate rules (CASS 8).New rules came into force on 1st January, with some technical aspects coming in on 28th February.

Dates for your diary JANUARY 2013 23-27

World Economic Forum Annual Meeting Davos, Switzerland

31

Deadline for self-assessment tax returns 2010/2011 (online only)

FEBRUARY 2013 10

Policy Statement Ref: PS 12/18 1st November 2012 58 pages

Consultation period ends for CP 12/37 (The Financial Services Bill: Implementing Markets Powers, Decision-Making Procedures and Penalties Policies)

4

Of interest to FSA-authorised banks and building societies, and to Capital Adequacy Directive (CAD) investment firms.

Consultation period ends for CP 12/35 (The FCA’s Use of Temporary Product Intervention Rules)

10

Chinese Year of the Snake commences

12

EU-China Summit Beijing, China

13

Consultation period ends for CP 12/36 (The Regulation and Supervision of Benchmarks)

22

Consultation period ends for Consultation Paper 12/33 (A New Capital Regime for Self-Invested Personal Pension (SIPP) Operators)

25-26

Global Tax Summit 2013 Monte Carlo, Monaco

28

Consultation period ends for CP 12/39 (The PRA’s Approach to Enforcement: Consultation on Proposed Statutory Statements of Policy and Procedure)

28

Final entry into force of Policy Statement 12/20 (Client Assets Firm Classification, Oversight, Reporting and the Mandate Rules)

Data Collection on Remuneration Practices

Sets out requirements for aligning the Capital Requirements (Amendment) Regulations 2012 with the European Banking Authority system, by providing data on remuneration data as set out in CRD3.

The new reporting requirements came into force on 31st December

Product Projections and Transfer Value Analysis Policy Statement Ref: PS 12/17 1st November 2012 31 pages

Of interest to pension advisers, life insurers and other providers of personal pensions.

Relates to the changes mooted in CP12/10 (see PS12/8) updating the assumptions and guidance for pension transfer value analysis (TVA),

I FA C A L E N D A R

operators of collective investment schemes.

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I FA C A L E N D A R

magazine...

MARCH 2013 1

Unbiased.co.uk annual ‘Media IFA of the Year’ awards

7-10

Berlin International Economics Conference

17-20

European Winter Finance Summit (EWFS) 2013 Obertauern, Austria

19

Consultation period ends for Consultation Paper 12/38 (Mutuality and With-Profits Funds: A Way Forward)

20

UK Spring Budget

22-24

European Pensions & Investments Summit 2013 Montreux, Switzerland

APRIL 2013 10

Tax year 2013/2014 begins

29

FSA deadline for advisers contacting investors regarding redress for the Arch Cru funds

MAY 2013 13

European institutions to submit first data on new European Capital requirements regulation

15-16

European Business Summit Brussels, Belgium

JUNE 2013 3-4

Emerging Markets Investment Summit Warsaw, Poland

JULY 2013 1

Lithuania assumes the EU Presidency until 31st December

3-7

Royal Henley Regatta

HAVE WE FORGOTTEN ANYTHING?

Let us know about any forthcoming events you think ought to be in our listings.

(Sorry, press and official events only.)

Email us at editor@ifamagazine.com and we’ll do the rest.

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FSA Publications + IFA Cal.indd 56

following the growing use of the consumer price index (CPI) as a measure of price inflation in occupational defined benefit (DB) pension schemes.

Short Selling Regulation – Handbook Changes Policy Statement Ref: PS 12/19 1st November 2012 38 pages

Of interest to FSA-authorised banks and building societies, and to Capital Adequacy Directive (CAD) investment firms.

Sets out requirements for aligning the Capital Requirements (Amendment) Regulations 2012 with the European Banking Authority system, by providing data on remuneration data as set out in CRD3.

Mortgage Market Review – Feedback on CP11/31 and Final Rules Policy Statement Ref: PS 12/16 25th October 2012 312 pages

Of interest to lenders, advisers and mortgage holders.

The Statement summarises the responses received in relation to Consultation Paper CP11/31 (‘Mortgage Market Review: Proposed package of reforms’), and provides final guidance.

The majority of the MMR changes will come into effect on 26th April 2014.

The FSA now proposes to initiate a series of conversations with firms to help them understand the MMR reforms, to address any resulting systems changes, and to keep them informed of the next

steps in the implementation strategy. A review of the impact from these proposals is scheduled in not more than five years after implementation.

SIPP Thematic Review Findings and Guidance Guidance Consultation Ref: GC 12/12 23rd October 2012 12 pages

Of interest to SIPP operators, firms, trade bodies and consumer representatives.

The publication follows on from the last SIPP review, which investigated concerns about how far SIPP operators had adapted their processes and procedures to reduce risks following the 2009 report. The FSA had also considered the level of compliance among SIPP operators with our Client Money and Assets rules (CASS).

The FSA says that its survey showed up poor firm compliance with regulatory requirements, particularly in the area of risk planning and mitigation, which it said had significantly increased the risk posed

by SIPP operators. And the majority of SIPP operators had been unable to articulate accurately the application of CASS to their business structure.

The paper therefore calls for improvements in: •

The level of understanding among firms’ senior management of regulatory requirements.

•

The effectiveness of senior management oversight.

•

The application of CASS to the firm’s business model and the effectiveness of systems and controls to comply with the rules.

www.IFAmagazine.com

14/01/2013 22:00

TRAVEL GUIDE

LOST IN TRANSLATION MOVE ALONG THERE IN THE GREEN CHANNEL. GILLIAN CARDY HAS GOT SOMETHING TO DECLARE Christmas and New Year seemed to me rather like the flight transfer area of Changi airport. A kind of twilight zone between one journey and another.

You were free to shop duty free, have a meal and visit a grown-up sized restroom - but not free to go just anywhere, or to do whatever you pleased. The world you’d come from was behind you, but you hadn’t quite arrived yet.

But now we finally have arrived. Or have we? The RDR journey is more like one of those round-the-world tickets which only operate in one direction. Exciting, tiring, challenging.

New destinations and new opportunities keep presenting themselves, but there’s no going back.

Which is what I was trying to explain to my hairdresser. Why not going away for Christmas, and why being at home on 31 December was really important to me. So, having explained what the RDR changes were all about, he told me: “It’s not the commission my adviser gets paid that bothers me - it’s the charges that get taken out of my pension that really irritate me.”

Now, I’d be the last person to draw too many conclusions about life based on my hairdresser’s worldview. But I’m prepared to wager that, in this case, he’s expressing a level of knowledge and understanding of the workings of financial advice - and of product costs - that is relatively typical of most industry outsiders.

The Client’s Unfamiliar Perspective “Of course clients realise that advice isn’t free.”

“Of course they know we get commission.”

Well, that old mantra might be true, but I’ve met too many clients just like my hairdresser. They knew you got your commission somehow – but they hadn’t drawn the connection between commission and product charges. They hadn’t worked out that, if we didn’t take commission, the product charges would go down. They certainly hadn’t worked out that they would be better off if my fees were lower

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than the commission. Explaining this was the most time consuming element of client meetings.

You may say the clients were daft - I mean, where did they think the commission came from? But this highlights an issue addressed in a Harvard Business Review blog shortly before Christmas.

The writer (http://tinyurl.com/ aqewq52) suggested that people who work in financial services (and other jargon-ridden occupations) “become infused with insider knowledge, techniques, and perspectives. After a while they forget their former lack of expertise and start to assume that everyone must also possess their knowledge - customers included.

“Employees are like hostages suffering from Stockholm Syndrome,” he continued. “They take on the worldview of their employer and industry, and forget what it’s like to be a ‘regular’ person without this specialized knowledge.”

So here’s a New Year’s Resolution for you to adopt when all the usual aspirations have fallen by the wayside. As you get back on the plane for the next stage of this exciting, challenging, thrilling, opportunity-laden journey, assume nothing.

You understand this complicated world of money and numbers, and you can make sense of it. And explaining it clearly is precisely the service that your clients value.

And for which they will gladly pay.

For more comment and related articles visit...

www.IFAmagazine.com

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57 14/01/2013 22:02

THINK

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

JOHN ANDERSON OF RECRUIT UK SAYS THERE’S EVERYTHING TO PLAY FOR IN THE INDEPENDENT SECTOR As one stands and reviews 2012, the financial service industry has certainly has had its challenges to rise to. Investment banking fines, the manipulation of Libor rates and the rounded-down economic growth figures, as well as facets of the media seemingly determined to report only negative aspects of the industry rather than the successes.

It all seemed a bit gloomy.

I have entered 2013 with a fresh spirit of optimism. As a recruiter, I am privileged to be able to speak to a great number of IFAs and Wealth Managers, and I’d say that I’ve acquired a fairly good grasp of how this important part of the industry views the future.

Every practice I’ve talked to has reviewed its business plans and made changes as a result of RDR. Most of them wish to reduce the administration and compliance aspect of the role - but they still recognise its importance.

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THE HUMAN RESOURCE

POSITIVE As the market polarises, the need to position a business within a specific market sector has never been so important.

The challenges have been not so much the conversion to a fee based charging structure, but creating time and occasion to speak to new and existing clients as well to grow a profitable business.

Estimates of the numbers of authorised IFAs in the UK are still somewhat variable, and it remains to be

Looking longer-term, there is an increasing momentum to attract talented IFA’s from Banks and Building societies to both employed and self-employed IFA positions. On the face of it, the argument against has been overwhelming: The tied versus whole-of-market issue, and the matter of selling products as opposed to giving holistic advice are just two of the issues which could cause probable failure.

“I have entered 2013 with a fresh spirit of optimism” seen just how many advisers choose to leave the industry, or to become restricted. But, inevitably with no industry initiatives to attract new talent to the industry, (a review of which ought to be on the FSA’s list of things to do for 2013) the numbers will surely diminish.

For those companies who wish to increase turnover and profitability, the recruitment of a talented IFA who has business to bring, and who fits the culture and expertise of any practice, is always a viable option.

Each party shares the risk, and with the right support, can produce a long term beneficial relationship. But there is not an abundance of this type of IFA out there.

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Recruitment.indd 59

However, and this is where a good recruiter can play a part, there are exceptional financial advisers within Banks and Building Societies who wish to make the transition to IFA. They may already be working an IFA channel or a specific market sector, have the hunger, desire and capability to make a positive transition which benefits everybody.

Where a good recruiter can make a difference is to understand your business planning, culture and long term plans and comprehend a candidate’s aspirations, qualities and skills to an extent we can say with confidence, they are worth your time to meet and interview.

For more comment and related articles visit...

IFAmagazine.com

Januar y 2013

59 14/01/2013 22:03

Thinkers.indd 60

14/01/2013 22:14

HELLO! WE KNOW YOU’RE OUT THERE

Senior Sales / Ad Manager To manage/sell print and digital advertising, event sponsorship and bespoke projects. Selling to finance businesses, asset managers, agencies and related companies.

London based, you will be expected to develop existing contacts and represent the magazine. A great opportunity for an established sales person to step up and benefit from business growth.

News Journalist

As IFA Magazine celebrates it’s second anniversary, following intense interest and prolific growth, we have a need to expand our team.

To work alongside the Editor in producing and co-ordinating financial features and news for both the web and print magazine.

F/X Consultant / Director As we develop our successful brand we have an opportunity for an experienced foreign exchange consultant to join our senior team.

A working knowledge and contacts within the f/x market essential, this role could be highly lucrative and a perfect step up for someone ready to take on a senior role.

To register your interest, please send cv in full confidentiality to HR@ifamagazine.com

magazine

the financial services e-learning specialists

Get your skills up to date the easy way

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

If you like the sound of this, go to www.bwd-development.com where you can see a full demonstration of the service or call BWD development on 0845 850 9995 T 0845 850 9995 F 0113 274 3031 E info@bwd-development.com

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Thinkers.indd 61

Januar y 2013

61 15/01/2013 13:44

Financial Services Recruitment Specialists

Business Development Manager

Director / Employed IFA

Employed IFA

Southampton / Reading

Cheshire / Manchester

Birmingham, Poole, Cardiff

Circa £55k

Up to £60k + Basic + Bonus and future equity

45k – 65k + Bonus

My client is a unique and successful investment company who offer innovative solutions and a wide range of funding options to UK investors and companies.

My client a boutique HNW IFA based in the Manchester/Cheshire area is looking for a director to join their business. You will play an integral part in the running of the office and future development of the staff over the next 5 – 10 years in exchange for good earnings prospects and equity. My client has an excellent support in place, latest systems and provides true holistic advice to high net worth clients. The current director is looking to exit the industry In 5 years’ time. The model in place will allow you to take over the business and implement your own exit strategy. The business is currently writing over £1million with a plan to double this over the next 5 years.

My client is a reputable private client investment firm with an IFA arm who specialise in delivering a holistic service to HNW private clients across the UK. They are seeking a high calibre professional IFA in with a transferable client bank to join their expanding organisation on an Employed basis.

They are one of the few businesses that have continued to progress and expand despite the turbulent economic environment, experiencing rapid growth in funds under management.

My client currently has a highly sought after Business development manager position within their Southampton/Reading office.

The BDM must be a highly motivated, articulate, passionate individual who thrives whilst working in a fast paced sales team and has confidence in networking and negotiation. You will always go above what is expected of you with both internal and external relationships and develop new strategies to implement within the company and beyond, always striving to improve the team’s process and performance.

Ideally you will have a background in intermediary sales and be qualified with an IMC or similar qualification. Experience in building robust relationships with IFA’s is a prerequisite for the position, as is the determination and drive to further your goals and ambitions.

My client is offering a competitive salary up to £55k along with a generous bonus structure that rewards hard work and excellence, share options and a competitive package of benefits.

If you are seeking a long term position with an investment company that has a reputation for personal service, Please apply in confidence.

Thinkers.indd 62

■ You must be an established IFA

with transferable assets, used to writing 100k+ (200k ideally) ■ You have the desire to run a

practice, manage AR’s and manage a HNW client base in 5 years ■ Diploma qualified with an aim

to become chartered ■ Happy to take a basic salary + bonus

The applicant will be a strong relationship developer with a track record in generating quality business. Although a small amount of leads will be provided, the majority of own business will come through current clients and own leads. Ideally the applicant will have a sufficient amount of AUM to bring with them. The successful applicant will be diploma qualified or above, with a proven record of success as an IFA with experience in educating HNW clients.

In return for expertise, my client are offering a competitive salary between £45k – £65k, with a generous split on all business written, a modern and professional office environment and a dedicated administration team that will allow more time to be spent on clients and less on paperwork.

■ Looking for equity in a proven

successful business ■ Para planner, admin, office

manager and office to work from with own parking space ■ Predominantly high net worth advice

through private and corporate.

Ideally you’re currently working for a large organisation and would prefer a more boutique specialist environment where you can influence the business, earn more and spend time building meaningful client relationships.

14/01/2013 22:14

Contact us to discuss our latest opportunities:

T 0844 371 4031

Private Wealth Director

National IFA

E HR@ifamagazine.com

Financial Planning Advisor

Office or Home Based

West Sussex

Up to 120k basic + Benefits

Basic Salary c40k + iPad, iPhone, Medical Insurance

Circa 50k

Our client is one of the foremost professional services companies the UK. Long established; it can trace its roots back to the late 19th century and has offices in every city throughout the UK. It has gained a reputation for sound Investments, professional accountancy to companies including FTSE 100 organisations and providing regulated financial advice to UHNW clients.

My client a national whole of market IFA and Stockbroker are actively recruiting qualified financial advisers across the UK. My client predominantly advises high net worth clients.

A specialist financial services group which has provided financial advice and investment management for over 40 years to a wide range of clients is seeking a consummate professional financial planning advisor to provide a first-class service to their existing and prospective clients.

As part of their planned growth, they are seeking a Director of Wealth Management to join their established team in Birmingham. Working closely with Accountancy and Investment Directors you will provide independent advice to company clients and those you bring to the company.

The ideal candidate will have proven experience in delivering regulated advice to clients with investable assets in excess of circa £300k.

A background in professional services, wealth management or private banking is essential with experience of dealing with HNW clients.

You will be able to evidence that you have maintained a loyal client bank, of which individuals have been a client for a minimum of 5 years.

In return there is a high basic salary on offer with generous bonus.

Please apply in confidence.

My client seeks IFAs who value their clients time, they will dramatically reduce your administration ensuring you’re out servicing clients or winning new business.

■ Designated Paraplanner and

administrator, end of the phone support in the UK. ■ Offer either employed or self-employed

(70/30 split, no extra costs).

■ In house DFM and bespoke portfolios ■ They cover all cost associated

with being an IFA. ■ Will provide full support in transferring

existing clients across and increasing the recurring income to 1%.

■ My client is currently working with

lead providers across the UK that includes solicitor firms.

■ A client bank if you’re based in Leeds,

however some leads are provided through progressive partnerships.

■ An exit strategy for IFA’s who

want to leave the industry, one off payments or structured buy out.

Ideally you will be an existing IFA with your own clients. Perhaps you are directly authorised and have concerns about the impact of RDR on your business and how you are going to manage research, servicing existing clients and winning new business.

Maybe you are currently connected to a network that is not providing the support that’s promised or it’s costing you more than you thought?

Don’t bury your head in the sand; call me today for a confidential discussion about how my client can add value to your existing successful business.

Thinkers.indd 63

The nature of this role requires both technical and relationship management skills. Working on a proactive basis, you will meet specified financial planning goals for the benefit of the client whilst being tasked with astute management and review. You will also be accountable for your financial planning delivery, compliance and business development, meeting regulatory and quality standards, including continued professional development (CPD) The successful individual will have a broad knowledge and deep insight across financial services, particularly within the HNW client arena. It is essential that you are Level 4 accredited with statement of professional standing and the determination to achieve chartered status. You will preferably be an existing IFA who has a sufficient level of transferable assets to bring with you and a steady work history. You will be a true hunter, who can demonstrate strong business development skills.

With a history of integrity and a reputation that has spanned decades, you will be joining a FTSE 250 organisation that measures its success by their referral rate and customer satisfaction and if you enjoy working within a mature, motivational and sharing office, this will be the perfect role for you.

Strong incentives are available to those individuals who contribute the greatest as well as a basic salary circa £50k If you are a proven Financial planning manager/IFA then look no further than this excellent opportunity.

14/01/2013 22:14

UK’s Number 1 IFA database Register for FREE unlimited access - Join this rapidly growing community today!

Visit www.MyTouchstone.co.uk to register or call 01236 794 120 “I wish to express my appreciation to MyTouchstone for data on hourly fee rates for IFAs in my area of SE England.

The fact that I had permission to quote the data in my client communication allowed me to justify and amend my hourly rate from £125 to the average for my area of £160”, said Mike Grant of Montgo Consulting Ltd, East Sussex.

How can MyTouchstone help your firm?

1) Investigate ‘Hotspots’ of investor activity on Google maps.

2) Discover your firm’s ranking and market share in our IFA League Table: Per location/per specific area of advice.

3) Adviser Charging Guide: How do your fees compare with your peers in you location?

4) RDR Survey: Understand how many firms are RDR ready and the biggest hurdles still to over come.

5) National & Regional Support Services to IFAs: Rankings for networks, broker service provider, outsourced fund management, wraps and platforms.

6) New Business Trends: Discover how business is changing from one quarter to the next.

7) Access our ‘Fund Focus’ page created in association with FE & Rayner Spencer Mills gain a unique insight into the latest fund selection and performance trends.

8) View our ‘Platform Page’ to find out the latest trends in the platform & wrap market, updated quarterly with the latest stats, reports & insights.

9) Download the latest FSA RDR Guide.

Independent financial advice is changing. Wisdom is knowing what to do next…..

Visit www.MyTouchstone.co.uk for this FREE service or call 01236 794 120 www.MyTouchstone.co.uk

Thinkers.indd 64

14/01/2013 22:14

THINKERS

STILL LEARNING “I am confident that we will meet whatever challenges the future may bring.”

Ben Shalom Bernanke Born 1953 in Augusta, Georgia Greenspan’s heir If there was ever a hard act to follow, it was ‘good old’ Alan Greenspan, who served six presidents of all political colours and who was worshipped as a kind of minor god until he backed the wrong loose money policy and tripped over the emerging subprime problem.

So when George W Bush appointed Bernanke in 2006 to replace the fallen idol, the new man should have found the whole thing was a breeze.

The Republicans’ own favourite villain Alas, no sooner was the former academic safely into his first four-year term than the skies went dark and the global economic crisis started. In the words of the liberal New York Times, the new man suddenly found himself suddenly under attack “for failing to foresee the financial crisis, for bailing out Wall Street, and, most recently, for injecting an additional $600 billion into the banking system to give the slow recovery a boost.” (Shocking, shocking…)

But that was nothing compared to the trouble that Bernanke’s own Republican brothers in arms have given him since then.

If Mitt Romney had won the presidency he’d have been out of a job as soon as his current term expired (August 2013), if not sooner. But then, we suppose, the smaller the government you want, the less you want an interfering saviour messing about with business policy?

Supping with the devil himself Barack Obama, freshly elected in 2008, lost no time in endorsing the Fed chairman, whose temperament, courage and creativity he said had helped to prevent a second Great Depression in 2008. But even that wasn’t enough to stop Bernanke’s reappointment squeaking through by the narrowest vote in the history of the Fed. And the GOP has never forgiven him since. www.IFAmagazine.com

Thinkers.indd 65

Damned if you do...

With hindsight, the new man had already guessed it wrong with his declaration, in 2004, that we are now living in a new era called the Great Moderation, where modern macroeconomic policy has decreased the volatility of the business cycle to almost nothing.

The “Bernanke Doctrine” wasn’t exactly the best of mindsets with which to approach the crisis of 2007 and 2008. So the Fed chairman duly switched to a pragmatic bailing-out of everything he thought too big to fail. That meant AIG but not, controversially, Lehman or Merrill Lynch. And the conspiracy theorists have been having a field day ever since.

Quantitative easing But it’s been the three phases of bond buybacks that have divided the markets most. In principle, printing new money should improve liquidity, lower interest rates toward zero and boost the stock market – but at the cost of a weaker dollar. Much to the Tea Party’s chagrin, QE has delivered all except the latter, unless you mean against the yuan of course.

Walking a greasy tightrope But the bookish academic still hasn’t found it easy to step into wily old Al’s shoes. Bernanke’s early determination to make fiscal policy less obscure suddenly looked naïve when he blurted out embarrassing hints about inflationary policy: on one occasion, he literally caused a stampede from the NYSE briefing room, as bond dealers in his audience rushed to their desks to exploit what they’d just heard.

On the whole, Bernanke’s waxy emotionlessness has probably caused more misunderstandings than it avoided.

And his refusal to be quoted on deficits or taxation issues (“that’s what politicians are for”) continues to bring accusations that he doesn’t understand fiscal policy at all.

So does he? We are all about to find out.

Januar y 2013

65 14/01/2013 22:14

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

TAXI

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

FOR HARVEY!

WHADDAYA KNOW, THE CONSUMER ECONOMY IS BOOMING, SAYS RICHARD HARVEY. YOU READ IT HERE FIRST Absolutely Definitely Maybe

Imagine the scene. Actually, you don’t have to, because I bet thousands of IFAs have already encountered this scenario...

Anxious pension saver: “When you say an Absolute Returns scheme, does that mean I can look forward to a bit of growth and a smidge of interest?”

Edgy IFA: “Er, not exactly. ‘Absolute’ really means ‘perhaps/maybe/sort of...’”

Which explains why the FSA is polishing up a new set of rules compelling financial advisers to make it crystal clear to clients that ‘Absolute Returns’ means anything but.

So here we go again. After alerting financial advisers that they didn’t like those nifty unregulated collective investment schemes, the FSA is now pouring another bucket of cold water over what once seemed a secure savings haven. Hardly surprising, if industry estimates are correct that almost one in three Absolute Return funds have lost money in the past year.

Hence the fact that increasing numbers of Silver Savers are coming to the conclusion that sticking their pension pot under the mattress is maybe not such a silly idea or – and here’s the rub for IFAs – maybe they’d be better off managing their own funds?

Now admittedly, there are optimistic (or should that be delusional?) characters like me who believe that, just as the world economy recovered after the Great Depression of the 1930s, there’s no reason why we shouldn’t see a similar revival in the next few years – on that would restore decent savings rates. Although hopefully without the follow-up of a world war.

But it really would be refreshing if, just for a change, the FSA and IFAs could be of one accord in pointing savers in the direction of investments that

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Januar y 2013

The Other Side.indd 66

offer solid reassurance of a modest but inflationbeating return. Or is that what they call an ISA?

No Room At The Inn

Further evidence that the ‘double dip’ was maybe a figment of the statisticians’ imagination...

A couple of months ago, I organised a Saturday beano to London for Mrs H and a couple of chums. Dinner at Brasserie Zedel, the much-feted new French restaurant off Piccadilly, and then the late show at Ronnie Scott’s.

All my mate Nigel had to do was book a couple of hotel rooms for the overnight stay.

As a man who has to be surgically removed from his laptop, iPad and other techno-gizmos, he predictably said he’d do it all online.

“Relax”, he said, “nobody books hotels more than a few hours in advance nowadays”.

So there we were, on the train to the Smoke, logging on to lastminute.com, laterooms.com, and every other flaming-hotel-site.com, all telling us that there was not a room to be had in London.

Now in December we wouldn’t have needed reminding that sometimes there is no room at the inn. But in early November?

There wasn’t a single in the City, a double in Docklands or a basement in Brixton.

And the proprietor of a less-than-salubrious joint in Bayswater gleefully informed me that he’d just sold his last room for £400.

We eventually decided to spend £120 on a cab home, on the basis that it would be more comfortable – and just possibly less expensive than a cardboard box underneath Tower Bridge.

So on that evidence, maybe the economy, and with it the prospects for IFAs, is on an upward trajectory.

Wishing everybody a Prosperous 2013

www.IFAmagazine.com

14/01/2013 22:15

M AY

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Very good in its make up and content. Sets itsel aside from other publications in the marketplace lio o mph Excellent.

Thank you. Really refreshing. High quality production with some good thought provoking articles and useful information. Good useful content. Up-to hly inco m , date useable, very good and easily read. Very ifully ba einfo lanced good articles, relevant to my work. Very interesting extremely useful. Very impressive read and lots o S N nice to see it in “magazine” style forma useful articles Monthly incIoG me, S beautifullythan ather 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 pape with good content which is plain talking. Good ayout and easy to read. Not seen anything like this or IFA market. Really good. Worth reading. Interesting content. Very professional and upmarket, exactly what is needed in the ifa community. Absolutely antastic. Not cluttered by endless comparison ables. 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 o the office - not something I could Tsay abou HE PAIN IN magazine manyThe financial publications! Great - look forward o subsequent editions. Brilliant! Very impressive the top IFAs and all interesting publication.

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W EWSREVIE ooking Breath of Nfresh air and topica get your free subscriptionI’m going get it instead of the n biteTosimply size chunks. fill out the form online at: professional adviser papers and financial advise www.ifamagazine.com/ content/subscribe papers. Enjoyed the read. Keep up the good work 2 0 12

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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.

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PUTIN RUINS A PROMISING OPPORTUNIT Y

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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,

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