How advisers can harness robo \to service the whole family
Mark Battersby introduces the April \edition with a word about this year’s <i>International Adviser</i> Best Practice Awards\\\\\\
An exciting opportunity awaits advisers as the 2018 International Adviser Best Practice Awards, now in its third year, has opened for entries.
Europe is the first of six regions to accept submissions, with a deadline for completed entries of Friday 15 June.
The UK, Hong Kong and Singapore regions will go live from Monday 23 April, South Africa from Wednesday 2 May and the Middle East from Tuesday 29 May.
Brought to you in partnership with Old Mutual International, the awards recognise financial advisers that are putting best practice at the heart of their business models.
This year we have fine-tuned some of the categories. The Excellence in Marketing award will now incorporate social media, to reward an innovative approach to multimedia.
Measure of success
A new Excellence in Operational Efficiency award recognises top-class, cost-efficient internal systems. It also examines how a firm collects, manages and employs data.
This is now a key requirement in light of the European Union’s General Data Protection Regulation (GDPR). After four years of preparation and debate, GDPR was approved by the EU Parliament on 14 April 2016 and will come into force on 25 May 2018.
Submissions for Best Adviser Firm must now include entry in at least one other category. Successful firms will have a comprehensive, business-wide strategy for growth and development, with a consistent track-record and demonstrable sustained success across the business.
This is a chance for advisory firms to showcase the high professional standards they have worked so hard to achieve.
Click here for further details.
‘The International Adviser Best Practice Awards 2018 recognise financial advisers
that are putting best practice at the heart of their business models’
Mark Battersby, editor,
Trials of transition
William Grahame-Clarke asks what the agreed Brexit transition arrangements \will mean for the industry
On 19 March, the UK and EU27 agreed on transition arrangements for Brexit. UK negotiator David Davis said the plan, which will run from March 2019 to the end of 2020, will provide “the certainty demanded by businesses and citizens”.
But what are the implications of this for clients and advisers?
Davis insisted that the arrangement will “give everyone the time they need to prepare for the future by ensuring our access to each other’s markets continues on current terms”.
He conceded, meanwhile, that the transition meant a good deal on Brexit “is closer than ever before”.
Michel Barnier, chief negotiator for the EU, said: “A decisive step remains a step. We are not at the end of the road. Nothing is agreed until everything is agreed.”
Importantly, both for clients and the firms that serve them, EU law would continue to apply in the UK during the transition period. This includes the passporting regime through which many non-UK providers operate.
‘The agreement reached is not final, it just forms part of the withdrawal of the UK’
Simon Gorbutt, associate director, wealth structuring solutions, Lombard International Assurance
Simon Gorbutt, associate director of wealth structuring solutions at Lombard International Assurance, expressed caution about the transition arrangements.
“The agreement reached to date is not final. It forms part of the withdrawal agreement that will ultimately regulate the UK’s exit, which is yet to be concluded,” he said.
‘If we have a hard Brexit, France will become the leading financial centre in Europe on many measures’
David Charlet, chair, Anacofi
“In view of this the government has announced plans for a temporary regime that would allow non-UK firms to continue their activities in the UK in the event that a withdrawal agreement is not reached.
“Regardless of the conclusion of a withdrawal agreement, Brexit will not, of itself, invalidate existing contracts.”
Gorbutt said existing investment-linked insurance contracts will remain in force and subject to current UK domestic tax rules, which do not distinguish between contracts issued within or outside the single market.
Additionally, the UK’s regulatory treatment of financial services is largely territorial. Its approach to non-UK firms is not rooted exclusively in EU norms, meaning that even in extreme circumstances firms have options for the servicing of their UK client base that do not rely solely on single-market freedoms.
‘The transition announcement at last offers some degree of certainty, which will always be welcomed’
James Green, head of western Europe, Devere Group
“Clients are likely to be best served by insurers that are not only EU-focused and have an existing track record in working with residents of non-EU and non-EEA countries, where freedom of services rules, including passporting, have never existed,” said Gorbutt.
“Those insurers should be the most adept in handling any turbulence from Brexit while continuing to deliver a high level of service.”
Davis: ‘A good deal is closer than ever before’
David Charlet, chair of France’s adviser association Anacofi, said the French stood to gain most from Brexit: “Brexit is not a good thing and for most EU27 countries it will not change much.
“However, Brexit will make a great difference in France. This is because in Europe we have two countries with big motives in finance, the UK and France. If we have a hard Brexit France will become the leading financial centre in Europe on many measures.
“Many firms are bringing functions back to France and some are setting up in the UK as there is a lot of common business between France and the UK. Germany, of course, is the other big financial centre but we don’t have such close connections there.
“If Brexit goes ahead, UK advisers will be freer to work with clients from outside of Europe. The truth is that the UK and France both need a deal on passporting, and the negotiations will tell us what that should be.”
After the status quo
James Green, Devere Group’s head of western Europe, said the transition period underlined the need for cross-border advice: “The Brexit transition announcement at last offers some degree of certainty, which will always be welcomed by the financial sector.
“Whichever way you look, during the Brexit transition period and beyond, there will be an increase in demand for financial advisers in Europe with cross-border expertise.
“There will be a growing number of individuals and organisations considering their options and seeking alternatives as the status quo is shaken up.”
London-based international financial adviser Dean Mullaly of Mark Dean Wealth Management said he would prefer a concrete deal to be struck sooner. “All we have done is prolong the uncertainty. Hopefully it will lead us to knowing what we are transitioning to,” he said.
“What is most important is passporting rights, and we have no idea if they will be honoured. There is talk of buying the passporting rights we need. I would support that, otherwise a lot of jobs will be lost.
“It is in the interests of both the UK and the EU27 that we reach a reasonable deal, and there must be give and take.”
It is evident that while the transition deal has been agreed, the EU and UK have begun to drift apart psychologically. The UK remains a member of the EU and the consequences of leaving are as yet unknown.
The political appetite in the UK to revisit the referendum decision is not there either. Despite ‘remainers’ probably holding a majority, theirs is a broad and fragile grouping.
Advisers should follow the lead of James Stewart, head of Brexit at KPMG UK, who believes businesses need to stop seeing Brexit as an exercise in damage limitation and instead reprioritise entrepreneurism.
Do international life companies have the right range of products for clients in your region?
- Range is ideal
- Too few products
- Products are outdated
- Too many products
- Too expensive
Hearts and minds
Figuring out how to retain your ideal clients while attracting new ones is key to a sustainable business model
To run a sustainable financial advice business in an increasingly challenging environment financial advisers need to rethink where their time is spent and focus their efforts on attracting and retaining their ideal clients.
Advisers across the world need to wear different hats in order to comply with rising standards in competence and meet ever-changing regulatory requirements and business standards.
These standards focus on treating customers fairly and professionalising the financial services sector.
Growing demands are made on their time and unless a firm is large and has a strong infrastructure, it is increasingly difficult for advisers to generate new business.
Masthead research, conducted in November 2017, confirms that advisers’ top concerns are running a sustainable business, the growing burden of administration and not having enough time to generate new income streams.
These issues, combined with changing consumer expectations of advisers and greater demand for quality service, relationships based on trust and the delivery on promises based on technical competence and suitable product solutions, mean there is no longer the time or luxury to have lots of clients.
The administrative and regulatory requirements are too cumbersome for this, so it is necessary for advisers to identify, attract and retain the right clients for your business.
‘There is no longer the time or luxury to have lots of clients. It is necessary to attract and retain the right ones’
Start by finding out who your clients are: their demographics, personal characteristics, relationship with you or your business, and challenges and fears or financial objectives.
From a business perspective, consider the income you receive from them, their lifetime value, extended family, number of referrals given and customer loyalty.
Think about the technical competence required to fulfil their financial needs and objectives, your back-office infrastructure, the variety of services you offer and your processes to follow a structured financial advice process, which includes reviews.
Are you are aware of what your clients value and expect from you to drive loyalty?
This could include the cost of your services, the quality standards they value, including responsiveness and personal interaction, and what they need to trust you and your business.
Do they feel you are acting in their best interest and protecting their confidentiality and data?
The next step is to segment your clients using a client segmentation model and identify the top 20% that generate 80% of your profit. As these are your ideal clients, design a convincing value proposition for this group that states how your services and products will solve their challenges and fears and meet their needs and objectives.
‘How can you attract and retain clients? Think about how you can make strong connections with potential and current clients’
Thereafter, craft a marketing plan to support your business goals and objectives. This will help clarify how to allocate your time.
Think about where you will find the clients you want and how you will attract and retain them. Consider how you can make the strongest connections with potential and current clients.
Such plans may include:
• setting up client referral agreements with professionals such as accountants;
• community networking;
• hosting introductory meetings for clients’ friends and colleagues;
• intimate social events for top clients who provide 5% of your profit;
• client appreciation events;
• presentations on specific financial challenges such as planning for retirement, managing money in a tax-efficient manner or children’s education;
• creating a memorable experience; and
• involving a client’s family, especially if the client is older than 60.
‘The key outcomes of your efforts should be client and income retention, as well as referral relationships’
For maximum impact at events, carefully consider your invitation list. You could group current or potential clients by age, gender and geographic location, as well as personal interests, hobbies and lifestyles.
Exclusivity generates appeal, and people who know they have been chosen may feel more appreciated, attend the event and bring a friend or colleague with a similar profile.
Planning events for the year ahead offers a targeted and planned approach to generating income from existing and new clients. In addition, you can calculate and allocate the resources you need upfront.
The key outcomes of your efforts should be client and income retention, as well as the generation of referral relationships.
Attracting and retaining clients while delivering a service that meets high standards of fairness is key to running a sustainable business and complying with treating customers fairly regulatory requirements.
The Isle of Man once again finds itself \centre stage as a regulatory storm brews. \Mark Battersby reports
Isle of Man regulatory
Isle of Man regulation that governs how life companies conduct business globally is looming but there are disapproving noises from some parts of the industry.
Some advisers believe that commission disclosure is a bad move and if all the Isle of Man-headquartered international life companies toe the line, the logical conclusion would be to take their business to companies not domiciled in this jurisdiction.
An industry insider told International Adviser that more and more companies are reaching out to financial advisers and promoting non-Isle of Man-based providers.
Further twists and turns can be expected before the Isle of Man’s Conduct of Business Code comes into force on 1 January 2019, when the inevitable shake-out will affect both advisers and providers.
‘More and more companies are reaching out to financial advisers and promoting non-Isle of Man-based providers’
Back on the
The EU Commission has announced that it will counter aggressive tax practices by aiming sanctions at those it has blacklisted as non-co-operative tax jurisdictions.
The move is an attempt by the commission to deliver on a pledge to ensure its blacklist is backed up by effective counter measures. It said the measures “mark the first step” in stemming the movement of EU funds through blacklisted jurisdictions.
“[The guidelines] will ensure EU funds do not inadvertently contribute to global tax avoidance,” the commission said.
The commission has now set its sights on the US as a potential candidate for the EU tax-haven blacklist. This came to light after media reports that a confidential letter, sent by the EU on 15 March, requested that the OECD analyse recent US tax reforms.
Isle of Man chief minister Howard Quayle is one of several heads of jurisdiction across the world to react publicly to the EU measures.
While giving evidence to the Isle of Man’s economic policy review committee Quayle said the Isle of Man was in “very real danger” of being put on the tax-haven blacklist.
He said the island’s financial services authority was hard at work making efforts to address “a number of emerging threats on the external front”.
The Isle of Man was not among the 18 countries blacklisted in December 2017. The list has been updated several times since then and currently contains nine jurisdictions.
However, the Isle of Man is on the so-called EU ‘grey list’.
Jurisdictions named on this list have pledged to make changes to their tax practices before December 2018. If they fail to do so, there is a possibility they will be moved to the blacklist.
The UK regulator has “no immediate plans” to ban trail commission on legacy investment products.
The announcement was part of a wide-ranging policy statement from the Financial Conduct Authority (FCA) which looks to shake up the asset management sector.
The Retail Distribution Review (RDR), which came into force in 2012, banned trail commission on new products, but commission is still paid by investors on advised share products bought prior to 31 December 2012.
The FCA began a consultation process last June to decide whether trail commission on share products sold prior to the RDR should be removed.
The personal touch
Personalised portfolio bonds are tailor made for expats moving from country to country, providing them with a wide range of investments and juicy tax breaks\\\
Personalised portfolio bonds (PPBs), often promoted simply as offshore bonds, have a place in the toolkit of all IFAs providing advice to expats that need to move from country to country, require a wide range of investments and various tax benefits.
While financial planners should never put themselves forward as tax advisers, deferred tax planning is where offshore bonds provide benefits. There can be pitfalls, however, which are covered in this piece.
A PPB is a life assurance or capital redemption policy that provides investors with the freedom to invest in a wide range of assets. These assets could include different risk-rated investment funds and cash deposits, as well as individual equities quoted on any recognised exchange, and both corporate and government treasury bonds.
‘A PPB is a life assurance or capital redemption policy that provides investors with the freedom to invest in a wide range of assets’
For advisers with no time to manage the investments within the bond, it is possible to appoint a stockbroker or fund manager.
It is the life assurance company rather than the policyholder that owns the property, which in turn determines benefits payable under the life assurance or capital redemption policy.
As the policyholder has the ability to select the property that determines the policy benefits, the policyholder retains nearly all the advantages of direct personal ownership of the policy.
As the property is held in the wrapper of a life assurance or capital redemption policy, the policyholder does not have to pay tax on dividend and interest income arising from either the investments or capital gains tax on disposals when the investments underlying the policy are altered.
What are the benefits?
Bear in mind that residency issues should be looked at on an individual basis.
There may be a small amount of withholding tax on some of the income-producing investments but the funds benefit from gross roll-up. As the funds do not suffer large tax charges, the benefits are rolled up to give greater potential growth than taxed funds.
‘If the taxpayer is living in a low tax/nil-tax jurisdiction, personalised portfolio bonds will have an advantage over other products’
There is nothing to say the bond can reclaim all taxes paid within funds or investments and so it would be inaccurate to say that PPBs are tax-free.
An allowance should be made for taxes that cannot be reclaimed and also the country of residence of the individual will determine if there is tax to pay.
In Spain and several other countries,
including the UK, income and capital gains tax within an offshore bond should be declared and paid. Indeed, the offshore bond must be registered and qualified in Spain or additional penal tax rates may apply rendering the offshore bond obsolete.
There is a saying that ‘tax deferred is tax saved’. Of course, there will be a time when the policyholder could be asked to pay some tax. However, tax deferral allows the policyholder to decide when to pay the tax.
If the taxpayer is living in a low tax/nil-tax jurisdiction, PPBs will have a considerable advantage over other products.
There can only be an income tax liability when a ‘chargeable event’ occurs in the following circumstances:
• when the sole or last life assured on the policy dies;
• when the bond is surrendered or a segment of the bond is surrendered;
• if the policy is assigned for money or money’s worth; or
• if more than the cumulative 5% of total premiums paid allowance is withdrawn in any given policy year.
Money can be extracted from an offshore bond through ‘partial encashment’ and ‘surrender of segments’.
There are some very important tax implications to consider when deciding which method to opt for.
Time is of the essence
When a policyholder has had tax residence outside the UK, a chargeable event gain can be reduced to reflect this period of non-UK residence. This is known as time-apportionment/non-resident relief.
Offshore policies issued by a non-UK resident insurer after 17 November 1983 are eligible for time-apportionment relief. Until 6 April 2013, this relief was only available for offshore policies but from that date, it was made available to new UK policies.
An expat who returns to the UK with a personalised portfolio bond must make changes to the bond or be liable to a deemed 15% per annum increase, even if no gains are being accrued.
There are a variety of ways of dealing with the problem, including changing the status of the bond so it does not fall within PPB rules.
The gain is apportioned using the formula A ÷ B, where A is the number of foreign days in the material interest period and B is the total number of days in that period. It is important advisers look at the definition of foreign days and material interest carefully.
From 6 April 2013, time apportionment relief can apply to new policies issued by UK-based insurers on or after that date, as well as policies issued by UK insurers before then.
These are varied on or after 6 April 2013 in such a way that results in an increase in the benefits secured, where such a policy is assigned from one individual to another or into or out of a trust.
However, one of the overriding attributes of these vehicles is the simplification of tax, particularly for an annual tax return.
Many expats plan on returning \home to retire after working \overseas and international \financial advice is crucial \in providing for future \family needs
At Guardian Wealth Management, my main focus is to provide technical support to our financial planners on their multi-jurisdictional requirements.
The following case study focuses on a familiar scenario and highlights the importance of international financial advice when moving to and from your home country.
As the clients are wealthy individuals, access to capital is not a major concern for the short term. It is something that may be required later in life when considering long-term care fees, however, as longevity is common in their family and both husband and wife have mothers that lived into their early 90s.
At the same time, being able to help get their three grandchildren on to the property ladder is a priority, and ensuring the portfolio is positioned to allow this is important.
An international portfolio bond was arranged with £200,000 that has been saved already, with the view of topping this up before the couple return to the UK.
Gross roll-up will benefit the client while overseas and back in the UK as they are likely to be higher-rate taxpayers throughout retirement because of the pension fund income. Deferring the tax on these benefits will help achieve the £600,000 savings target.
Five per cent tax-deferred withdrawals allow capital to be withdrawn without penalty over a minimum 20-year period and this can be used by the client to supplement income from the pension fund.
The client does not know how much income he will need on top of the defined-benefit pension scheme and there is no flexibility from this arrangement.
Being able to draw funds in a flexible manner can be achieved by deferring the 5% allowances while still in employment and then varying the withdrawals from the rolled-up years in the future, once repatriated.
‘Five per cent tax-deferred withdrawals mean capital
can be withdrawn without penalty over a minimum
To provide the capital for the grandchildren to buy houses, gift assignment can be used to reduce the potential tax liability on a withdrawal. The bond was set up with the maximum number of segments – 500 in this case – to allow the most flexibility.
When the grandchildren require capital, the segments should be assigned and surrendered in the grandchild’s own name, as they are likely to be basic-rate taxpayers. They could also use the £1,000 personal savings allowance and 0% starting rate.
As the client will have further surplus funds to top up the bond before leaving the Middle East it is recommend he adds capital to the bond before returning to the UK.
He will benefit from time-apportionment relief and the contributions are deemed to be made at the start of the contract rather than the date of the top-up. This reduces future tax on withdrawals ahead of repatriation.
The client expects to be a higher-rate taxpayer in retirement and though chargeable gains from the bond are unlikely to push him into additional-rate tax, his wife may be charged higher-rate tax.
Top slicing relief can reduce the liability by assessing the gains accumulated since returning to the UK rather than the total gain being added to one year’s income.
The client is concerned about inheritance tax over the long term but wishes to maintain control of the assets. We will consider trusts that can be wrapped around the investment in 2019 when the seven-year cumulation for a previous gift is outside of the estate.
Another of the client’s concerns is shares from his employer. With large capital gains present it is possible to transfer to the spouse. The couple can then sell up to the annual exempt allowance each tax year to reduce the exposure to single company shares and invest in diversified assets within the portfolio bond.
As the couple intends to return to the UK in three years, capital gains tax would be payable on disposals while overseas as they will not meet the five-year non-residency period.
As the pension scheme is being funded by the employer while overseas an overseas enhancement to the lifetime allowance may be available. This is because HM Revenue & Customs does not believe it is reasonable to test benefits that have not received tax relief against the lifetime allowance.
When the client retires we will be able to apply for an overseas enhancement to his lifetime allowance in respect of the time he has spent overseas.
This effectively means any scheme accrual during the couple’s time abroad will be awarded as an enhancement to the standard lifetime allowance.
Periodic reviews of the client’s repatriation plans must be completed and future legislation changes kept in mind. As more wealth accumulates this can be added to the existing structure. It can be used in the early stages of inheritance tax planning by transferring the existing structure into a trust.
Combining income tax, capital gains and inheritance tax planning goes a long way to fulfilling the client’s financial needs.
Automatic for the people
In his final article looking at financial advice for expat clients, Intelliflo’s Nick Eatock\ discusses the wealth of opportunity available through robo-advice
Advisers with UK-domiciled clients living and working abroad are usually managing a significant amount of assets and delivering sophisticated financial planning solutions.
If this is you, you could be forgiven for thinking a feature about people using a robot to choose direct investments without the help of an adviser is not relevant. Bear with me.
While the risk of your clients opting out of the investment advice you provide may be slim, at least in the short to medium term, the availability of automated risk-profiling and portfolio delivery services presents some interesting opportunities.
‘Harnessing robo-advice will help strengthen and grow the relationships you have with your existing clients while planting seeds for the future of your business’
Harnessing this opportunity will help strengthen and grow the relationships you have with existing clients while also planting valuable seeds for the future of your business.
The growth of automated advice systems that offer investors access to equity-based portfolios is gaining pace.
In the UK, companies such as Nutmeg, Wealthify and Moneyfarm are investing heavily in major marketing campaigns flagging their low fees and ease of use to people who typically don’t have access to equity investing.
Low bank interest rates are pushing on an open door in terms of attracting people who are fed up with their savings not even keeping up with the UK rate of inflation.
The level of knowledge about investment options among these firms’ target clients tends to be low.
This, together with the fact that most of these platforms do not take potential investors through an attitude to risk process; they don’t ask questions around debt and suitability; and they’re not configured to turn people away if they aren’t suitable, makes them a questionable route for investment success.
Also important is that these investors are not protected in the same way as they would be if they took advice from a qualified adviser. Effectively, they are on their own.
‘The growth of automated systems that offer investors access to equity-based portfolios is gaining pace’
In a ‘Jam’
What’s this got to do with you? Your clients are not in this demographic. That may well be the case but what about their families, grown-up children and their partners for example?
It is likely your clients are related or close to many people who are not in as comfortable a financial position as they are themselves.
Their extended family may well fall into Theresa May’s ‘just about managing’ or ‘Jams’ category. They want to save for the future but don’t have the resources to attract the support of independent financial planners who could help them maximise their modest means.
This group was highlighted in 2016 in the UK government’s Financial Advice Market Review report, which flagged a savings gap, with a lack of options for people who do not need, want or can’t afford personalised qualified financial advisers.
During 2017, Intelliflo worked with a number of advice firms to create their own automated advice systems, enabling them to meet the needs of investors who want the protection provided by an adviser-backed service.
We were responding to advisers who are looking over their shoulders at what the large product providers are doing.
Our automated advice platform is designed to be superior to the Nutmeg, Wealthify models, providing a configurable advice process that incorporates attitude to risk and investment projection, and links to a suite of risk-rated default investment solutions.
Importantly, all investments are made via an adviser’s branded website and they carry the protection offered by using a financial adviser. Advisers have the ability to view all transactions and to configure-in ‘stop scenarios’, restricting what the client can do and allowing the adviser to intervene and provide specific advice if necessary.
This renders the service suitable for all types of people: employees of corporate clients; non-actively serviced clients or new clients that require a direct investment route.
Profit and potential
Advisers with wealthy clients and who have their eye on the long-term growth potential of their businesses, either for themselves or for selling on at a profit to others in the future, are seeing the potential in harnessing technology and segmenting their clients accordingly.
It is relatively early days but those financial advisers who are able to respond quickly to the opportunities offered by automated advice systems will, I firmly believe, gain the most in terms of cementing existing client relationships plus growing their client base for the future.
Best laid plans
Credence International is a \young firm with global ambition. \Chief executive Chris Ferguson talks \strategy with Will Grahame-Clarke
Credence International is a financial adviser firm with global ambitions at a time of unprecedented change in international markets.
Chief executive Chris Ferguson believes the business is ready to adapt and grow in Dubai, where he founded the firm in 2014.
Prior to Credence, Ferguson had worked at Guardian Wealth Management for around four years, having joined from PIC – part of the Devere Group – in 2010.
Since 2014, Credence has established offices in the UAE, Australia and the UK.
Philosophy and focus
“My advice philosophy is very simple,” he tells International Adviser. “I got into advice because it is an area in which you can really help people with their own money and I knew right away it was the career for me.
“I have also always been entrepreneurial. I like the idea of shaping the client experience to the best of my ability.
“I believe that if you recruit the right staff and ensure you are focusing on the same objectives you will succeed.
“We have 14 advisers in Dubai and Australia. We have one in the UK finalising the proposition, which will be live this year. We also keep a marketing function there.”
‘I like the idea of shaping the client experience to the best
of my ability’
Chris Ferguson, chief executive, Credence International
Scouting for talent
One of the key challenges Credence has faced is fierce competition for talent. Credence formed a core team during its first two years, but Ferguson admits they have had to “kiss a lot of frogs” to grow the headcount.
He says adviser recruitment in the UAE has been distorted by “certain alternative recruitment techniques”.
“There is a lot of competition for talent but I believe we have the right team. It has not been a level playing field. However, I have no regrets over anyone.”
Advisory firm Credence International is headquartered in the UAE, where the job market has been distorted by ‘alternative recruitment techniques’, according to chief executive Ferguson
‘The international market
is moving from commission
into fees and we are ready
for this “new world”.
If it is a level playing field,
we are happy to play’
Customer comes first
Ferguson believes the advice industry has a tendency to be self-centred, focusing on its own problems and often failing to see the client perspective.
He has tried to build client focus into the investment process from the ground up and an advice process that understands the client.
“Credence is very focused on the client,” says Ferguson. “We make sure the investment management is risk-appropriate. We set expectations early and fact-find thoroughly.”
He prefers a risk-rated multi-asset approach where client aims are “strategically aligned” with the aims of the investment manager.
Beyond that a client is offered a core and satellite approach.
The bulk of client money is invested in a core diversified multi-asset fund. A small percentage can then be allocated, where appropriate, to satellite investments that might reflect a customer’s interests and ideas.
“With the right advisers I prefer not to over-manage. I give them the autonomy to work with their clients within the investment criteria,” he says.
‘New world’ of fees
Besides talent acquisition, one of the biggest strategic challenges facing Credence is the switch from commission to fees in the international advice space.
In common with many global jurisdictions the change has been driven by regulatory change and received client opinion that fees are a more transparent way to pay for advice.
“We are undergoing a full review of fees,” says Ferguson. “Sometimes it is better that clients pay fees. The international market is moving from commission and into fees and we are ready for this ‘new world’. If it is a level playing field, we are happy to play.
“However, we are not afraid of commission. Sometimes without commission the client may not make the right decision if they are focusing on fees.”
Ferguson admits a lot of his time and efforts are focused on business development.
Outside the UAE the firm’s presence in the UK and Australia means there is much work to be done.
Credence is planning two further office openings in Australia and has both organic and non-organic growth plans in the UK, as well as a training academy and marketing function.
Serving clients with an average investment of £330,000, Ferguson aims to develop an advice organisation that effectively leverages its international experience to appeal across client segments.
Says Ferguson indicating his ambition for what is still a young firm: “The more you give us the better we get.”
UK buyers have flocked to global \equity funds as regionally diversified exposure proves more alluring than the beleaguered domestic market
During the 12 months to the end of February, global equity funds accounted for the largest net cash inflows for any sector available for sale in the UK.
Inflows for the period totalled €35bn, taking the total assets invested in global equities to €94bn. UK equity funds, meanwhile, were hit with the largest net outflows, of €491m, during the same period.
Investors have voted with their feet, opting for more regionally diversified equity exposure rather than their domestic market.
Has this shift away from the UK also been reflected in the regional allocations of global equity fund managers?
There is no clear answer when we look at UK exposure of the average fund relative to the MSCI World in each of our global equity categories at the end of February 2017 and February 2018.
The most meaningful changes occurred within the global large-cap value and global flex-cap categories. While the average fund in both sectors ended the period with the same 4.5% overweight position, the relative UK exposure of the former was up by 1.1% while the latter’s fell by 1.6%.
UK economic uncertainty has thrown up good value opportunities for managers on the hunt for large caps. The FTSE 100 underperformed its smaller counterparts in the same period.
However, when considering opportunities across the entire market cap spectrum, fund managers have discovered more attractive opportunities elsewhere in the world.
Active global equity managers enjoyed a better run in the 12 months to the end of February 2018, with growth stocks favoured by the market and conditions remaining challenging for those with a value tilt.
The average fund in the global equity income and global large-cap value categories lagged behind the MSCI World but was ahead in all other categories.
‘Active global equities enjoyed a better run in the 12 months to the end of February 2018’
• Baillie Gifford Global Alpha has a Morningstar analyst rating of bronze and has been managed by Malcolm MacColl (pictured above), Spencer Adair and Charles Plowden since its June 2010 inception.
The three managers have been with the firm for an average of 23 years and follow Baillie Gifford’s tried and tested fundamentally based, long-term approach. They seek out companies with competitive advantages and superior business models that generate above-average earnings growth.
The fund managers pay little regard to the sector and country weightings of their benchmark, and their purely bottom-up approach means exposures often diverge widely from the benchmark.
Investors should note that, as a result, returns can be more volatile over the short term but have proved strong over the longer term, even on a risk-adjusted basis.
• Morningstar analyst gold-rated Fundsmith Equity is managed by Terry Smith (pictured above right). His experience in the industry dates back to 1974 and has included stints in research and in senior management positions at FTSE companies. Smith’s investment philosophy is to buy and hold high-quality businesses that will continually compound in value over time.
High-quality companies are defined as having little leverage, an above-average cash return on operating capital employed and an ability to sustainably grow this rate of return.
When considering these criteria, and a minimum $2bn market cap to keep the strategy scalable, the investable universe is significantly reduced to a shortlist of around 65 names for deep-dive analysis. We consider the analytical resources well-equipped given the limited opportunity set and extremely long-term investment horizon.
Investors should be aware that this is a very high-conviction and long-term approach. There are elements of sector concentration – the approach excludes large parts of the market – and valuation risk in the portfolio.
Returns may look at odds with the broad MSCI World Index over the short term but we believe Smith has a handle of the risks and will serve investors well over the long term.
• Orbis Sicav International Equity has a Morningstar analyst rating of silver and is managed by the same team, using the same approach, as Orbis Sicav Global Equity, but it follows an EAFE mandate – essentially global ex US. While William Gray (pictured above) is listed as its named manager, the fund is run using a team-based approach.
A small team of senior analysts are responsible for selecting stocks and driving the overall strategy. They form part of a larger team of regional and global sector analysts, located across key markets, who often have long industry experience, typically gained within the group.
The investment approach is long term and focused on fundamental, bottom-up research that seeks to identify shares that are priced attractively relative to their intrinsic value. Key considerations include high-quality management, a solid track record of generating value and a robust balance sheet.
The fund can deviate significantly from its benchmark because of the contrarian nature of the approach but performance has been driven primarily by the team’s stock selection.
‘Active global equity managers generally enjoyed a better year, with growth stocks in favour and conditions challenging for those with a value tilt’
• Among the new funds in our global equity categories is Baillie Gifford Global Select. Launched in December 2015, it aims to leverage the expertise of the group’s regional teams within a global context.
It is managed by the portfolio construction group, comprising six regional heads and a governance and sustainability expert. As with all Baillie Gifford funds, the focus is on companies with competitive advantages and superior business models that generate above-average earnings growth.
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