As the offshore world takes\a battering, where next for\international financial centres?
As the EU is on the verge of releasing a tax haven blacklist in the light of the Paradise Papers, Mark Battersby introduces this month’s issue of <I>International Adviser</I> by asking if we are about to see a cultural shift in the financial services sector\\\\\
One of the questions that has been stirred up by the big whirl of publicity surrounding the Paradise Papers is whether international financial centres rely too heavily on financial services.
There are plenty of well-rehearsed arguments advocating the benefits for internationally mobile clients of keeping their assets in such domiciles as the crown dependencies.
But now the agenda is setting an increasingly low bar for what is morally acceptable tax avoidance, is it time to look at other business opportunities?
Dependence on financial services varies across the domiciles, with the Isle of Man less exposed than Jersey.
Should Jersey, for example, start thinking about breaking into new sectors to avoid a worst-case scenario where governments and regulators around the world move to engineer an end to so-called tax havens?
On the one hand, the network of established practice across jurisdictions, in both big and small countries, looks too big to fail, with a culture at all levels of society comfortable with tax breaks of one sort or another.
‘It would be wrong to think this latest wave of attention on the offshore centres will simply die away and business will return to normal’
On the other, if the UK Labour Party’s Jeremy Corbyn wins power at the next election a much harder line on the crown dependencies seems like a good bet, and possibly even exchange controls preventing money leaving the country.
The EU has already sought to bring forward its naming of a tax haven blacklist in the light of the Paradise Papers, with sanctions included in the line-up of crackdown measures.
Meanwhile, ex-UK chancellor Gordon Brown has weighed in with a global petition to get international agreement to ‘immediately’ close centres that help the wealthy dodge tax.
Against this activity, the ever-adaptable international financial centres, which have weathered plenty of storms in the past, are telling the world they have already moved on to a highly transparent exchanges of information state of play.
But it would be wrong to think this latest wave of attention on the offshore centres will simply die away and business will return to normal.
Check out the views from leading figures in the international life industry in the UK Your Region analysis here.
Mark Battersby, editor,
Ailo’s 30th anniversary celebrations have been overshadowed by the Paradise Papers, but beneath the torrid headlines is a much sunnier picture as great headway has been made in the name of transparency across many jurisdictions, writes Mark Battersby\\\
‘Anyone who thinks Apple’s billions are sitting in a Jersey bank is way off the mark’
Alan Morgan-Moodie, chief executive, Ailo
Soon after the Association of International Life Offices (Ailo) celebrated its 30th anniversary at the end of October, the Paradise Papers were released to the world, with extensive coverage of the offshore investments held by a number of celebrities and politicians.
‘As long as these tax benefits remain there will be a market for investment vehicles’
Bob Pain, chairman, Ailo
The papers also covered how Apple, one of the world’s biggest companies, went about choosing a new domicile.
Leading figures of the international life industry gathered to reflect on three decades of Ailo member expansion into markets beyond the UK.
‘our industry has to aim for the best possible customer outcomes’
Mike Foy, chief executive, Utmost Wealth Solutions
Meanwhile, a very different agenda was making headlines as 96 media partners worldwide, including the BBC and The Guardian, released details of an investigation into 13.4 million leaked files from what were labelled as two offshore service providers and 19 tax havens’ company registers.
What is apparent to seasoned observers of the offshore world are the huge strides that have already been taken, or which are in the pipeline, to ensure greater transparency of international financial centres.
Alan Morgan-Moodie, chief executive of Ailo, said the controversy existed around the morality of the financial arrangements rather than their legality.
“Historically, mitigating tax liabilities through genuine planning was accepted. Now it is not, with the campaign by the OECD being unable to legally prevent tax avoidance, to make it morally unacceptable.
“In the case of the UK’s crown dependencies and offshore territories, financial planning has been encouraged as these small island states have no ability to produce physical goods for export, so high value services are encouraged.
“Why? They act as a conduit for money into the City of London. Anyone who thinks Apple’s billions are sitting in a Jersey bank is way off the mark.”
Morgan-Moodie points out that the Isle of Man is 13th on the OECD’s list of transparent jurisdictions. It was an early adopter of the Common Reporting Standards and passed inspections from Moneyval and the OECD.
He said: “The Isle of Man has no ‘real’ politicians because 85,000 people have no need for them.
“It is the oldest democracy in the world, with over 1,000 years of continuous parliaments, and women have had the vote for two centuries. Its reputation will survive.”
A few bad eggs
According to Bob Pain, chairman of Ailo, while the Paradise Papers may have highlighted some of the extreme celebrity cases, the vast majority of policyholders are investing in mainstream schemes from their taxed assets and income.
He said: “A basic premise for offshore investments is that high net-worth individuals who have exhausted all their onshore investment opportunities, such as pensions and ISAs, seek further savings schemes for their money.”
He added that the UK has been a core market for many European-based jurisdictions for a long time and should be for many years to come as it has many recognised tax benefits for the UK policyholder.
“As long as these tax benefits remain there will be a market for investment vehicles offered by the cross-border life companies. Some of these benefits are unique to life assurance vehicles.
“As independent adviser companies in the UK are regulated by the FCA and comply with the RDR they should be seen as ideal distribution to meet the Isle of Man FSA’s roadmap in the future.”
Meanwhile, Mike Foy, chief executive of Utmost Wealth Solutions, applauded the move by the Isle of Man’s FSA to “respond to the direction of travel in worldwide regulation”.
“The Isle of Man needs to maintain a reputation as a robust, internationally recognised centre of regulatory excellence, advocating product transparency and delivering better customer outcomes,” he said.
“With increasingly mobile customers, our industry has to aim for the best possible customer outcomes we can deliver, regardless of jurisdiction or business model.”
Looking ahead, Morgan-Moodie said “the future could be very good for strong, progressive member companies. Within Europe the avalanche of post-crisis regulation has abated and now the challenge is to make the numerous directives and regulations work.
“This industry exists through sales. Without sales that meet the consumer’s end objectives, the market will vanish.”
Are the Paradise Papers a game changer for offshore financial centres?
- Small impact
- No impact
Treasure island: the Isle of Man has maintained a reputation as an internationally recognised centre of regulatory excellence
Cyprus spreads its wings
Cyprus-based Woodbrook Group’s recent acquisition of Robusto Asset Management is not only a huge bonus for clients but further indication that the Mediterranean island is fast becoming the financial hub of Europe
Woodbrook Group, a well-known financial institution based in Cyprus recently acquired another financial firm, Robusto Asset Management. Robusto Asset Management is a German-based firm that offers several financial services to thousands of customers all over the globe.
The acquisition happened a couple of weeks ago and it is a very important one for Woodbrook. Robusto Asset Management has been offering financial solutions and recommendations to their customers for quite a while now.
They have been working closely with individuals, families, trusts and companies to build customised financial solutions and recommendations to their customers.
They work with individuals, families, trusts and companies to build customised financial solutions and portfolios in their best interests. They offer a wide range of services, such as objective advice, personal attention and comprehensive resources, all targeted at making their clients reach their desired goals.
Their services include wealth management, financial planning, pension issues, international banking, health insurance, marine financial advice, life insurance and currency exchange. They stick with their customers through all the financial stages of the above-listed services.
Woodbrook Group, on the other hand, is an international firm of financial advisers. They are an independent company with years of experience. Their independence means they are able to offer clients unbiased and impartial advice. Deeply ingrained in their philosophy is the notion that every individual has unique dynamics, goals and attitude to risk.
It is for this reason that their team of highly experienced financial consultants can help their clients to identify their personal needs and devise professional solutions and services that are customised to your unique situation, objectives and goals.
Woodbrook Group is licensed to provide the investment services of investment advice.
‘Cyprus is becoming the financial hub of Europe’
Robusto Asset Management has been in existence for nearly a century and their acquisition is a big achievement for Woodbrook Group.
This is a further indication that Cyprus is slowly becoming the financial and business hub of Europe. The business opportunities that the country has to offer can’t be matched by any European country.
With this acquisition, it will be of little surprise if more of these follow as more and more businesses and institutions come to terms with what Cyprus has to offer.
Busting the \value myth
In the final article of his series on how firms can thrive, Phil Billingham says if our ultimate aim is to run a practice where clients will ‘cheerfully’ pay our fees, first we must counter some false truths about value
It’s that age-old conundrum, what is the value of our advice?
During the transition process to fees that we have seen in the UK and Australia, the critical questions are always:
• What fee should I charge?
• How can I charge it?
• How do I set the fee?
• If I charge 1%, won’t that just cut the client’s returns?
Underlying all of this are concerns about how advisers demonstrate their value to clients. Let’s start with the words of the late, great David Norton, one of the UK’s leading lights in financial planning. He claimed the ultimate aim was to run a practice where clients would “cheerfully pay our fees”.
It’s a brilliant vision but how good does the client’s experience have to be in order to get to a point where they cheerfully pay fees?
The first thing to point out is that it is the whole client experience in question and not just performance.
So let’s kill a few ‘value’ myths:
• Myth 1: clients pay us to outperform the market/benchmark/get the best return.
No they don’t. The reason we think they do is that all the marketing is about performance. And when most advisers and fund managers set their stall out on that basis, it’s no wonder clients think that’s what we do.
But when 90% of managers and advisers fail to achieve this objective over any measurable period, it’s going to go wrong. And then what is the value we can charge for?
Myth 2: clients pay us to ‘buy the best product’. Tricky one this, especially for independent advisers, as there is some truth in it. To start with we must define ‘best’. And even when we get that bit right, what happens when a new, updated plan is launched next year? Whisper it quietly but ‘new and improved’ is often just a way of getting you to change last year’s policy and buy this year’s plan. After all, that is what the senior providers are paid for.
Myth 3: clients won’t pay for advice. Um, yes they will. The issue here is the historical one that the ‘advice’ part of the process has been a giveaway in order to sell a product. So let’s rephrase things. Clients won’t pay a fee to be sold a product.
In an age of ‘free’, we are learning that ‘if it’s free, you are not a customer, you are the product’. Think Facebook and Google. How do they make their money?
‘In an age of ‘free’, we are learning that ‘if it’s free, you are not a customer, you are the product’. Think Facebook and Google’
The bad news is that if the above are myths, then how do we add value and what is the value we add?
If it’s not about beating the market then perhaps it’s about not losing the money. Perhaps the value we add is in preventing the client from doing dumb things, such as trying to buy the best-performing fund or asset of the last year. Think Dalbar studies, think behaviour gap.
And if all that sounds a bit ‘fluffy’, then read the recent report on adviser value published by the International Longevity Centre and supported by Royal London. It finds that clients with advisers accumulate £40,000 or more extra assets than those without.
You could also refer to the Vanguard studies on adviser alpha or Morningstar on ‘gamma’.
The figures agree that advised clients get the equivalent of 2-3% per annum higher returns, due to advisers doing the basics:
• Using sensible tax allowances
• Using ‘institutional’ type funds
Not complex, but valuable.
I think we need to start again, and understand what we do and especially what we should do. So, can you answer the following questions?
• What are you for?
• What do you do?
• Who do you do it for?
• Where do you do it?
The rule is if you have never turned away a potential client, you do not have a client proposition. ‘What are you for?’ is the most important question you can ask as an adviser and as a business.
• Is it selling products? Then you are competing with Lidl, Tesco and Amazon.
• Is it researching the market? Moneysupermarket and Gocompare can do that so much better.
• Is it providing security and simplicity? That service and value cannot be outsourced to call centres in India or South Africa. The cliché is ‘cost is what you pay, value is what you get’.
Clichéd and a bit arrogant in reality.
But the fact of the matter is that the rational economic human being so beloved of classroom economists is just that, a creature of the classroom. They don’t exist in real life.
In real life we drive Mercedes, Jaguar and BMW, when a Kia or Ford would do the job. We justify our position but it’s a justification not a reason. In real life we decide with our emotions and justify through facts.
‘In real life we drive Mercedes, Jaguar and BMW, when a Kia or a Ford would do the same job. We decide with our emotions and justify through facts’
Attention to detail
So let’s get back to the proposition. How do we add value so that clients will cheerfully pay our fees? And the answer is through boring technical attention to detail.
You must have clear processes, be there to stop the client making irrational choices, be a sounding board and the ‘trusted adviser’. Make sure it is the client themselves and not the money that is the client.
You are not in the ‘money business’ but the ‘people business’. You are working with the clients to deal with the money business, not ‘beating the market’ this week.
Clients understand this crucial difference. They may not say so, but it is true. And when they see it, they are happy – cheerful even – to pay our fees.
After \the fall
As the EU accelerates plans to publish its blacklist of tax havens in the light of the Paradise Papers, the world’s financial regulators must decide what action is needed. Mark Battersby reports\\\
As the publication of the European Union’s blacklist of tax havens has been brought forward in the light of the Paradise Papers, regulators across the world are assessing whether the existing framework of planned transparency and exchange of information is enough, or more rule changes are needed.
London leads the charge: HMRC will require taxpayers with undeclared UK tax liabilities relating to offshore interests to correct their position by 30 September 2018
Against this backdrop, the UK tax office HM Revenue & Customs continues to be more active than its counterparts in many other countries, with such initiatives as the ‘requirement to correct’ (RTC) measure, included in the second Finance Bill of 2017.
The RTC will require taxpayers with undeclared UK tax liabilities relating to
‘UK tax office HM Revenue & Customs continues to be more active than its counterparts in many other countries’
offshore interests to correct their position by 30 September 2018. Failure to do so could result in heavy penalties of up to 200% of the tax at stake, and HMRC will also have the power to publicly name and shame affected taxpayers in certain circumstances.
The UK’s Financial Conduct Authority has also continued to flag up issues that advisers and their clients need to be aware of, issuing a recent warning that failure by advisers to carry out thorough due diligence on introducers and appointed representatives could put customers at risk of financial harm.
The FCA published data revealing that St James’s Place was the most complained about adviser for the first half of 2017, but the big five banks received the most complaints overall, led by Barclays with 446,978.
Christopher Woolard, FCA executive director of strategy and competition, said the regulator now required firms to report all complaints, giving it a fuller picture of where the industry is not meeting customer needs.
“But even allowing for the change in reporting rules, and some progress made, the numbers are still significant”, he said.
One development amid the ongoing Brexit saga is the German financial services regulator BaFin contacting UK insurers with operations in Germany to ask for details of their emergency plans for all Brexit scenarios, with an emphasis on a hard Brexit.
BaFin highlighted growing concern that insurers will not be able to fulfil promises to customers after the UK leaves the EU.
Bruno Geiringer, partner for Pinsent Masons’ life insurance and wealth management practice, says passporting rights will come to an end in March 2019, unless a trade deal is agreed.
He adds it is high time for regulators to agree to a process that will protect protect policyholders who will otherwise be caught in a “potentially huge mess”.
Levelling the playing field
Meanwhile, the lower house of the Swiss parliament has rejected automatic exchange of information agreements with New Zealand and Saudi Arabia, but has given the green light to ratify deals with 39 other nations.
The Swiss want the New Zealanders to sign a separate bilateral social security agreement and are concerned that the Saudis will not be able to treat the data securely.
In the Middle East, regulators are relatively quiet with no updates on the big changes in the pipeline, but not yet rubber stamped, setting out commission disclosure and capital requirement rules.
There has also been less regulatory activity in Asia, although the Securities and Exchange Commission in Thailand is consulting on giving asset management businesses a lower ongoing capital requirement. This will level the playing field with those offering full custody to institutional investors.
‘The UK’s Financial Conduct Authority issued a warning that failure by advisers to carry out due diligence on introducers and appointed representatives could put customers at risk’
To counter multinationals using aggressive tax-planning schemes that direct profit away from the \UK, HMRC has introduced a pay first, dispute later deterrent in the form of diverted profits tax\\
The UK’s diverted profits tax (DPT) was rushed through parliament with great haste in 2015. It was a unilateral move by the UK to “counter the use of aggressive tax-planning techniques used by multinational enterprises to divert profits from the UK”, according to HM Revenue & Customs (HMRC) guidance. Earlier this year, Australia followed the UK’s lead and introduced its own diverted profits tax.
Unlike adjustments to corporation tax such as transfer pricing, DPT has to be paid first and then argued about later, and it has its own fixed timetable which is likely to drive a dispute towards litigation.
Loss and profit
Two years on, we are seeing DPT start to bite. The first charging notices have been issued, with drinks company Diageo revealing it has been forced to pay £107m in upfront tax, despite the fact it disputes the liability. We are likely to see further notices being issued by HMRC over the next few months, as the deadlines approach for the issue of notices for the first accounting period within the regime.
Broadly, DPT applies in two circumstances. The first is where there is a group with a UK subsidiary or permanent establishment (PE) and there are arrangements between connected parties, which “lack economic substance” in order to exploit tax mismatches. The second is where a non-UK resident trading company carries out activity in the UK which is designed to ensure that the non-UK company does not create a PE in the UK.
It is charged at 25%, rather than the lower corporation tax rate (currently 19%). This
‘Two years on, we are seeing diverted profits tax start to bite. The first charging notices have been issued’
‘The tax must be paid within 30 days of the final notice. It cannot be postponed and you cannot appeal until the end of the review period, which could be 12 months later’
disparity in rates is intended to encourage businesses to take a transfer pricing adjustment rather than pay DPT, or to restructure their affairs so they are paying more UK corporation tax.
The first step in imposing DPT is HMRC issuing a preliminary notice. A company then has 30 days to make representations against the preliminary notice and HMRC has a further 30 days to issue the final charging notice. However, at this stage, representations can only be made against a restricted number of issues such as factual errors, you cannot argue about the fundamental principles.
The tax must be paid within 30 days of the final notice. It cannot be postponed and you cannot appeal to the tribunal until the end of the review period, which could be 12 months later. This is a significant cashflow disadvantage to a business, particularly when it disputes that the tax is chargeable at all.
An appeal to HMRC needs to be submitted within 30 days of the end of the review period, and can then be notified to the tribunal. At this stage, you need to set out your case and the grounds for appeal. So in parallel with negotiating with HMRC during the review period, you need to be preparing for litigation – waiting until the end of the review period will be too late.
Companies should therefore treat the receipt of a preliminary notice as potential litigation. Group legal counsel should be involved and a detailed action plan should be drawn up in conjunction with legal advisers. Key witnesses should be identified at an early stage and evidence preserved, particularly when there have been changes in personnel or may be changes before the case reaches the tax tribunal.
Second bite of the cherry
Groups with advance pricing agreements in relation to their transfer pricing may think they are immune from a DPT challenge. However, the position is not that straightforward and, in some cases, HMRC is using DPT to get a second bite of the cherry in respect of existing structures.
When it was first introduced, general consensus was that DPT would apply to a small number of companies, like the US-owned tech companies frequently mentioned in the press in connection with multinational tax avoidance. However, the reality is that HMRC is using the tax in more situations than was originally envisaged.
Large payments out of the UK (especially for intellectual property), the use of offshore finance structures by UK groups and UK activities with a relatively low ‘cost plus’ margin, are all red flags for the tax. You definitely do not need to be a US-owned tech giant to get caught.
Best foot forward
It is more important than ever that advisers carry out robust research and due diligence when selecting product, investment and platform solutions, to deliver positive customer outcomes and be on the front foot when responding to an ever-changing market
Adviser businesses are being encouraged by regulators to ‘go deeper’ with research and due diligence exercises when selecting products and services for their customers, and to piece together an audit trail to illustrate the process undertaken.
It is therefore in the best interests of advisory businesses to carry out robust, repeatable and recordable research and due diligence when selecting product, investment and platform solutions.
These exercises should be done to facilitate best practice within the adviser business and, crucially, to support the delivery of good customer outcomes.
Uppermost in adviser thoughts should be the suitability of products, propositions and services for the customer. Given the evolution of adviser firms in recent years they would also be looking to work with propositions and companies that can dovetail with their beliefs, processes and business models.
In a market experiencing great change, due diligence will continue to increase in importance and is something that needs to be done when first identifying and selecting partners and solutions, and then revisited on an ongoing basis.
‘Uppermost in adviser thoughts should be the suitability of products, propositions and services for the customer’
Doing the groundwork
There are a variety of ways in which an adviser business might go about their research and due diligence. In order to establish a workable due-diligence framework when selecting partners and solutions, and to create a supporting audit trail, AKG proposes a balanced process with three core components – which can be tackled in any order – covering consideration of:
• proposition research and analysis;
• operational capability and service delivery standards; and
• provider-level assessment.
Contextualise the process
Advisers should also seek to contextualise due diligence exercises and key considerations for their customers and their business against the backdrop of an uncertain economic, regulatory and political landscape, allied with an ever-changing financial services marketplace.
In the table on page 2 are some examples of potential contextual items for consideration by adviser businesses when looking at international financial services partners.
Provider agility and responsiveness
Because of the above challenges, providers, as well as demonstrating a depth or robustness to meet external change and challenges also need to illustrate agility in their business and in their proposition, including the technology/digital component.
This isn’t necessarily all about size and resource, although capital reserves and ongoing investment will inevitably be required, but displaying an ability to respond to key market changes and developments while keeping abreast of evolving adviser and customer requirements.
By adopting robust due diligence processes, advisory businesses will be able to put themselves on the front foot with regards to establishing and sustaining winning relationships with product providers.
Meanwhile, they will be able to deliver positive customer outcomes and better respond to change and challenge.
‘By adopting robust due diligence processes, advisers will put themselves on the front foot with regards to establishing and sustaining winning relationships with product providers’
In the last of the series, PwC looks at \three key areas for the business primed \for the future: attitude to innovation, the shape of the workforce of tomorrow and \the evolution of work culture\\\
1. Aligning innovation with corporate strategy
Too many organisations pursue innovation, new technology initiatives and fintech independently of their overall strategy. It is important that these efforts are closely aligned to the corporate strategy of the business and that, in turn, the corporate strategy has digital technology at its heart.
For independent financial advisers, improving the financial return on innovation is ultimately the name of the game. Roughly half of the companies PwC recently surveyed in its ‘Innovation benchmark’ study think their innovation efforts have had a great impact on driving their growth, with an equally significant impact on cost management.
Nearly all companies believe there has been at least a moderately positive impact on both top-line and bottom-line revenue growth. But only slightly more than a quarter profess to being innovation leaders.
They also happen to expect higher revenue growth than their survey peers, as do those respondents who plan to reinvest in innovation at higher rates. This means a wide range of companies could benefit from refining their approach to innovation, focusing efforts on initiatives aligned to the company’s strategy and being rigorous in their approach.
While fintech is not the be-all and end-all of innovation, its importance is undeniable, particularly for game-changing innovations. Gone are the days when most businesses looked to technology mainly to keep pace with evolving market demands and as an adjunct to the day-to-day business of the company.
Instead, with technology-fuelled disruption and dislocation now the norm rather than an anomaly, a majority of companies across a variety of sectors depend on technology as a driving source of innovation and growth.
Businesses pursuing technology-led innovation tend to focus more on breakthrough innovations than on incremental ones, relying on technology to help create markets for novel products and services that don’t yet exist and to meet customers’ anticipated future needs.
With so much riding on technology, it’s no wonder that approximately half of companies rate technology partners as their most important innovation collaborators, topped only by employees.
2. Adapting to the successful workforce of tomorrow
Organisations that are fit for the future will need a new mix of talents in order to succeed. It may well be that the traditional recruitment, reward and retention strategies are not suited to maintaining the workforce of tomorrow.
This may take some adjustment for the thriving IFA industry. The question would be: ‘If it ain’t broke, why fix it?’ But what if the workforce of the future is unrecognisable from the environment we inhabit today?
The huge advances in AI and robotics will change the nature of roles in organisations. In the past 20 years, US firms have ‘offshored’ repetitive tasks to lower-cost locations such as India, China and Poland. However, relative costs for labour in those regions have started to rise and machines will soon become credible substitutes for many human workers.
As the capabilities continue to improve and technology continues to drive down the cost of machines, these forces will combine to bring about reshoring and localisation, as more tasks can now be performed at a competitive cost onshore. Even functions that seem dependent on human input may be affected.
This changing landscape will require a completely different workforce and a different mix of permanent staff, partnerships, contractors and third-party companies.
We are already seeing alliances between leading incumbent financial services and technology companies, using robotics and AI to address key pressure points, reduce costs and mitigate risks.
They are targeting a specific combination of capabilities. These include social and emotional intelligence, language processing, logical reasoning, identification of patterns and self-supervised learning, physical sensors, mobility, navigation and more. And they are looking far beyond replacing the bank teller.
The main capabilities shaping these sophisticated machines are based around cognition and manipulation.
Cognition is the robot’s ability to perceive, understand, plan and navigate in the real world. Better cognitive ability means robots can work autonomously in diverse, dynamic and complex environments.
Manipulation is the precise control and dexterity for manoeuvring objects in the environment. With improvements in manipulation, robots will take on a greater diversity of tasks and uses. The opportunities for IFAs to capitalise, for example by cutting down on red tape, are many.
3. The long-term advantage: cultural change
The most advanced companies are adapting the way they procure services, recruit staff and manage teams. But one of the crucial areas they need to address to get this right is their culture.
To succeed in the digital age, many firms will need to adapt. If the client-centric ethos of the business was based on face-to-face customer engagement – as it is for many IFAs – that will need to evolve.
Engagement of the traditional kind will still be an important factor, but customers may also need to be empowered to access information and take actions for themselves through digital mediums, which will be a significant shift for some advisers.
It is of particular importance for those companies with ‘traditional’ customers, but who already recognise that future growth is going to come from a client base who expect a technology-enabled service.
Executives responsible for client offerings need to adapt to the external perceptions of their company. They must ensure they are seen as being able to operate comfortably with the expectations of 21st century customers.
Similarly, the internal culture needs to value the talents of technology staff in the same way as it values successful relationship managers.
Organisations that previously developed and owned all of their technology as a proprietary advantage will have to adapt in a world in which they leverage third-party fintech and technology companies to provide the best services possible.
All of this will require internal cultural change. Some of it will be complicated, for instance devising new reward structures. Some will be simple, such as changing the dress code from formal business wear to ‘appropriate for your schedule’, but these issues need to be addressed by the company.
We believe that, in the long run, culture is the biggest driver of competitive advantage. Firms should retain their core principles but they should adapt to the changing nature of the business environment.
All eyes on the prize
David Benskin tells Kirsten Hastings that as regulatory change in Hong Kong has opened an opportunity gap in financial advice, Strabens Hall uses a ‘four eyes approach’ with a view to fulfilling the market potential
The Hong Kong advice market has seen a lot of shrinkage since Strabens Hall got its licence in 2014 and launched its RDR model. At that time, business still revolved around high-commission products.
“They’ve had quite a tough time of it,” David Benskin, director of Strabens Hall, Hong Kong, told International Adviser.
The introduction of regulation, specifically GN15 which banned indemnity commission, “helped clean up a lot of the mis-selling and bad practices”. Benskin estimates there has been a 30-40% reduction in the number of advisers during the past five years.
Change brings opportunity
The Hong Kong Insurance Authority has been “reasonably quiet” since it was formally launched in the summer, says Benskin.
“How they have brought the Insurance Authority together makes a lot of sense. From a regulation and oversight perspective, the next couple of years should be positive. The regulators are very much in the right place.
“We’d like to see a little more refinement to make sure clients are getting the protection they need while suppliers are able to operate properly in the market.”
With change comes opportunity, and Benskin admits he rarely finds himself competing against other firms. “There are a lot more clients and potential sources of business,” he says.
‘There is a gap in the market. The $1m-$10m client is pretty underserved at the moment’
David Benskin, director, Strabens Hall
While insurance companies have also scaled back in the region, in terms of the number of companies and products on offer, Strabens Hall has worked with some of the key providers to help develop products, “not specifically for us but for an evolving market with transparency on fees”.
“There are fewer suppliers, but the ones left have really strengthened their propositions.”
Another significant change in Hong Kong during the past five years has been the shift of private banks towards higher-value clients, which has opened up “a really nice gap in the market”, Benskin says.
“The $1m-$10m range of client is pretty underserved at the moment,” he says, which works really well for the firm’s model.
Offering both an integrated financial planning and asset management service, a typical Strabens Hall client is nearing the end of their career, has a few million pounds with different banks in different locations and is looking to do some IHT pre-arrival planning into the UK.
Around 60-70% of the clients are either British domicile or have a British connection, such as a UK property.
“We provide all the advice, execute it and if they don’t have their own asset manager in place, we can help with that in the long term.”
Every piece of advice that gets sent out by Strabens Hall goes through what Benskin describes as a “four eyes approach”, where two chartered financial planners have to sign off the work.
“It can be time consuming but it is a really good quality control mechanism. It helps improve your own work because you are seeing other people’s ideas, which can lead to some healthy debates.
“Often, there is not always one solution to solve a problem, so if you’ve got two people who have reviewed the advice, it can lead to some interesting ideas being generated before the solution is presented to the client.”
The company’s business model is not currently well suited for clients who are still accumulating their wealth but this is something Benskin is interested in exploring during the next few years.
An eye on fintech
“The fintech area is a cool thing to be in at the moment and, inevitably, there are going to be winners and losers.
“There are solutions available in the market that are able to do 70-80% of what companies are looking for but we’re yet to find one that we are completely comfortable with,” according to Benskin.
He is also keeping an eye on developments in the financial technology space in countries such as Australia and the US.
“I like the idea of trying to use something that is established and works well in another country and to work with that provider to bring something into the international space.”
Looking beyond the borders of Hong Kong, Strabens Hall has clients in Thailand, Malaysia, Singapore and the Philippines.
“The obvious area to expand would be Singapore, but it’s very tough to get licensed there and it’s quite expensive.”
Benskin concludes that while this is something the company may consider in future, “we have still got plenty of work to do in Hong Kong”.
The IT \crowd
Tech stocks continue to drive the Asia Pacific ex Japan equity sector and though there is likely to be some differentiation between countries in terms of monetary policy as the easing cycle winds down, those managers savvy enough are spotting growth opportunities there for the taking\\
In USD terms, investors in Asia-Pacific ex Japan equities have been well rewarded during 2017 (to end October) with a gain of just over 32% for the MSCI AC Asia Pacific ex Japan Index.
This also compares favourably with global equity markets, as the MSCI AC World Index shows growth of 19.7%. Looking more deeply into Asia Pacific ex Japan Index returns shows that more than one-third of the growth is derived from just one sector: information technology. Taking this a stage further to the stock level again shows significant concentration of returns.
Four stocks are responsible for 9.2 percentage points of the 13.3% performance shown by the sector: Tencent, Alibaba, Samsung Electronics and Taiwan Semiconductor Manufacturing.
All of these names have performed strongly, particularly the former two, and all were within the top-five biggest index constituents at the start of 2017. With the largest index holdings performing so well, it should come as no surprise that the average active manager underperformed the benchmark in 2017.
Scouting for talent
Looking ahead, the region remains attractive from a relative growth perspective, with GDP estimates running ahead of developed markets, and the consensus view with regard to the key market of China appearing to be more widely held and showing only a small reduction in the rate of growth.
In the short to medium term, there is likely to be some differentiation between countries in terms of monetary policy as the easing cycle unwinds and there are also elections due in a number of countries. All of this should provide opportunities for talented active managers.
‘The largest index holdings performed so well that it is no surprise the average manager underperformed in 2017’
Top performers of the past three years include funds that have a variety of investment styles.
• The Invesco Perpetual Asian Fund has a strong track record versus peers and the benchmark, but it has seen a change of lead manager. William Lam (pictured) took over in May 2017 having been co-manager since 2015, working alongside the team head and long-term manager of the fund Stuart Parks.
Despite the manager change the overall approach of the fund remains intact, with Lam still conducting the stock research and drawing on other members of the team. This includes Parks, who provides top-down views that may guide the stock research effort.
Company research focuses on quality growth stocks, but there is a greater awareness of valuations compared with some of the fund’s peers, and this can be evident at the total portfolio level where a slight value bias can sometimes be seen. The fund holds a Morningstar Analyst Rating of Bronze.
• Veritas Asian has a Morningstar Analyst Rating of Silver and is managed by the highly experienced Ezra Sun. He joined the group in 2004, having previously worked with its founders at Newton. He is supported by a team of three analysts based in Hong Kong and all have worked together for a number of years.
Sun looks to identify long-term themes, and these form the core of the fund. Shorter-term ideas make up the rest of the portfolio and reflect cyclical opportunities or more stock-specific special situations.
Although the long-term focus can result in shorter-term periods of relative weakness, investors have been well-rewarded over the longer term.
The largest funds in the Asia-Pacific ex Japan equities sector include several that have strong performance track records.
• Stewart Investors Asia Pacific Leaders has undergone its share of change during recent years, but the investment philosophy remains unaltered and the broad portfolio biases and relative performance patterns are expected to continue in the same vein.
Since July 2016, the fund has been managed by David Gait (pictured above), who is an experienced investor in the region and has produced a long and successful track record on his all-cap Asia mandate.
This fund has a larger-cap bias and therefore includes some names Gait would not have held in the past. However, his focus on sustainable growth stocks with strong management remains in place and the portfolio has clear biases to areas such as consumer staples.
More recently, markets have not favoured the approach but long-term returns from the strategy are strong and the fund holds a Morningstar Analyst Rating of Silver.
• A Morningstar Analyst Rating of Gold is held by Schroder ISF Asian Total Return. The fund is managed with a benchmark-unconstrained approach that seeks to invest in high return on capital stocks for their upside potential but also shorts less attractive names. Index shorts may also be taken to protect the fund in weak market conditions.
The fund is managed by the highly experienced team of King Fuei Lee and Robin Parbrook (pictured above right, l-r). The managers have worked together for more than 15 years and they are supported by a very well-resourced team made up of over 30 individuals. Returns relative to the index have been strong over time.
The most recent fund launches within this sector took place during 2016, and many of these still have limited assets under management.
• The exception to this rule is the Aberdeen Asia Pacific Equity Enhanced Index. This is a quantitatively managed fund that takes limited bets against the index and it is a very well diversified offering.
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