One false step
It takes many good deeds to build a great \reputation and only one slip-up to lose it
Mark Battersby introduces this month’s \edition by looking at the controversial new partnership between Standard Life and Pheonix Group and asking what it might mean for the future of the industry\\\\\\
The sale of Standard Life Aberdeen’s UK and European insurance arm is the latest move making waves across the international life sector.
As Phoenix Group takes ownership of the assets but sales and marketing remains in the hands of Standard Life’s established adviser team, the nature of the deal is raising plenty of questions but few answers as yet.
The novelty of this partnership puts the deal in relatively uncharted territory and guarantees much ensuing confusion in the market.
The release of a shareholder circular from Phoenix in mid-April will be the next milestone in this journey of discovery, when much-needed light should be shed on the tie-up.
‘The Phoenix Group/Standard Life partnership guarantees much ensuing confusion in the market’
As with any change in life company ownership, this move triggers the need for advisers to do due diligence on financial strength, service and a variety of other factors to meet approval.
This work would also involve assessing what impact the change could have on both existing and new clients.
From Standard Life Aberdeen’s perspective, the deal with Phoenix Group “completes our transformation to a capital-light investment business”, as chairman Gerry Grimstone puts it, which could be seen to undermine his company’s commitment to life business going forwards.
Open to interpretation
Alternatively, this could be interpreted as a way of keeping exposure to a part of the financial services sector without all the burdens that come with it.
That is not the way Standard Life’s rivals are looking at the deal, however, and there is a certain amount of gleeful picking away at the uncertainties around the partnership and whether it can last.
The future of the international life industry has huge potential so the players that get it right should reap great dividends.
Mark Battersby, editor,
A bridge too far?
Phoenix Group’s acquisition of Standard Life Aberdeen’s UK and European life business is unsettling \the offshore bond market, despite both firms saying it’s business as usual. Mark Battersby reports\\
‘The partnership with Standard Life Aberdeen allows both companies to focus on their key strategic strengths’
Clive Bannister, chief executive, Phoenix Group
What does the Standard Life Aberdeen deal with closed-book specialist Phoenix Group mean for the offshore bond business in the UK? Rather than merely the removal of a significant player from the market in one fell swoop, the reality is a little more complicated.
‘Is this bad for the market? It’s far too early to tell and we’ll need to see what longer-term plans Phoenix has’
Mike Foy, chief executive, Utmost
The line from Standard Life Aberdeen was very much ‘business as usual’, with its offshore bond categorically remaining open to new sales, but there has been confusion from financial advisers about how Standard Life can remain an open book if they are selling it to another company.
‘Market consolidators support those who become orphaned by a provider’
Sean Christian, MD and executive director, international businesses, Canada Life International
A spokesperson told International Adviser that while it will take time to “provide definitive answers to all our plans” the Standard Life business in Ireland is “profitable and we are continuing with business as usual”.
“In the longer term, Phoenix will support Standard Life’s existing plans for these businesses and is committed to continuing to write profitable new business in line with existing plans for these markets,” the spokesperson continued.
According to Standard Life, the future ‘ownership’ of the underlying products, such as the International Bond, will be with Phoenix, branded as Standard Life under the new partnership, but it said it would still have some influence by way of proposition development and marketing.
“In relation to the International Bond, the part of Standard Life Assurance that provides this in Dublin will transfer to Phoenix. The International Bond will continue to be provided with the Standard Life name and continue to be serviced by the same people from our Dublin base as they are today.”
The bond will sit on the Phoenix balance sheet, and customers and advisers “will continue to be supported by the same Standard Life colleagues who look after them today and will continue to receive the same high standards of customer service”.
Standard Life said: “Phoenix has committed to retaining both the Dublin and Edinburgh business centres and therefore the quality of staff and systems in place.
“No numbers will change for the time being. If there are any changes to contact details in the future, we will contact advisers with this information.”
To be continued: Phoenix has committed to retaining the Standard Life business centre based in Edinburgh
As for Phoenix Group, a statement on the day of the announcement of the acquisition – of Standard Life Aberdeen’s UK and European life business for £2.9bn – shed a little light on the parties entering a long-term strategic partnership.
In its presentation to analysts, CEO of Phoenix Group Clive Bannister summarised it as “two companies doing what they do best: the largest closed-life consolidator in Europe and a world-class global investment manager with a UK wealth platform”.
“The reinforced strategic partnership with Standard Life Aberdeen allows both companies to focus on their key strategic strengths while generating future value through the new client service and proposition agreement”, Bannister said.
Mike Foy, chief executive of rival international life company Utmost, painted a different picture. He said Standard Life Aberdeen had clearly decided its offshore bond business was no longer core to its long-term strategy, as Axa did with its Isle of Man operation.
“Is this bad for the market? It’s far too early to tell and we’ll need to see what longer-term plans Phoenix has for the acquired business. Does this cause disruption to advisers and customers? Inevitably it does.
“Until Phoenix is clearer on its strategy there will, of course, be doubt in the minds of advisers and customers.
“Regardless of Phoenix’s intentions, however, there is still sufficient choice in the market. Ownership of providers is an easy thing to fixate on, although I accept that changes in brand can cause anxiety.”
Foy emphasised that while a brand could be new, the organisation carrying that brand was a different matter. “The Utmost brand is only 18 months old but the service heritage of the organisation is over 25 years old,” he said.
“The completion of the Generali PanEurope acquisition in May will make Utmost Wealth Solutions a €24bn brand, with an appetite to expand further and open to new business.”
A two-tier system
Canada Life International’s Sean Christian characterises two types of companies emerging in the international life sector: established long-term open-book operators such as his company; and market consolidators, including those acquiring blocks of business with the intention of keeping them open to the market.
Christian said: “There is a place for both types of companies in our market.
“First, there will be those large established providers who will continue to offer new products, strong technical support and a national relationship manager support structure for advisers promoting solutions to both new and existing clients.
“Meanwhile, market consolidators will play an important role in providing ongoing servicing support to customers and advisers who find themselves orphaned by a provider.”
According to Foy, it is less important how many providers are supporting the offshore bond market than how many are actively looking after sales.
He said: “We may find Standard Life International continues in its current form, that it is ultimately closed to new business or even acquired by another active player within the market.
“None of us has a crystal ball but while enough of us are committed to the market, recognising the high net-worth of our customers and the need to provide high-quality customer outcomes, the offshore bond market remains in rude health.”
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Pension\transfer: \a lesson \in risk
Helping clients understand how the \responsibility for risk changes hands \after a defined-benefit scheme is \transferred is critical if they are to \make informed decisions, says \Old Mutual Wealth’s David Denton\\\
It is vitally important to explain risk to clients who are transferring their defined-benefit (DB) pensions.
When clients’ benefits are within the DB world, all the risk is managed by the DB scheme itself and the sponsoring employer. When a transfer into a defined-contribution (DC) pension is completed, then the investment risks and their management become the direct responsibility of the adviser and the client.
Financial advisers need to make sure their clients understand what that means and the outcomes they could face.
A good place to start is with these four concepts – longevity, sequence of returns, volatility and inflation.
Once the client understands these concepts, the adviser can move on to an analysis of their personal circumstances.
A simple example to use in order to explain each of the above concepts is a client who: has £100,000, withdraws £5,000 annually in arrears and achieves 4% per annum growth after all charges.
Taking the example and plotting the outcome, over time, the £100,000 will be eroded by the withdrawals and the fund will run out shortly after the 40th anniversary. If the client lives until this point, they’ll face financial hardship because they can no longer rely on this fund. This is known as longevity risk (see chart 1).
As we know, the investment markets don’t go up every year by a fixed amount – they fluctuate over time.
To demonstrate how the investment markets work and the concept of sequence of returns risk, it’s helpful to use a simple sequence of returns over a five-year period, as shown in the figure below.
The average over this five-year period is 4% per year. We can generate five sequences of return (1) 4%, 6%, 8%, 10%, -8% (2) 6%, 8%, 10%, -8%, 4% (3)… and so on. Just choose a starting point for the sequence and then follow the numbers clockwise. To create a sequence that’s longer than five years, just keep going clockwise around the circle (repeating the five-year cycle).
Then use these sequences within the example and plot the outcome (see chart 2).
This shows that the sequences have different outcomes.
Two of the sequences result in more money remaining after 40 years than the average 4% per annum return scenario used for longevity risk. Three sequences result in money running out sooner.
The worst-case scenario would be that the fund runs out after 33 years.
This clearly demonstrates the sequence of returns risk.
3. Volatility risk
However, what happens if the investment returns go up and down by greater amounts?
We can demonstrate the concept of volatility risk simply by taking the simple sequence of returns and making them more volatile. The average over the five-year period remains at 4% per year (see below).
As before, you can use these sequences within the example and plot the outcome (see chart 3).
This shows that volatility has a detrimental effect for the client.
All of the sequences result in money
running out sooner than the 4% per annum average return.
The worst-case scenario is that the fund runs out after 23 years. This demonstrates volatility risk.
To demonstrate inflation risk we simply need to take the example in figure 3 and increase the rate of withdrawal by inflation. We do this in order to maintain the purchasing power of the withdrawals.
We use an inflation rate of 2% per year and plot the outcome (see chart 4).
This outcome shows all four risks and their combined effect is very different to where we started. The worst-case scenario in this example is the fund running out after 19 years and the best-case scenario is 27 years.
Education is key
Demonstrating these concepts and educating DB clients on the risks they face is central to the PFS Adviser Good Practice Guide for Transfers, particularly around the attitude to risk and sustainability of income.
Once clients grasp these concepts, they can make much more informed decisions and have a greater understanding of their adviser’s recommendations. After all, they will look to them to help them manage these risks throughout increasingly long retirement years.
This article was inspired by the Sequencing of Returns paper written by Milvesky in 2006.
Is your reputation at risk?
Managing client complaints that could put a firm’s good name on the line must be at the heart of a standard planning process. Masthead’s Mimi Pienaar explains how to mitigate the risk and create peace of mind
“It takes many good deeds to build a good reputation, and only one bad one to lose it,” Benjamin Franklin, the 18th century statesman, scientist and founding father of the United States, once said.
His words still hold true for advisers. Have you ever considered the damage that client complaints could have on your business?
An unresolved dispute could end up with a financial ombudsman, leaving your firm liable to compensate the complainant or pay a fine to the regulator. Alternatively, if a news story is published, the negative publicity could severely undermine your reputation.
As such, paying attention to client complaints should be a priority for any firm.
‘Monitoring the types of complaints received and addressing internal processes to mitigate the risk posed creates peace of mind’
Monitoring the types of complaints received and addressing internal processes to mitigate the risk they pose will create peace of mind.
The onus must be on building a business culture that values clients, embedding standard financial planning processes to ensure the provision of high-quality advice. This is essential to creating a sustainable business that delivers on its objectives.
Over the years, there have been many examples of complaints from clients who claim: charges and exit penalties had not been explained; selected funds had performed more poorly than expected; an investment had been mis-sold, or; an adviser had failed to adhere to standard financial planning processes, or to adequately perform a suitability analysis.
In each case, a firm’s reputation and its ability to meet its goals is at stake. A complaint on any of these counts can undermine a firm’s capacity to retain existing clients, attract new customers or meet its financial obligations.
But there are also wider implications to consider. What about the emotional impact on the employees involved? Would trusted relationships continue? Would an adviser feel comfortable remaining with the firm? What would the impact be on an adviser’s family?
These concerns apply equally to clients. Would they be confident in the advice provided? Or that recommended investments would deliver on their promise? In addition, would they feel they had been treated correctly, and be comfortable enough to refer friends and colleagues?
‘The ultimate aim is to retain a strong, positive reputation and a thriving business that increases in value’
Here are some examples for firms to consider when assessing their exposure to risk in the event of a client complaint, and in the absence of a standard financial planning process:
• If reputation and unsuitable advice are not yet in your firm’s current risk management plan, add it. If it is, review the current controls and adjust where necessary.
• The financial planning process should be added to the firm’s operations manual and training should be provided.
• Senior management must monitor adherence to industry standards to track performance.
There must be monitoring of the planning process and of general business management information (see figure on next page).
It must also be used to assess the impact of any complaints on goals and profitability, including how many existing and future income opportunities were lost and how many new clients had to be sourced as a result.
Gathering this information takes time but firms would be wise to consider the alternatives: damage to reputation, a fine or compensating a client.
What is the benefit of adhering to international governance standards, which is in effect just good business practice?
Clients feel valued and experience tangible evidence that the advice provided is based on a process that takes their unique financial needs and objectives into account and delivers on promises made.
This is underpinned by ongoing fair service standards. These are delivered profitably per client segment and focus on building long-term relationships and trust, significantly reducing the probability of complaints.
Referrals increase and this results in new business growth contributing to business goals and objectives. Research by engagement consultant Julie Littlechild shows 57% of clients referred a friend because they faced a financial challenge, not because their friend requested a referral.
In other words, the leading driver behind referrals is that a client has a friend in trouble and proactively reaches out to help.
Paying attention to what takes place in the business on a day-to-day basis means you can detect and manage risk.
The ultimate aim is to retain a strong, positive reputation and a thriving business that increases in value.
As the EU strikes three tax havens from \a blacklist discredited from the outset, \Mark Battersby reports on yet another fraught month in the world of regulation\
A certain irony pervaded recent regulatory news. Just as HM Revenue & Customs fired a warning shot that threatened heavier fines for tax evaders with overseas assets, the next chair of the UK’s Financial Conduct Authority admitted an error in judgement in using a tax-avoidance film scheme promoted by Ingenious.
And with the heavily criticised EU tax-haven blacklist set to lose three more names, and proposed pension freedom rules in the Isle of Man attracting the ire of the chair of the jurisdiction’s association of pension scheme providers for “a critical lack of transparency”, there is an unsatisfactory flavour to the way some rules are playing out in the wider world.
HMRC cracks the whip
Tougher penalties from HMRC, which could mean evaders are hit with fines of up to 200%, will take effect from 1 October 2018. This move comes as the UK government aims to ensure there are no safe havens for taxpayers that seek to evade paying what they owe. HMRC said, “as always”, it would “prosecute the most serious cases of tax evasion”.
‘The credibility of the EU blacklist must be restored’
Sven Giegold, member of European Parliament, Germany
A consultation on how the UK should legislate to extend the time limits to assess tax in cases involving offshore income, gains or chargeable transfers will close on 14 May.
The limit would triple from four to 12 years under the proposals.
The awkward moment for incoming FCA chair Charles Randell, a former City lawyer and government adviser during the global financial crisis, came when he appeared before the Treasury Select Committee and announced the Ingenious Film Partners 2 scheme had been recommended to him by a financial adviser.
Randall is expected to take up the role at the regulator in April 2018.
EU under fire
Meanwhile, the EU will remove Bahrain, the Marshall Islands and Saint Lucia from its tax haven blacklist, leaving only six jurisdictions of the original 17 listed, according to a document seen by news agency Reuters.
In a debate involving MEPs from across the political divide, many deplored the lack of transparency surrounding the compilation of the EU blacklist.
They claimed the lack of detail about the criteria for adding a country to the list and, more importantly for its removal, had completely undermined its credibility.
As a result, the MEPs said the list was an ineffective tool in the EU’s fight against money laundering, tax avoidance and tax evasion.
German politician Sven Giegold said he would be demanding “all documents relating to the screening of third (non-EU) countries for the EU’s blacklist of tax havens”.
“The credibility of the blacklist has to be restored,” Giegold said.
In the case of the new Isle of Man pension freedoms, there was “a critical lack of transparency” from the Isle of Man treasury minister ahead of the introduction of the regulation, according to Dougie Elliott, chairman of the IoM Association of Pension Scheme Providers.
Elliott said he was in favour of pension freedoms and that the measures announced by treasury minister Alfred Cannan on 20 February were “a sensible end result”.
“However, with regard to the lead-up to the introducing of pension freedoms to the island, I cannot help but agree with the speaker of [the IoM parliament] Tynwald, Juan Watterson, who said there was ‘a lack of transparency’ by the treasury minister in relation to the budgeting process.
“We were in the dark as to what would be included, which is strange as we have historically had a great relationship with government,” he said.
‘We were in the dark in the
run-up to the Isle of Man pension freedoms’
Dougie Elliott, chairman, IoM Association of Pension Scheme Providers
Policy to protect
In Hong Kong, if plans to introduce a mandatory industry funded compensation scheme come to fruition, policyholders will be protected if their insurer becomes insolvent.
Hong Kong’s Panel on Financial Affairs has outlined plans for a policyholders’ compensation fund.
The aim is to “better protect policyholders’ interests, maintain market stability in case of insurer insolvency and enhance public confidence and competitiveness of the insurance industry”, the research office of the Legislative Council Secretariat said.
During the past two decades, Hong Kong has experienced only a handful of insolvencies involving small non-life insurers. However, the research office stated that the lack of a protection scheme “contrasts with many developed economies”.
The Singapore and UK compensation funds were cited as examples of similar schemes. Singapore introduced its Policy Owners’ Protection Scheme in 1986, while the UK Financial Services Compensation Scheme was launched in 2001.
Bigger picture: HK aims to ‘better protect policyholders’
Time to talk about tax
How the UK Trust Register is ringing in big changes for non-UK trustees and beneficiaries
Non-UK trustees who administer trusts that hold UK property, shares or other assets need to be aware of the new trust registration requirements.
The rules came into force on 26 June 2017 as part of the implementation of the EU’s fourth Anti-Money Laundering Directive.
Under the directive, a UK-taxable trust that holds assets in the UK or receives income from a UK source may be required to register the trust with HM Revenue and Customs (HMRC) under the Trusts Registration Service.
Registration is not limited to UK-resident trusts; it is vital that non-UK trustees are aware of what needs to be disclosed to HMRC as it may include trusts where the trustees, beneficiaries and protector are located outside of the UK.
When to register
A trust must be registered if it is deemed ‘UK taxable’, for example, if it is liable to pay income tax, capital gains tax, inheritance tax, stamp duty land tax or stamp duty reserve tax in the UK, and if any of the following conditions apply:
• all individual trustees are UK tax resident;
• it has a corporate trustee incorporated within the UK;
• it was funded by someone who was UK-resident or UK-domiciled at the time and it has at least one UK trustee; or
• it has no UK resident trustees but has UK assets or income from a UK source.
What to register
The amount of information that is required is rather substantial and covers various aspects of the trust, including its beneficial owners and any potential beneficiaries (see below).
The definition of ‘beneficial owners’ is broad. It includes the settlor, trustees, ascertained beneficiaries, the class of persons in whose main interest the trust is set up, and any other individual with control of the trust.
‘It is vital that non-UK trustees are aware of what needs to be disclosed to HMRC’
This could be a protector, enforcer, guardian, appointer and anyone else who has a power to:
• dispose of, advance, lend, invest, pay or apply trust property;
• vary or terminate the trust;
• add or remove a person as a beneficiary, or from a class of beneficiaries;
• appoint or remove trustees or give another individual control over the trust; and
• direct, withhold consent to or veto the exercise of the four powers mentioned immediately above.
Under the regulations, the registration deadline for a trust with a tax liability in 2016/17 was 31 January 2018. However, the HMRC later extended the deadline to 5 March.
If a trust only meets registration criteria in a subsequent tax year, the deadline will be 31 January at the end of the relevant tax year.
Succession planning \in a globalised world
In the second of a series of three real-life case studies, Darren Jones introduces a high net-worth \family of mixed ethnicity, where the focus is on succession planning, IHT and forced heirship
The husband, aged 61, was born and educated in India before moving to the UK where, as a young man, he built up a retail chain, which he sold in 2010 for a substantial sum. He married a British lady, now 57, and they have two daughters, aged 29 and 27.
The couple lives in Dubai but their daughters, both of whom were born, educated and live in the UK, are married to men of British origin and domicile. Neither of them have children but they both eventually hope to start a family.
The immediate family relationships are stable and none of them have any intention of ever living in India. However, the husband has three brothers still resident in India, with whom he has a strained relationship and he desires that no wealth should pass to them or their families on his death.
The couple has £5m in liquid assets held in cash and investments, almost entirely in the husband’s name. They have four UK properties, all mortgage-free and let, worth £1.4m. All four are owned in the husband’s name and show only a small capital gain. Their main home in Dubai is valued at AED6.5m (£1.3m) with a mortgage of AED3m and is their only major jointly-owned asset.
The husband is semi-retired with UAE business interests, but plans to fully retire within two years. They have no immediate intention to return to the UK but are likely to do so for part of the year if they have grandchildren. They will keep a property in Dubai but hope to downsize with no mortgage.
Once fully retired, they expect to require £100-120k per annum of additional income, net of tax, from investments.
Downtown: the couple’s main home is in Dubai
Man and wife were particularly concerned about forced heirship and required a structure to be put in place that would ensure assets pass appropriately down their bloodline. Additionally, given substantial, multi-jurisdictional assets, a mixed UK domiciled/non-domiciled marriage and UK inheritance tax (IHT), they required planning.
The double taxation agreement for IHT between India and the UK also needed advice and it is important to consider in whose name assets should be owned, now and in the future.
The desire to clear their mortgage on the UAE property had to be discussed, as did how best to produce the additional income in retirement, and whether the possibility of future UK residency will affect that planning.
‘It is important to consider in whose name assets should be owned, now and in the future’
I first established the domicile of each family member. The husband, who was born in India after the partition in 1947 to Indian parents, is not UK-domiciled by origin. He was UK-resident for 31 years until 2012 and is no longer deemed domiciled.
He has no definitive intention to live permanently in the UK in the future, so, at present, he is considered non-UK-domiciled.
Whether he may become UK-domiciled in the future must be considered with reference to the 1956 treaty provisions, which preclude taxation of non-UK situs assets for those individuals deemed UK-domiciled, but also domiciled in India under local domestic law, the latter of which is not clear in this case.
As a result, we planned on the basis of non-UK-domicile status today but with the option of becoming UK-domiciled in years to come.
The domicile of the wife is clear; born to parents of UK descent, she has a UK domicile of origin. Married after 1974, she does not have a domicile by marriage and has not established a domicile of choice elsewhere.
Despite being born in the UK, the domicile of origin of the daughters is arguably not UK, given their father had only resided in the country for a few years before they were born. They currently intend to remain in the UK permanently and do not have a domicile in India under local domestic law. As a result, they are UK-domiciled at this time.
Irrespective of domicile or residency, the UK properties will be subject to UK IHT on second death. For simplicity, life assurance could be arranged in trust to cover the tax liability but the couple decided they had liquidity to pay the tax should they both die prematurely, and further planning should be considered in due course.
Capital gains tax is not an issue due to negligible growth, and income tax is payable on rent in excess of the personal allowance. The couple will occupy one of these properties if they return to the UK and require a UK will to ensure succession to their daughters.
‘International trust planning is underused and the benefits of succession planning are being missed’
The UAE property requires planning. For succession purposes, it is sensible for the downsized property to be in the name of the wife only. A suitable will can then pass ownership to the daughters and should avoid forced heirship to family members in India.
However, unless a mortgage is maintained, this may generate a UK IHT charge.
Alternatively, maintaining joint ownership with a mortgage would help, with only the equity at risk of passing to primarily male heirs. The outstanding debt and joint ownership, plus the possible non-domiciled status of husband at the time, will negate IHT.
Planning with the cash and investments was kept simple. The advice is to maintain a suitable cash balance outside of the structure with the remainder in an offshore portfolio bond in the name of the husband.
Once fully retired and potentially UK-resident, gross roll-up will apply and 5% tax-deferred withdrawals will cover any extra income needs. If extra capital is needed, there is a build-up of time-apportionment relief and top-slicing, plus the option of assigning segments to the most appropriate taxpayer.
Non-domicile status allows the bond to be settled into a settlor included discretionary trust as excluded property.
Succession planning naturally occurs as desired, along with asset protection in the event of, say, a divorce in the family.
Interest-free loans to UK-domiciled beneficiaries, not capital advancements, will aid IHT planning for future generations by creating debt on their estate.
London’s calling: the couple may move back to the UK
While the values are above-average, this is not an untypical expat family structure. I am finding significant opportunities for excluded property provision rather than allowing a future UK-deemed domicile to provide IHT issues with relevant property.
Trust planning internationally is underused and the benefits of succession planning, asset protection and the use of loans from trusts to create additional debt are being missed.
Watch out for my third and final multi-jurisdictional case study next month.
Hacks \to crack \cyber \crime
In the second of three articles on \General Data Protection Regulation, Intelliflo’s Nick Eatock offers practical guidance on putting your business in safe mode and securing it against cyber attacks\\\\
We must applaud the digital revolution when it comes to managing finances, particularly as growing numbers of people move around the world, living and working away from their domiciled residence.
Sadly, this portability attracts a sinister element, with criminals worldwide employing sophisticated techniques to part innocent people from their hard-earned cash.
In order to protect yourself and your clients you must take a ‘belt-and-braces’ approach; and there is no room for complacency.
This will become even more important after 25 May, when the General Data Protection Regulation (GDPR) comes into force across the European Union.
The regulation requires all advisers to operate stringent data protection processes. It will also allow a client to sue a firm where it has failed to ensure their data is safe.
With the clock ticking and the cyber-criminals evolving ever-more sophisticated scams, here are some tips on how to protect your business and your clients’ assets.
Embed your strategy
Taking the time to articulate a cyber-security strategy should ensure you have an overarching approach to preventing your firm and its clients from falling victim to crime.
Build in key aspects to your strategy, such as improving incident responses. Staff should also be educated to avoid the trap of solely focusing on threat-detection solutions.
Keep up with updates
While downloading new security updates can be annoying, it is essential that you keep your software and devices – including mobile phones and tablets – up to date at all times.
Software companies invest millions in developing ways to stop cyber-criminals, and software updates are developed in response to known weaknesses so downloading them immediately is a no brainer.
Secure your browser
Do not take your web browser’s security for granted. Make sure you are using the latest version. Automatic updates can be switched on by simply ticking a box in the ‘settings’ section of the browser.
Last year, Intelliflo identified 10% of its customers were using unsupported browsers or operating systems that could not receive security updates. This meant they were open to cyber-attacks and viruses.
Training all staff to fully understand the rules governing data is an essential element of complying with GDPR. It also helps to mitigate the risk of data falling into criminals’ hands.
Under GDPR, any data breach will have to be reported to the UK’s Information Commissioner’s Office (ICO) and, in most cases the person whose data has been accessed, within 72 hours.
During 2017, the ICO publicly identified 96 data breaches, 11 of which involved individuals working for firms that held data. Offences included the unwarranted accessing of personal data and the sending of sensitive data to personal email accounts without reason.
It also reprimanded public bodies. For example, the ICO fined Greater Manchester Police £150,000 in May last year after three incidents where sensitive personal information was lost in the post.
In each of these cases, staff training and robust processes would have mitigated the risk of the breaches, or at the very least offered some protection to firms by demonstrating they had operated due diligence in having processes in place aimed at ensuring safe data management.
Back up data
Ransomware attacks increased by 36% in 2017, according to online security expert Symantec. Such attacks are all about disruption, stopping your access to files and data.
You can help prevent your business being crippled by such attacks if your data is backed-up offsite and stored, so an attacker cannot access and tamper with it. Cloud-based service providers invest heavily in security and are ideal for this.
Be forensic with due diligence
Cyber-security services are available to help you but it is essential you carry out detailed due diligence before opting to use one.
You should ask how your data will be stored; if the services offered are comprehensive; and whether or not they comply with the rules and regulations that govern your activities.
All providers should offer encryption and two-factor authentication but examine their service level agreement to check everything meets with your needs and expectations.
Guiding \the way
Josep Soler-Alberti founded the \European Financial Planners \Association in 2000 and it is now \the biggest adviser training body \on the continent. He tells \Will Grahame-Clarke about \his mission to educate\\\\\\\
Barcelona-based Josep Soler-Alberti is a passionate financial planner: as ardent about working out what clients’ objectives are and what it takes to get there as he is about getting the plan itself right.
He says of his early motivation: “There is tremendous information asymmetry. People are not dealing with their personal finances in an adequate way. There is a huge demand for advice that is free from conflict of interests.
“Most customers have a longer-term horizon than they initially believe they do,” he says of his advice philosophy.
“In conversation they realise a much longer-term horizon is right for them. European clients are also too conservative. They don’t hold much in equities, certainly compared with Anglo-Saxons.
“Most clients lack clear knowledge of themselves. The first task is to educate them and show them certain risks and what they can expect in return for taking those risks.
“A client then realises they have a different risk profile. They come to understand their objectives, which then need to be addressed through savings and investment.”
‘People are not dealing with their finances in an adequate way. There is a huge demand for advice that is free from conflict of interests’
Josep Soler-Alberti, chair, European Financial
In 2000, Soler-Alberti founded the European Financial Planners Association (EFPA) to help the industry to professionalise and prepare for impending regulation.
During his 18 years as chair he has built a team at EFPA that is now the biggest adviser training and standards organisation in Europe, with 250,000 members across the continent.
“The profession needed to improve its standing and self-regulate before someone else came in,” says Soler-Alberti. “We also had a clear mission to help clients understand that financial advice was really needed.
“We have made a lot progress in Spain and Italy and we are making headway in France. The EFPA is still small in Germany and in the UK I think we will make a big leap with the Personal Finance Society (PFS).”
Last year, the PFS announced a partnership with the EFPA to provide qualifications passports across Europe. The deal will allow UK advisers to move to Europe and convert their UK qualifications into local equivalents.
Soler-Alberti’s desire to build bridges between UK and continental advisers remains undimmed in spite of Brexit.
“I cannot be positive about Brexit,” he concedes. “It is going to be a negative for financial services in London and will loosen the links between Europe and the UK.
“With Brexit, it is clear for the profession in the UK that they need to rebuild bridges with the continent. Through that, I expect the EFPA will be more evident in the UK.”
Co-operation and partnership will, he believes, become more important post-Brexit, regardless of the agreement reached.
Brexit isn’t the biggest piece of work in Soler-Alberti’s in-tray, however. “It is an enormously busy time,” he says of the regulatory burden being generated by legislators. “We are advising our members and providing content for them.
“We recently did some work on divergences in the implementation of Mifid II across Europe and how it relates to quality, and we will share that information with the European Markets and Securities Authority.”
Ultimately, Soler-Alberti is confident the industry can handle the pressure and that advisers will prosper once they are bedded in.
‘The advice gap exists because of a lack of education and financial literacy in most European countries’
The great divide
Soler-Alberti explains the advice gap is a huge responsibility and that all advisers have the ability to address the problem.
“The advice gap exists because of a lack of education and financial literacy in most European countries. Reducing that gap is the first thing that must be addressed.
“We must also talk about guidance and the solution we find needs to be balanced with an expanded role for quality advice.”
The EFPA also supports non-independent advice, providing it is transparent and education levels can be addressed.
As part of this approach, according to Soler-Alberti, ‘robo-solutions’ could offer “great supporting instruments” for the adviser but they will never replace planners who can develop a client’s intentions and connect them to a viable solution.
“What is important is to be flexible. To talk and listen, and work to improve the sector for the benefit of our customers,” he says. “There is no magic recipe at the moment.”
As the European economic and \political situation stabilised during 2017 \Europe ex UK equities gained muscle\\\
After some uncertainty in the run-up to the French presidential election in April, European ex UK equities enjoyed a reasonably strong year in 2017. The MSCI Europe ex UK index generated a total return of over 11% in euro terms, which translated into nearly 16% in sterling, aided by growth in earnings and strengthening economic data.
Active managers in the Europe ex UK Large-Cap Equity Morningstar category also had a good year, and the average fund outperformed the index by 1.2%.
In a reversal of the value leadership in the second half of 2016, this success was helped by the average fund’s slight bias to growth, which outperformed value during 2017 – with MSCI Europe ex UK Growth returning around 18% in sterling terms versus 13% for MSCI Europe ex UK Value.
‘Performance was helped
by the average fund’s slight bias to growth, which outperformed value
At the beginning of 2018 we saw the return of higher volatility, prompting another shift on the value versus growth axis. Highly rated growth stocks, after a sustained run of performance for a prolonged period, fared worse than value stocks from the start of this year to the end of February.
Despite the falls in the index, evident particularly during February, the picture emanating from European macro data has remained broadly positive.
For example, eurozone GDP data for the fourth quarter of 2017 was released recently and it clearly shows a rise in the annual pace of growth.
On the plus side, market falls such as this can create opportunities for capable active fund managers, particularly at a stock-specific level, to add value for their investors through stock selection and overall portfolio positioning.
A number of active funds rated positively by the Morningstar analyst team are detailed in the sections that follow.
‘Despite the falls in the index, eurozone GDP data for Q4 2017 shows a rise in the annual pace of growth’
• Blackrock European Dynamic has a Morningstar analyst rating of silver and is managed by Alister Hibbert (pictured above).
The fund aims to unearth companies with medium- to long-term earnings power significantly higher than the market and not factored into the share price.
Top-down considerations come into play as a result of team discussions on themes and sector trends that aim to prioritise the trends in research.
The portfolio is unconstrained and the manager does not shy away from making big sector bets where he has strong conviction. The fund has a strong track record during Hibbert’s tenure from 2008.
• Threadneedle European Select has a Morningstar analyst rating of bronze and has been managed by David Dudding (pictured above) since 2008.
Dudding’s investment philosophy has remained the same throughout his career as he targets firms that exhibit pricing power and high barriers to entry.
This leads to a concentrated portfolio of sturdy growth companies, and the portfolio is constructed from the bottom up with latitude to deviate from the benchmark’s sector and country weightings.
The fund has below-average volatility, thanks to a preference for established franchise companies with low levels of debt.
• Fidelity European has a Morningstar analyst rating of bronze and is managed by Sam Morse (pictured above). He favours a bottom-up investment approach, conducting his own stock analysis as well as making good use of the extensive European analyst resources at Fidelity. Dividend growth is key to this process, as Morse views dividends as an indicator of a company’s ability to grow in a sustainable manner, and he looks to hold high-quality names over the medium to long term.
• Jupiter European, rated gold by Morningstar, has been managed by Alexander Darwall (pictured above) since 2001, providing a high degree of stability for investors and a consistency of investment approach.
The team acquires an in-depth understanding of how a company works by maintaining regular direct contact with its management. Darwall prefers firms with proven track records, clear business plans, where management acts in the interest of shareholders, and above-average earnings growth prospects. He likes firms with differentiated products or services, a dominant market position and thereby superior pricing power.
• Martin Skanberg (pictured above), manager of the silver-rated Schroder European Fund, takes a measured approach to constructing his portfolio, and the process is predominantly bottom-up in nature.
He is style-agnostic, assessing each stock in terms of a company’s growth, margins and returns, implied market valuation and share-price behaviour. That said, he is willing to tilt the portfolio to reflect areas of opportunity.
The fund has a strong long-term track record under Skanberg’s management.
• FP Crux European Special Situations, rated bronze, has been run by Richard Pease since its launch in 2009, shortly after he moved to Henderson. He left Henderson in 2015 to found Crux Asset Management, transferring over the assets with him.
At Crux, his process has remained unchanged. He seeks businesses with sustainable returns, led by quality management with proven track records.
• DNCA European Select, launched in 2017, is run by Isaac Chebar. The investment approach is the same as the one Chebar uses on his pan-European strategy to good effect, targeting stocks that are deemed undervalued.
He assesses various valuation multiples in a historical context and compares them with their mid-cycle levels. Meanwhile, he tends to stay away from high-growth stocks and companies with weak financials.
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