How having the right licences propelled\adviser David Halley to a fee-based model
Mark Battersby introduces the May\edition with a look at how financial adviser firms are upping their game as the regulators raise the bar of professional standards\\\\\\
How can advisers deliver a full financial planning service to clients when the regulators are serving up an awkward mix of licences and other types of authorisations in some jurisdictions?
The good news in Hong Kong is there exists a route via licences from the Securities & Commodities Authority and the Insurance Authority, as our financial planner profile of David Halley, managing director of Capstone Financial, spells out.
On a recent trip to Asia I was pleased to see that many financial adviser firms are upping their game as the regulators in turn raise the bar of professional standards.
The percentage of recurring income is rising among expat-focused advisers and some are moving aggressively towards the type of fee-only approach that is a feature of jurisdictions such as the UK.
It looks likely that Hong Kong’s Insurance Authority will in due course increase the continuing professional development requirements for advisers, plus raise the amount of capital that must be held in a designated bank account.
The dark side to this promising potential development within Hong Kong’s regulatory world is those insurance brokers and local life company advisers selling whole of life products with whopping upfront commissions attached.
Do take part in this edition’s online poll, which asks whether the regulators are delivering the right kinds of licences to enable advisers to offer a fully holistic financial planning service.
Changing of the guard
On a personal note, this is my last International Adviser as editor. From 1 June I am passing the mantle to the newly promoted and highly capable Kirsten Hastings, who already knows our audience well.
I will be taking on a wider role as head of content research, building on Last Word’s quality content, but I will be keeping in touch with International Adviser in this capacity as our exciting plans develop.
‘On a recent trip to Asia I was pleased to see that many financial adviser firms are upping their game as the regulators in turn raise the bar of professional standards’
Mark Battersby, editor,
View from the bridge
The recent Federation of European Independent Financial Adviser conference, held at London’s Hilton Tower Bridge Hotel, brought to the fore all the issues and upheavals facing the industry. Will Grahame-Clarke reports
‘Being an adviser is different now as client expectations have changed. The ‘don’t ask, don’t tell’ era has ended
Simon Colboc, founder, Mawen Asset Management
If European-based international advisers are fizzing with ideas, the Federation of European Independent Financial Adviser conference is where they go pop, and advisers have been forced to be creative lately, having experienced a period of extraordinary change.
‘In the UK and South Africa we have regulated away opaque remuneration structures and some of the worst practices’
Brandon Zietsman, chief executive, PortfolioMetrix
Feifa’s annual conference on 14 May was a chance to hear the latest ideas and share best practice. Delay to the Insurance Distribution Directive (IDD) has given some regulatory respite but upheaval has continued on the back of demographic and technological shifts.
‘When the finalised text for the IDD was confirmed, it was plain that the vast majority of the proposals had been heeded’
Paul Stanfield, chief executive, Feifa
Advisers discussed regulatory overreach and resultant problems; future business models; the effects of changing demographics on advice; technology and automation and the importance of adviser representation in Europe at a policy making level.
Panellist and European Federation of Financial Intermediaries and Financial Advisers (Fecif) advisory board member Simon Colboc, founder of Mawen Asset Management, believes strongly that advisers need to focus on fundamentals.
“The starting point for any adviser is to decide what you do for the client, and the challenge is changing demographics and changing technology,” he said.
“Part of the challenge is much more mundane but also more worrying: declining interest rates.
“We have seen the end of the ‘don’t ask, don’t tell’ era, when we didn’t ask where the money came from and the client didn’t ask how much the adviser charged.
“Clients never asked because they felt they were getting good value for money when interest rates where 10 or 12%. With rates at between 1% and 2%, the full-cost fee of 3% is really visible.”
Shift to fees
“Client expectations have changed,” said Colboc. “It is not harder to be an adviser; it is different. The shift to fees has been positive for those advisers who know where they stand with the customer.
“The Retail Distribution Review in the UK, and similar regulations across Europe, has reduced the options for clients. To some extent it has limited the adviser but for those who already had a clear client relationship, it has made things easier.
“These advisers are best placed to handle the upcoming challenges of technology and demographic changes.”
Young clients are often looking for new ways for advice to be delivered through apps and ‘robo’ platforms.
“Robo advice is a misnomer, it’s really robo investment. It is more of a threat to the asset management industry,” said Colboc.
“The best advisers will learn to harness technology and focus on client service and planning, leaving the delivery to the robot.”
Fellow Feifa panellist Brandon Zietsman, chief executive of South Africa-based discretionary investment manager PortfolioMetrix, said his business sees regulation as “a dramatically positive enabler” and is totally unconcerned by the robo threat.
“As a business we’ve found it easier to operate in a well-regulated environment,” he said. “In the UK and South Africa we have regulated away opaque remuneration structures and some of the worst practices.
“I’m very positive about advice. Over the past few years we’ve seen a more genuine profession emerging.”
According to Zietsman, sales-led practices driven by upfront commission leave the client worse-off because client and adviser interests are not always aligned.
The change to fee-based models began with the emergence of the platforms that enabled the UK independent model to develop. This has become a template for Feifa members.
Mainstream European advisers are very different, said Zietsman. Often still commission-based, and tied to banks or insurers, they will be most affected by fee transparency regulation.
“Europe is about to go through a change from commission to fees far faster than in UK and South Africa,” said Zietsman.
“Losing commission is no bad thing because it gives your business entrepreneurial value and it means you can sell it. It is what we should all be striving for. A sales person has no value in their business with no fees.
“This means good advisers will rise to the top of the deck. If I had a son or daughter I would tell them to go into financial advice.”
Representation is paramount
For Paul Stanfield, Feifa chief executive, converting stakeholder’s visions for the advice industry into concrete solutions is key.
“Representation for the advisory sector is of paramount importance, not least due to ever-increasing regulation and the undue lobbying power of many European banks and insurance companies,” he said.
“When the finalised text for the IDD was confirmed, it was plain to see that the vast majority of the proposals put forward in the preceding consultation period, by adviser representative bodies such as Feifa and Fecif, had been heeded.
“This is one of many good examples as to the need for strong and effective representation for the adviser and intermediary community, to ensure that any new regulations are appropriate, proportionate and workable, while still achieving a sensible and necessary level of consumer protection.”
With IDD postponed until October, advisers have extra time to prepare. They can also reflect on an industry that the Feifa conference revealed is in rude health and ready to handle the key demographic, regulatory and technical challenges.
Building bridges: the Hilton Tower Bridge Hotel in London was the venue for Feifa’s annual conference on 14 May
Do regulators have the right licence(s) to allow holistic financial advice in your region?
- Not at all
Sink or swim
As advisory firms struggle to keep the boat afloat in terms of profitability, the time has come to explore new methods of efficiency
Warren Buffet said: “In a chronically leaking boat, energy devoted to changing vessels is more productive than energy devoted to patching leaks.”
With advisers struggling to keep the boat afloat in terms of profitability and sustainability, the time has come to explore new methods of efficiency and effectiveness. This includes adapting your business model.
Keeping up with non-income-generating external demands takes up time and resources and increases the cost of doing business. Furthermore, resources are no longer as efficient as they could be.
Everyone in your business may be busy but if they are not engaged in activities that drive your strategy, you may not be able to realise your goals. Operational inefficiencies are no longer a temporary challenge but have become the new reality.
‘In a chronically leaking boat, energy devoted to changing vessels is more productive than patching leaks’
Learn by experience
Operational inefficiencies and the resulting lack of profits reduces market share. Fewer new clients and an increasing burden to retain existing clients could result in a downturn in the business cycle, less work and a loss of quality staff.
A good way to turn your business around in these circumstances and ensure its profitability is to rethink the way you do things. To reassess your business objectively and look at it from the outside in, try and understand what it feels like to do business with your company.
Is the first call welcoming? Are you put through to the correct person straightaway? Is a service query resolved speedily and professionally? When advice is provided, do the solutions suit your financial objectives?
Would you be a client of your own business. Would you feel comfortable referring friends with similar financial needs? In the process, have you identified where the leaks are that could make the boat sink?
Put on your leadership hat and identify how possible leaks have affected your business performance. Ask yourself what goals you have achieved over the past three months. Did this make a difference to your business? What could you not achieve and why not? How healthy were your financials?
Consider your upfront and recurring income, expenses, and gross and net profit in terms of your budget, actual and variance. Where are some of the leaks in your business operations that you can see negatively affected your profitability?
Which of your business practices support your firm’s profitability?
This is one exercise that helps you spend time on your business. It allows you to take a step back and do a full review. It helps reignite your vision, tackle any frustrations and inspire your colleagues.
‘Take a step back and do a full review of your business. It helps reignite your vision, tackle any frustrations and inspire your colleagues’
There are tangible benefits to taking time out of an already busy day if your time is used wisely. This includes revisiting your business plan and then tweaking it where weaknesses are apparent.
Research shows that setting a direction for your business by having a business plan improves profitability (see table on page 2).
When you identify leaks in the boat and plan ways to mend them through a business planning exercise, you are on the way to creating a new, profitable vessel. What better vision could you have for your business?
‘Ask yourself what goals you have achieved over the past
three months. Did this make a difference to your business?
What could you not achieve and why not?’
The Blacktower Group has launched \two new offshore businesses as part of \its mission to create an international \offering to be reckoned with
John Westwood, group managing director, is pleased to advise that the group has successfully launched two new separately regulated companies, namely:
Blacktower Financial Management (US), a US-based company regulated by the Securities and Exchange Commission, provides pension and financial planning advice to both US expat residents and nationals.
With offices established in New York and Miami, headed up by Bradley Hamilton and assisted by Chris Thornton, the new business will be looking to quickly expand its offering, working from existing solid foundations.
Westwood: ‘Blacktower’s mission is to become one of the strongest brands in the international market’
Ally Kerr, one of the group’s main board directors is the group director responsible for oversight and is relocating to Blacktower’s successful Cayman Islands office to lead and assist with the whole region’s management and growth.
Ally Kerr said: “These are very exciting times for Blacktower as a group and the opportunities are immense for both current and potential advisers.
‘These are very exciting times for Blacktower as a group and the opportunities are immense for both current and potential advisers’
Ally Kerr, group director, Blacktower
“We had a vision 10 years ago to strengthen and develop our overseas business and we wanted to be able to offer financial solutions to expats and locals throughout each region.
“This resulted in the opening of further offices in Spain, Canary Islands, Malta and Scandinavia. So, having experienced growth in Europe, the next stage of our progression was going to be the US and Caribbean, and we are in a fabulous position right now globally as we continue our rapid expansion.
“The opening of the New York office will give us a chance to service clients across the US, right down to Miami. The Cayman office has been open now since 2014 and we have already seen a massive uplift in business, both in Grand Cayman and surrounding areas.
“On a personal level, it’s fantastic to be heading up the US, LatAm and Caribbean, and I feel proud to be part of this great journey.”
The group has also launched Blacktower Expat Solutions, a fully regulated entity in Germany specialising in the advice and provision of German domestic pension and investment products.
The business is jointly headed up by Matthias Wolf, a specialist in German-based domestic advice, and Paul Brown, one of the Blacktower Group’s main board directors.
Paul Brown said: “Blacktower Expat Solutions is now open for business, offering local products and solutions suitable for each client’s circumstances and affordability.
“Being part of a ‘broker pool’ we have access to all products available on the German market. We have also formed direct links to several reputable insurance companies, including the German subsidiaries of international insurers.
“Assets are accumulating with a robust and well-known international insurer, giving the client peace of mind that his or her future wealth and financial security is in safe hands.
“This project is a new approach to a mature market that we hope will provide access to efficient local solutions for far more people and change the way expats in Germany save and invest for the future.”
‘We hope to provide access to efficient local solutions and change how expats in Germany save and invest for the future’
Paul Brown, group director, Blacktower
Westwood believes the launch of these exciting businesses confirms Blacktower’s drive to become one of the strongest brands in the international market, working from solid and fully regulated foundations.
The Blacktower Group is also recruiting financial advisers across all regions but most specifically in Malta, Cyprus and France.
For more information visit www.blacktowerfm.com
Long arm \of the law
There’s no hiding from regulatory scrutiny as this month’s wrap features a landmark fine for a Middle East adviser and a clampdown on the illegitimate \use of limited partnerships. Mark Battersby reports
A regulator in the Middle East has flexed its muscles and imposed a landmark fine of $1m on a financial adviser firm.
The Qatar Financial Centre Regulatory Authority (QFCRA) imposed two fines plus costs on Guardian Wealth Management Qatar (GWMQ), which is currently in liquidation.
The company suggested the fine was in retaliation to its decision to cease operating in the country in 2015.
A QAR2.5m ($0.7m) penalty was imposed for contraventions to rules on anti-money laundering and combatting the financing of terrorism, and an additional QAR1.09m was levied for “general regulatory contraventions”.
GWMQ must also cover the costs of the investigation conducted by the QFCRA.
In a statement defending GWMQ’s conduct, joint chief executive David Howell said the company has “always maintained a good, respectful and professional working relationship with our regulators and supervisors [at the QFCRA]”.
He added that GWMQ worked closely with the regulator during its six years in the country and described the fine as “a disproportionate financial penalty”.
UK gov’t in
hot water over public register
The British overseas territories (BOTs) slammed the UK government for trying to force public registers of beneficial owners on the jurisdictions, describing it as an act of “constitutional overreach” and “an unacceptable act of modern colonialism”.
On 1 May, the UK government backed an amendment to the anti-money laundering bill, meaning that BOTs must introduce public registers that disclose who owns the assets in companies registered in each jurisdiction.
If a territory fails to introduce a register by end 2020, it would be forced to via a legally binding order from the Queen’s Privy Council.
British Virgin Islands (BVI) premier Orlando Smith said the public register “destroys any trust between the BVI and the UK”.
Cayman Islands premier Alden McLaughlin said it was “reminiscent of the worst injustices of a bygone era of colonial despotism”.
Scottish loophole checked
A Scottish loophole that is reported as being used to launder billions of pounds was brought to light in a review of Scottish limited partnerships (SLPs) by the UK Department for Business, Energy and Industrial Strategy (BEIS).
According to BEIS, just five individuals registered thousands of SLPs between January 2016 and mid-May 2017.
In one scheme, cited by BEIS, hundreds of SLPs were used to move $80bn from Russia.
BEIS said thousands of British businesses used SLPs and limited partnerships legitimately. However, business minister Andrew Griffiths said: “SLPs are being abused to carry out all manner of crimes abroad, from foreign money laundering to arms dealing.
“This simply cannot continue to go unchecked and these reforms will improve their transparency and subject them to more stringent checks to ensure they can continue to be used as a legitimate way for investors and pension funds to invest in the UK.”
Australian IFAs under scrutiny
Scrutiny by the Royal Commission of Australia’s banking, superannuation and advisory firms is taking the form of a review into financial advice.
As with many jurisdictions around the world, Australia has its issues in this space, illustrated by the admission last month from the country’s largest insurer, AMP, that it repeatedly and intentionally lied to the Australian Securities and Investments Commission for more than 10 years.
A series of reforms of Malta’s pension regulations have been announced following complaints about unregulated advisers and risky investments.
One key rule set to come into force will be a sales ban on ‘risky and illiquid’ structured notes by unregulated advisers.
The UK’s Financial Conduct Authority (FCA) is also gearing up to the launch of its retirement outcomes review following a report that noted there were less protections in place for consumers of decumulation rather than accumulation products.
In a speech delivered at the London Business School’s Asset Management Conference, FCA chief executive Andrew Bailey said, besides Brexit, changing demographic patterns are the biggest issue the FCA must get to grips with.
As the UK population ages and individuals take responsibility for their retirement savings, there is a shift from defined benefits to defined contribution schemes.
Bailey said: “A prime example of an issue we face is the growing number of people reaching retirement. This could lead to a shift in the balance of assets under management from accumulation-orientated to decumulation products, including a variety of income drawdown strategies, some of which are likely to be relatively complex.”
‘The growing number of people reaching retirement could lead to a shift in the balance of assets under management from accumulation-orientated to decumulation products’
Andrew Bailey, chief executive, Financial Conduct Authority
Change is \in the heir
Can the upcoming IHT review give this most reviled of taxes a new lease of life?
You have to hand it to inheritance tax (IHT). With its roots in Denis ‘squeeze the rich until their pips squeak’ Healey’s 1975 capital transfer tax, IHT has been with us since 18 March 1986.
Since that date, it’s made a remarkable transition from being a little-known or some would say optional tax, to what is now the UK’s most-hated levy. Although the current £5.2bn yield from IHT exceeds treasury forecasts, the tax has acquired its dreadful reputation despite only 4% of estates actually paying the tax.
The £325,000 threshold has been frozen since 6 April 2010 and will remain so until at least April 2021. Together with various exemptions for annual gifts, small gifts and marriage gifts all eroded by inflation, and estates increasing in value as UK property prices rise, it sounds like a prime example of the dreaded fiscal drag much loved by tax gatherers around the world.
‘IHT has made a remarkable transition from being a little-known tax to what is now the UK’s most-hated levy’
Vote of no confidence
In recent years, IHT has become a political hot potato, potentially losing the votes of those whose most significant asset is the family home. But instead of initiating a reappraisal of the policy aims of the tax, complicated rules have been enacted relating to:
• the transfer of any unused nil-rate band to a surviving spouse or civil partner; and
• the phased introduction of the phenomenally complicated residence nil-rate band.
Whether you regard that demographic as being a core part of the Conservative electorate or a crucial element with which the Labour Party must engage, the cycle is all-too familiar. Clear policy aims underpin the introduction of a new tax.
As the years go by the tax is changed, perhaps to widen its scope, narrow its focus or address issues that were never envisaged when the policy was formulated. Before you know it, what was a clear policy has turned into an administrative mess.
The government of the day then invites the Office of Tax Simplification (OTS) to create order out of chaos. New legislation is enacted and the whole process starts all over again.
Call for arms
With IHT at a turning point, chancellor of the exchequer Philip Hammond briefed the OTS to identify opportunities for simplifying IHT in both technical and administrative terms.
The OTS has now published a call for evidence with an 8 June 2018 deadline for responses.
It addresses the following three problem areas:
• first, there are practical issues such as the filing of tax forms, related administrative problems and the guidance available from HM Revenue & Customs to address these;
• second, the complexity of the IHT rules themselves; and
• third, there is an issue with the scale and impact of ‘distortions to taxpayer decisions’ caused by the IHT rules in relation to investments, asset prices or the timing of transactions.
In a welcome first for the OTS, the call for evidence is accompanied by a brief online survey that enables non-specialists with practical experience of completing IHT returns to make suggestions.
Learning by experience
While the accessibility of the review is welcome, there is a genuine need for reform that will not be met simply by scrapping exemptions and reliefs. This is also a valuable opportunity to assess how IHT deals with non-domiciled individuals and trusts.
Over recent years the taxation of both has been subject to considerable modifications that necessitate changes to the way in which people live their lives. Arguably, some of that is as it ought to be. But in other situations, neither the government nor HMRC seems willing to recognise that most trusts are not set up for tax reasons.
Predictably, the OTS emphasises the review should not reduce the yield from IHT but there is an openness to consider the experience of other countries, and any other aspects of the tax.
We hope this once-in-a-lifetime review will restore a clear policy direction to IHT and ensure that it operates in a fair, clear and certain manner. It is too good an opportunity to be missed.
‘We hope this once-in-a-lifetime review will restore a clear policy direction to IHT and ensure it operates in a fair and clear manner’
After a difficult birth the \Finance (No 2) Act 2017\ has huge repercussions \for UK resident non-doms
Last November will be remembered for the introduction of the Finance (No 2) Act 2017, which included sweeping changes to the taxation of UK resident non-domiciled (RND) individuals. This legislation was left out of last year’s pre-election Finance Bill as there was not enough time available for debate.
The delay to its inclusion was controversial, particularly as the changes were backdated to 6 April 2017. Given the uncertainty around their tax position and wealth, RND individuals were unable to plan confidently for the future and their advisers were unable to fully assess the effectiveness of existing structures.
Ringing in the changes
With the legislation now passed, we have clarity on the important legislative changes in effect, including the fact that RND individuals resident in the UK for 15 of the past 20 tax years become deemed domiciled in the UK for all tax purposes.
Returning doms, ie those born in the UK with UK domicile of origin that shed their UK domicile and subsequently return, are treated as deemed domiciled for all tax purposes while they are in the UK, subject to a one-year grace period for inheritance tax (IHT).
Two key items of transitional relief were introduced, other than for returning doms:
• rebasing – the transitional relief allows individuals who became deemed domiciled in April of last year to rebase certain foreign assets to their value as at 5 April 2017; and
• cleansing – the government is allowing non-doms a one-off opportunity to segregate their ‘mixed funds’ to allow more tax-efficient remittances to the UK to be made in the future and to permit the isolation of clean capital. The relief permits the separation of mixed funds into their component items of capital, income and gains but only until 5 April 2019.
‘Given the uncertainty around their tax position and wealth, RND individuals were unable to plan confidently’
Protected trusts – those established offshore by a RND prior to acquiring deemed domicile – will protect UK deemed domiciled individuals from tax in respect of trust income and gains.
However, the trusts can quite easily be tainted, for example, by additions. Protected trust status is not available where the taxpayer is a returning dom.
Interests in UK residential property held indirectly by non-domiciliaries, such as via non-UK trusts, companies and partnerships, are now within the scope of UK IHT. Overall, this is a major change for non-doms and it will be more difficult to manage
Looking at IHT exposure on UK residential property, affected non-doms should review existing arrangements, including comparing the merits of maintaining or revising existing structures and, for example, paying the ongoing Annual Tax on Enveloped Dwellings charge against unwinding and paying any associated taxes at that point.
What to expect in the future
The changes to RND taxation have not stopped with the introduction of Finance (No 2) Act 2017. The Finance Act 2018, passed on 15 March, brought in further amendments to the taxation of offshore trusts, including a prohibition on the washing-out of trust gains via payments offshore.
This means that from 6 April 2018, subject to limited exceptions, it is no longer possible to reduce the trust’s pool of capital gains by making capital payments to non-UK resident beneficiaries and so gains will continue to accumulate in the trust.
The act also extends a rule from the previous Finance Act which can shift an income tax charge, and since 6 April this year a CGT charge, to the settlor where benefits are received by a close family member.
A further trust loophole that closed on 6 April is the ability for capital payments or benefits to be made to non-residents or remittance basis users.
The intention is that those payments or benefits later be transferred to a person who would have been taxed had they been the direct recipient.
The latest act ensures that even if there are multiple onward gifts from the trust the final recipient in the chain can be taxed. If the final recipient is also within the scope of the close family member rule then the tax charge shifts to the settlor.
‘The latest Finance Act ensures that even if there are multiple onward gifts from the trust, the final recipient in the chain can be taxed’
Planning for the current tax year and arrangements for the future can now move forward. The effectiveness of current structures must be assessed, particularly in light of the extension of tax exposure for deemed doms and UK residential property being drawn into the inheritance tax net.
That said, options such as life assurance policies can continue to protect policyholders from tax on underlying investments, maintaining tax deferral and preserving clean capital beyond acquisition of deemed domicile.
Life assurance policies can also protect wealth from the tainting rules applicable to trusts and can remain effective for clients with family, financial and other interests in multiple jurisdictions.
The new technocracy
Tailormade tech solutions are the key to a happy relationship between adviser and client amid the \ever-increasing demands of global regulation that tends to focus on process rather than outcomes
Mifid II has dramatically changed how investment firms in the EU engage with clients and are remunerated for their services. The days of squirreling client money away in British protectorate islands have ended and the operators in those countries are not currently able to fully comply with the new reporting requirements.
Advisers in the UK, US and Australia have led the way in adapting to this fresh regulatory terrain and have developed solutions that incorporate elements of customer relationship management, client engagement tools, reports, cashflow analysis and ongoing trading and client reporting functionality.
Many have merged different technologies together with varying results. Sometimes these technologies will speak the same language but most of the time they are patchwork solutions that cause sleepless nights and empty pockets.
There are several platform solutions in the UK that have succeeded due to sheer scale and because they were owned by big insurers, such as Standard Life, Axa or Old Mutual.
But these platforms have failed to look beyond the UK for a few reasons and there are very few operators offering these solutions in the international IFA space.
‘Regulation has a constant impact on the sector. While driving trust and transparency for customers regulators have tended to focus on procedures, not necessarily on outcomes’
Some advisory firms that are constructed around indemnified upfront commission models continue to wear blinkers.
Everything will change during the next six to 18 months with the bedding down of Mifid II, the Insurance Distribution Directive, Isle of Man commission disclosure, the G20/OECD High-Level Principles of Financial Consumer Protection and other regulatory changes around the world.
Regulation has a constant impact on the sector. While driving trust and transparency for customers it also adds to operating costs. Regulators have tended to focus on procedures, systems and inputs, not necessarily on outcomes.
Not only is it pushing up the cost for clients but regulation is also driving out many insurance companies that can no longer compete profitably. Non-compliance penalties are too detrimental for a major financial organisation involved in retail distribution.
This leaves EU onshore operators, such as Conexim, with a significant advantage, especially since many of the traditional life companies have exited the region. Conexim and a handful of others have slowly been growing market share with IFAs looking for a flexible and client-focused solution.
Social and demographic changes coupled with global regulation aimed at improving transparency of costs and client outcomes has heralded the rise of technology in many forward-looking advice organisations.
Technology is driving change across banking, insurance and investment management companies. Customers expect tailored products and service, and to be able to access detailed information how they want it.
Investors expect more now since all their banking and much of their social communication has moved online. The days of a mangled opaque valuation arriving in the post have long gone for most.
‘Investors expect more now since all their banking and much of their social communication has moved online. The days of a mangled opaque valuation arriving in the post have long gone’
Clients need to receive the right communication at the right time. A professional process is proven to enhance the customer’s experience and lead to better outcomes for the IFA business itself and for the investment return.
A well-informed client making attractive returns on their portfolio is the key to a long-term partnership with the IFA.
Backed by its custodian Pershing Securities International, the Conexim Platform works for IFAs and pension trustees servicing clients primarily in Europe but also across the EMEA.
Conexim provides access to a range of investment strategies, including thousands of funds, individual securities and ETFs.
Capstone Financial’s David Halley tells \Mark Battersby about the importance of having an SFC licence – and he predicts trouble for advisory firms that sleep on it
Sitting in his Hong Kong central district office David Halley is keen to stress that if financial advisers do not have Securities & Futures Commission (SFC) licences, and opt to rely solely on the insurance licence, they will be in big trouble.
As managing director of Capstone Financial, Halley’s is one of the few financial adviser firms to have the SFC’s licence 1 for dealing, 4 to give financial advice and 9 for asset management, plus the Confederation of Insurance Brokers (CIB) licence.
Licence 1 requires $475,000 of liquid capital in the bank at all times, which means there must be monthly reporting to the SFC.
Halley says: “That means you must be 100% on top of your business and fully aware of your advisory processes on an ongoing basis. A fee-based world is the only way to go really.”
In contrast, the CIB only requires advisers to hold around $13,500 and for there to be just one chief executive with management experience in place. This still opens the door to the running of huge investment portfolios.
With the CIB and the Professional Insurance Brokers Association being subsumed into the Insurance Authority, the more powerful combined regulatory body is expected to ramp up the requirements, adding more management oversight and upping capital.
“There is a huge change afoot and the Insurance Authority is serious about industry reform, cleaning up the bad reputation of a lot of the old, broker-style businesses.”
The firm has around $300m under advice and approximately one-third of income is recurring, which Halley says is rising all the time. He wants to add five financial advisers to the existing 13-strong team in Hong Kong and its Labuan-regulated Kuala Lumpur office.
‘Licence 1 means you must be 100% on top of your business and fully aware of your advisory processes on an ongoing basis. A fee-based world is the only way to go’
David Halley, managing director, Capstone Financial
Site specific: Capstone is well placed in Hong Kong
Learning by experience
One salvo that did not work out was the setting up of an office in Shanghai around seven years ago, and the firm has since exited the region.
“We didn’t like the opaque nature of Chinese regulation; we want black and white regulation. For us, there are two places in Asia that meet that criteria at present.
“Singapore is the most obvious market to enter but that’s a whole different beast and I think there’s enough to be done in Hong Kong for the time being.”
Around 90% of the 1,000 clients across the region are expats, mainly in the mass affluent banker/lawyer category and business owners.
“We changed the way we work with clients and the revenue has risen steadily as a result. It took about three years to turn that around and make it a more modern, fee-based business style.
“You have to have a big book of clients. It would be very hard to start from zero and work in this environment now. We are lucky in that we are well established; it will be our 10-year anniversary next year.”
On the investment proposition, Halley says the three-strong investment committee follows a huge folder of practices and procedures that are rigorously documented for its SFC licences.
“We use the Ifast investment and funds platform. We also very much like portfolio bonds, which are really good tools for people, and excellent compliance-wise.
“Each one suits different clients. The problem with a lot of advisers is they stick to one approach whereas we are very much agnostic when it comes to a platform.”
The bigger picture
Looking at the big picture of Hong Kong as a jurisdiction for advisers, Halley says the economy is becoming quieter as a lot of expats are leaving. Capstone Financial, meanwhile, is well placed because of its mature client bank.
Halley does not share concerns about growing integration with mainland China, saying he can only see long-term positives.
“There seems to be learning in both directions. It’s going to take some people longer than others to become more integrated with China but I believe there will only be positives in the long run.
“Hong Kong has benefited in the past 20 years enormously from this process and it should keep on benefiting, though some people are oddly negative.
“This is China. There is no huge conspiracy. Technologically, online, the power of the capital of China and the ability to work together is a huge opportunity for the foreseeable future.”
‘There is a huge change afoot and the Insurance Authority is serious about industry reform, cleaning up the bad reputation of a lot of the old, broker-style businesses’
China and technology are the \two engines driving the emerging \markets sector from strength to strength
Investors in emerging markets have continued to reap the benefits as the MSCI EM Index has slightly outperformed the global MSCI ACWI year to date, adding to the substantial outperformance of 2017.
Last year’s strong returns were dominated by China at the country level and technology from a sector viewpoint. Digging deeper reveals further concentration in terms of individual stocks, with just five companies accounting for more than one-third of the gains made.
Tencent, Alibaba, Samsung, Naspers and Taiwan Semiconductor, which are all technology/internet related companies , now form the top holdings within the index. More interestingly, four of them were the top index constituents at the start of 2017, providing a helping hand to passively managed funds.
Have year-to-date returns been similarly concentrated? The marginally positive returns (in USD) made so far this year have still been led by China at the country level, closely followed by Brazil.
However, leadership within China was spread across individual banks and commodity plays as well as technology, while in Brazil the large banks and commodity stocks made the largest contributions.
Regarding the emerging market index from a sector viewpoint, positive returns reflected the above, revealing gains that are spread across financials, energy and materials.
Looking ahead, managers are highlighting a broadening out of improving stock-level fundamentals, with earnings growth upgrades. This broader set of opportunities should benefit active managers but there are stumbling blocks, particularly in terms of potentially above-consensus interest rate hikes and global trade issues.
‘Managers are highlighting a broadening-out of improving stock-level fundamentals, with earnings upgrades’
The biggest funds within this sector include several that have strong long-term performance track records.
• The Comgest Growth Emerging Markets Fund remains very highly regarded, despite the retirement of its long-standing manager Vincent Strauss in 2016. The fund has been awarded a Morningstar Analyst Rating of Gold. The current management team includes Wojciech Stanislawski (pictured left), who has been part of the team since 1999, providing some much-valued continuity. The investment approach is unchanged and is clearly focused on sustainable growth stocks, with longstanding overweights to the communications and consumer defensive sectors. Most cyclical stocks are excluded from the investment universe and the names that make it into the fund tend to be held for long periods of time. The portfolio is concentrated in around 40 holdings.
‘Considerable resources feed into the Fidelity fund, including
a team of more than 40 analysts located across the globe’
• Fidelity Emerging Markets has a Morningstar Analyst Rating of Bronze. The fund manager since 2009 has been Nick Price (pictured top right), who joined the group in 1998. Considerable resources feed into this product, including a team of more than 40 analysts located across the globe.
They analysts contribute research to regional portfolio managers, who in turn provide Price with three regional portfolios that form the primary investment universe for the emerging markets fund. Price also conducts his own due diligence on individual companies, working alongside the relevant analyst. The resulting portfolio generally shows growth characteristics as well as quality aspects in terms of lower debt and higher margins than the index.
Top performers over the past three years include funds with a variety of different investment styles.
• The Hermes Global Emerging Markets Fund identifies high-quality companies that exhibit attractive growth, momentum and valuations. However, the overall portfolio shows growth and quality characteristics in terms of relatively high price/earnings and return on invested capital, while debt levels are generally lower. Manager Gary Greenberg (pictured left) is an experienced investor who has been at Hermes since 2010. He prefers to run a portfolio of 50-75 holdings and has the flexibility to allocate across regions to reflect the best opportunities. ESG assessment is part of the process and the fund has a Morningstar Sustainability Rating of Above Average. The fund has often shown a bias to consumer cyclicals and, more recently, technology.
• Baillie Gifford Emerging Markets Growth is managed by Richard Sneller and Mike Gush (pictured top right, l-r). Sneller is an experienced investor who joined the GEM team in 1995. He was joined by Gush in 2015 and they form part of a 10-strong team dedicated to emerging markets. The team all have research responsibilities for stocks, which are allocated on a country or regional basis. A long-term growth approach is followed as the analysts seek companies that can show sustainable earnings and cashflow growth over time. This is reflected in portfolio positioning, which tends to show a significant overweight to technology. This bias led to some very strong performance during 2017.
There have been relatively few launched in the GEM space during the past year or two but it remains a region that is seeing considerable interest from investors and attracting resources and support within many investment houses.
• The most recent launch is from Candriam and is part of the firm’s sustainable and responsible investment range. Can we name the fund and say a little bit about it to fill this space please???
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