\More to be done to lure in\‘next gen’ advisers
Editor Kirsten Hastings introduces the November edition of <i>International Adviser</i>
Welcome to the final edition of IA Digital. After much deliberation, we have decided to focus on producing and delivering content via our daily bulletins and not by way of a monthly publication.
The world of media and publishing
has changed dramatically over
International Adviser’s 13-year history.
The ways in which content is now
consumed means it is better for us to
focus on delivering news, features and analyses through our email bulletins.
We will continue to write the articles and profiles that have been key features of our monthly publications over the years – they will just be delivered in a different format.
International Adviser is evolving to meet the changing needs of financial advisers across the world. Our commitment to producing up-to-date, meaningful and relevant content
remains undimmed and I thank you for your continued support.
As you may be able to tell, the video was filmed prior to this decision being finalised. But, rest assured, it will not be the last time I reach out to you directly.
The race to the finish line is in full
swing and Christmas parties are starting
to fill the diary. On behalf of the team at International Adviser, I hope you all
have a Merry Christmas and a Happy
Kirsten Hastings, editor,
After finding fault with the processes \of transfer specialists, the regulator \has turned its attention to all advisers \that do transfer business, writes John Lappin
The Financial Conduct Authority has sent out a questionnaire asking advisers who do pension transfer business about almost every aspect of their business. The move has caused some ripples of concern among advisers about future FCA intentions.
Having previously reviewed the processes of transfer specialists, the regulator is now looking at all IFAs who carry out transfers, asking how many clients were advised to do so from 1 Apr to 30 Sep ’15, and for the same period over the next three years.
Advisers are asked what percentage of their business pension transfers account for, the number of specialists within the firm and the approach to triage. The question of comparing any pension solution with a stakeholder pension is even revived.
‘Because of what the FCA has seen in firms they have already investigated, I think the bar is set very low’
Alistair Cunningham, chartered financial planner, Wingate Financial Planning
Other information required by the
regulator includes whether the firm has worked with unregulated introducers and how much money was invested (such as via a discretionary fund manager (DFM) or Sipp), what is the firm’s centralised investment proposition, use of Qrops and non-standard assets and information about charges.
Finally, it asks a question about disregarded benefits from direct contribution schemes.
This set of 10 questions has prompted some advisers to voice concerns via social media about what the FCA may uncover with an eye on professional indemnity and compensation scheme bills.
Setting the bar low
International Adviser spoke with two advisers and a compliance consultant to sample what industry figures have made of the move.
Wingate Financial Planning’s Alistair Cunningham said: “The questions reflect the FCA’s current concerns, particularly the ones relating to what happened with British Steel.
“So, for example, it asks how many firms have used unauthorised introducers, how many have gone into Sipps and then non-standard investments.”
The chartered financial planner suggested that the impact of research such as this would have been greater two or three years previously.
‘There are at least four interpretations of each question. The regulator will struggle to get enough detail on where the risks really lie’
Robert Reid, principal, CanScot Solutions
In terms of what he believes the regulator is expecting, he said: “Because of what the FCA has seen in firms it has already investigated, I think the bar is set very low.
“For me, if someone transfers out they need to be significantly better off, rather than taking the view that if they are there or thereabouts there is little harm done. With that bar, it shouldn’t be a big issue.
“Will there be loads of people transferring into Sipps and non-standard investments? I think not.
“They may have 90% getting through triage and then 90% getting advice to transfer. It’s a concern but nothing as major as the issues with British Steel.”
‘There is a certain amount of fact-finding going on as the FCA tries to get a handle on things. It may not be a case
of it going after people’
Adam Samuel, independent compliance consultant
Open to interpretation
According to CanScot Solutions principal Robert Reid, the questions are open to interpretation and advisers may even find it a struggle to provide some of the data, such as what DFMs are charging.
“There are at least four interpretations of each question as the FCA hasn’t screwed down the information well enough,” he said.
Reid also questions whether advisory firms will really have kept records of who they have said no to, certainly when this came early on in the process.
He warned that if the information isn’t correct, the regulator should be careful about extrapolating too much from it.
“I think the FCA will struggle to get enough detail on where the risks really lie,” he said.
Independent compliance consultant Adam Samuel finds some of the questions intriguing, particularly those that indicate the FCA is looking for firms that may have too much dependency on transfer business and might not survive if this disappeared.
He speculates that the regulator may be concerned there is an undersupply of specialists who, as a result, are coming under pressure to approve transfers too quickly to avoid a backlog.
The questions about RU64 and Qrops also caught Samuel’s interest.
“There is a certain amount of fact-finding going on,” he said. “It can be difficult finding out information stuck in an ivory tower. Broadly, the regulator is trying to get a handle on things and work out what is happening. It may not be a case of it going after people.
“Of course, it knows there were some transfers going on that were very wild. This is due to a combination of things. I believe the regulator is trying to scope the size of the issue and make up the information deficit, with a view to a deeper look.”
Strength, security, stability
Three reasons why advisers should choose Isle of Man for Life
With 40 years’ experience and expertise, the Isle of Man’s life insurance and wealth management sector offers your clients the benefits of strength, stability and security.
And, with a range of products to suit the diverse needs of investors, expatriates and high net-worth individuals, it’s a compelling choice for your business.
These are three reasons why the Isle of Man should be your first choice:
‘We offer products that directly cater to the needs of your customers’
1. Strength of our product offering
The Isle of Man is home to a number of regulated life insurance and wealth management companies offering a broad range of products and services. These can support a variety of your client’s financial planning requirements including wealth protection and succession planning.
As a result of our wealth of expertise, experience and understanding of the markets in which we operate, we offer products that directly cater to the needs of your customers. Benefits include, but are not limited to, multi-currency options, the ability to invest into markets that would otherwise not be available and portability.
The variety of products on offer gives the Isle of Man’s life insurance sector the broadest market footprint of all established cross-border life domiciles. Customers include UK nationals and expatriates, high net-worth individuals, expatriates from other countries and local nationals from around the world.
This diversity and flexibility makes it easy for advisers to cater for customer needs through one international financial centre. This is further enhanced by the technical support and excellent customer care that all our companies provide.
‘The move towards greater transparency will bolster adviser relationships with their customers’
2. Security of a strong regulatory framework
Customer protection is an important feature of the products you recommend, with clients valuing the benefits that a well-regulated and transparent market can bring.
The new Conduct of Business Code will be introduced on 1 January 2019 to further enhance consumer protection.
The code applies a range of principles to insurers’ business practices in order that policyholders continue to be treated fairly.
This includes the requirement to provide new customers with standardised information, including details of commissions and fees,
in the form of a key information document
or a summary information document from 1 July 2019.
This move towards greater transparency will help advisers bolster relationships with their customers.
3. Stability of a mature life insurance and wealth management sector
The Isle of Man is one of the oldest and largest international life insurance and wealth management centres offering cross-border products, having built up expertise in this market for over 40 years.
The Isle of Man has a high level of political stability. As a UK crown dependency, it has its own government and laws and, in ‘Tynwald’, boasts the oldest continuous parliament in the world at more than 1,000 years.
The experience and expertise that the Isle of Man’s life insurance and wealth management sector has gained is widely recognised.
As well as being rewarded with awards for Best International Finance Centre, it has also been recognised by the International Monetary Fund as a well-regulated Finance Centre of Excellence.
The sector is also represented by the Manx Insurance Association, an industry body committed to promoting professionalism
Banks re-entering the financial planning market, a Gibraltar Brexit deal and industry scepticism over new probate fees were among the stories making a splash in the UK during the past month
Schroders and Lloyds ready to re-enter advice space
Lloyds Banking Group and Schroders have struck a deal to make them joint owners of a new financial planning company.
The involvement of banks in the UK financial planning space has been limited since they moved away from the traditional position of having in-branch staff offering products to customers. But that seems to be changing.
The partnership will combine Schroders’ investment and wealth management expertise with Lloyds’ significant client base and multi-channel distribution and digital capabilities.
The intention is that the new venture, set to launch by mid-2019, will become one of the top-three in the UK within just five years.
Its introduction to the market could have significant repercussions for the availability and cost of advice.
A spokesperson from St James’s Place was unable to comment on the deal but told International Adviser: “Any new entrant into the market supports our belief that there is a significant advice gap in the UK.
“A growing market combined with fewer advisers, low interest rates, tax complexity and pensions freedoms means there has never been more demand for advice than today.”
Chief executive of Intrinsic Andy Thompson told IA: “Banks re-entering the market should not be seen as a threat. Research has shown that those who take advice are likely to continue to take advice in future, so I believe a rising tide can lift all ships.”
Under the deal, Lloyds will own 50.1% of the share capital of the financial planning business, with Schroders holding the remaining 49.9%.
Schroders co-head of UK intermediary James Rainbow and Scottish Widows chief executive Antonio Lorenzo will become chief executive and chairman of the new business, respectively, subject to regulatory approval.
Gibraltar on dry land as post-Brexit
A deal has been struck between the UK and the EU regarding Gibraltar putting to rest any fears of the status of the disputed peninsula after a Brexit deal is reached, according to Fabian Picardo, the territory’s chief minister.
In a statement, Picardo said there was “a fairly final protocol on Gibraltar”, which will be a part of the UK-EU withdrawal agreement.
“There is genuine reason for optimism that there is no longer any question mark over the inclusion of Gibraltar in any transitional or implementation period,” he said.
Spain’s prime minister, Pedro Sánchez,
was reported to have said that the protocol
on Gibraltar was “already closed with the British government”.
Details have not been released but press reports indicate the protocol will mean Gibraltar is covered by the UK’s withdrawal agreement and that the rights of people in and near the territory will be addressed.
Picardo said: “The protocol follows, in great measure, the structure of the protocol on Northern Ireland.”
Critics brand probate fee ‘stealth death tax’ on big estate holders
The Ministry of Justice has introduced a probate fee of 0.5% on estates worth £50,000 or more, while setting a cap of £6,000 for estates worth more than £2m.
However, by increasing the threshold for which probate fees are incurred to £50,000 from the existing £5,000, from April 2019 in England and Wales only, the new structure will lift around 25,000 estates annually out of fees altogether.
Fees will be capped at 0.5%, instead of the 1% initially proposed, meaning around 80% of estates will now pay £750 or less.
Parliamentary under-secretary of state for justice Lucy Frazer said revenues from the fee system would go towards running costs for the courts and tribunal services.
However, the industry still has major reservations about the legislation.
Rachael Griffin, tax and financial planning expert at Quilter, said: “The replacement of the flat-rate probate fee of £215 will likely mean people with large estates will face extortionate fees. With property values at historically high levels, the number of estates falling into a top band are likely to be high.
“Despite the reassurances, it’s hard not to see this as a stealth tax on those who already pay inheritance tax.”
Similarly, Nick Rucker, national head of tax, trusts and estates at Irwin Mitchell Private Wealth, claimed the reform was a “new death tax”, and said the current fees already covered the cost of providing such services.
Closing\ the gap
With unprecedented growth and transition on the near horizon, the financial advice industry desperately needs to attract young people into the profession – but, at present, it is proving a hard sell
Demographic and cultural shifts are simultaneously increasing the demand for wealth management and financial planning services, yet as a profession we continue to struggle with bringing in ‘new blood’. This leaves us facing a sizeable recruitment challenge.
It is hard to obtain statistics on the average age of a financial adviser but it is widely recognised that the profession continues to be
made up predominately of males in their 50s. This has to change.
We all have a responsibility to bring about that change by taking steps to show that the profession offers a meaningful and rewarding career. If we can’t attract the ‘next-gen’ planner into the industry, there is going to be a shortage in advisers to meet the needs of future clients.
As a sector, we have not been great at investing in training and development.
We instead look for advisers to achieve the minimum qualification standard and to be FCA authorised, then we send them out with no further training and development. Fortunately, this is changing.
‘The wealth management and financial planning profession is facing a sizeable recruitment challenge’
Making a commitment
Starting a graduate scheme or an academy is a big commitment for firms to undertake, both in terms of financial investment and time. However, the Mazars Financial Planning Graduate scheme and the academies run by other firms, such as St James’s Place and Intrinsic, demonstrate that a significant return on the investment can be achieved.
Firms that have clearly defined schemes and training programmes in place, and which are attractive to millennials, will have a significant advantage during the next decade as unprecedented growth and transition looms.
To run a successful graduate or apprenticeship scheme there has to be a formalised on-boarding and training programme that runs for at least two years. Although realistically, for it to benefit everyone – both employer and employee – it needs to be designed to have touch points for development for at least three to four years.
A recent study conducted in the US by EY shows there is a link between the length of the training programme and retention rates. It found that increasing the length of a formalised training programme from three years to close to five improves retention of trainees who become authorised during the programme. Some firms managed to increase retention up to nearly 50%.
‘Starting a graduate
scheme or an academy is
a big commitment for firms
to undertake, both in terms
of financial investment
Mentoring is an essential part of the development programme. It can improve the trainees experience, provide a better client experience and help retention rates over the longer term.
An important aspect of this is to have a scheme that provides exposure to clients as early as possible. Although it is also crucial that much of the early months and years of training will need to be spent on developing interpersonal and soft skills.
There is evidence to suggest that client exposure notably increases engagement and loyalty from the trainees, while at the same time it provides a ‘real’ learning environment. This gives trainees invaluable experience of seeing different advisers interact with clients from all walks of life.
Mentoring is also vitally important because it provides a forum for trainees to openly discuss their ideas and concerns. This is good for the growth and development of financial planning professionals.
I recognise that not every business is going to have the time, capability or financial resources to invest in the training and development of young individuals, but if you can, the return on investment over the longer term is significant.
Having spent many years training and developing individuals in my various teams, I can wholeheartedly say it is worth the investment of time. It is so rewarding to see students learn and become excellent client-facing financial planning professionals.
In sickness and in health
Death benefits and IHT are key when providing advice on pension transfers for clients in poor health
Financial advisers are often called upon to impart recommendations on a variety of pension transfers when clients are in poor health. This could be in the form of defined benefit (DB) pension transfers or transfers where safeguarded benefits are involved, such as guaranteed annuity rates.
Even pension switches with a view to
access flexible benefits could incur inheritance tax (IHT) if the client dies within two years of the switch.
Without doubt, for clients in poor health, and particularly where DB pensions are involved, death benefits play an integral factor in the decision to transfer out.
‘Under the Pension Act 2011
and from 6 April 2012, IHT charges for ‘omissions’ to take pension benefits in relation to a UK pension scheme will no longer apply’
Case in point
Such circumstances were highlighted by the Court of Appeal’s verdict of the Parry v HMRC (2018) case that took the industry by surprise.
The UK’s financial advisory community was enthralled by the case, particularly professionals that specialise in pension transfers and switches between UK pensions.
Perhaps the most-intriguing outcome prevailed as the judges failed to agree on the exact reasons why IHT should apply in this case, despite an agreement it should apply for both item 1 (transfer from the Section 32 scheme to a personal pension plan) and item 2 (Mrs Staveley’s omission to withdraw an income from the personal pension plan).
It is important to highlight that under the Pension Act 2011 and from 6 April 2012, IHT charges for ‘omissions’ to take pension benefits in relation to a UK pension scheme will no longer apply. Mrs Staveley was not able to benefit from this as she died in 2005.
When the client is in poor health a transfer between two pension schemes is likely to be a transfer of value under the Section 3 para (3) IHTA 1984.
This is because of the client’s failure to exercise a right, ie he could have exercised a right to nominate their estate to receive the death benefits. By failing to do this, their estate is reduced, and IHT should apply on the amount that reduced the value of the estate.
In these cases, section 10 of the IHTA 1984 is equally important and particularly where there may be an intention not to confer a gratuitous benefit. In this instance, IHT should not apply (see box).
In the Parry v HMRC case, Mrs Staveley’s health had been defined as terminally ill. Upon her impending death, she had prior sought to ensure that no pension benefits would fall into the hands of her ex-husband.
Under the pre-A day pension rules (introduced 6 April 2006), any surplus
in pension benefits would have been previously paid into the company owned by her former husband.
Given their acrimonious divorce, Mrs Staveley wanted to take every precaution to ensure this wouldn’t happen and that her ex-husband would not benefit.
As Mrs Staveley realised she would not survive beyond 6 April 2006, when the new pension rules came into effect and
new death benefits pension rules also applied, she decided to transfer her pension benefits from the Section 32 scheme to a personal pension plan.
When arriving to a conclusion,
the Court of Appeal judges would have considered whether Mrs Staveley’s intention was to confer a gratuitous benefit, as per Section 10 IHTA 1984.
To do this, they looked at what happened after the transfer with the view that the transaction should be considered together with the “associated operations”, as per Lord Justice Nevey’s verdict statement.
In this case, Mrs Staveley’s decision not to take retirement benefits led to the conclusion there was an intention to confer a gratuitous benefit to her children, too, and as a result IHT should apply on Item 1.
“The fact that the transfer to the PPP was not intended of itself to confer a gratuitous benefit (because Mrs Staveley was not intending to improve her sons’ position by it) cannot without more prevent it from having been a relevant ‘associated operation’.
“The FTT was, in my view, mistaken in considering there was ‘no intent linking [the omission to take pension benefits and the transfer to the PPP]’,” said Nevey.
‘In the case of clients in poor health but not terminally ill,
a transfer from a DB scheme should not be intended to confer a gratuitous benefit’
Questions and answers
This recent case has undoubtedly raised
many questions. In cases where clients are terminally ill, I agree with HMRC that
there can be no other reason to transfer
unless with a view to confer a ‘gratuitous benefit’, ie to increase death benefits
for both the client’s spouse and
That in itself does not mean a transfer should not be recommended. For married clients, Section 18(1) IHTA 1984 exemption may still apply. Applicable circumstances would require the value transferred be attributed to their spouse’s estate and,
if not, the spouse’s estate must be increased
by that value.
As a result, for the spouse exemption to apply the spouse must receive the death benefit as a lump sum.
A nominee flexi-drawdown pension, received by the spouse, would not benefit the IHT exemption as it would not increase the value of the spouse’s estate.
In this case, the Nil Rate Band (NRB) would be applicable. In many cases, the NRB would be suffice to cover the transfer of value, as calculated by the Government Actuarial Department based on the illness the client suffered from.
Another option may be to advise the client to nominate their estate to receive the death benefits from the personal pension. In this case, both the spouse exemption and the NRB will apply.
In the case of clients in poor health but not terminally ill, a transfer from a DB scheme should not be intended to confer a gratuitous benefit. Here, advisers must show caution as they draft suitability reports.
It is important to indicate higher retirement benefits as the singular reason to transfer, and not death benefits.
Once the transfer proceeds, the client must start withdrawing higher retirement benefits as any omission to do it will indicate the intention to confer a gratuitous benefit.
In the event that a client survives two years beyond the transfer, an alternative retirement planning strategy may apply.
This may include stopping retirement benefits or the client starting an expenditure on assets that would otherwise be assessed for IHT on death.
Where all advisers may not be accustomed to such complexities or issues, it is vital to stress that should a client be healthy when the transfer actually takes place, the value of the transfer for IHT purposes would be nil.
As a result, no IHT would apply in the event of a client passing unexpectedly in the course of the next two years. The executors or personal representatives of a client’s will and estate must still report the transfer or pension switch on the IHT409 (form).
London is a magnet for overseas property investment but a proper \understanding of UK inheritance tax law is paramount to\ producing cash from brick and mortar assets, writes Neil Jones
Property prices in the south-east of England, and especially London, can make owning a residential property a lucrative exercise.
Wealthy non-UK residents look to London property for three main reasons: as a buy-to-let investment; to accommodate family members such as students or returning expats; or as a London base for work and holidays. It has been suggested that more than 70% are bought as an investment and to rent.
Recent figures also show that a third of new homes in the prime central London boroughs of Westminster, Kensington & Chelsea and the City were sold abroad.
‘A third of new homes in the prime central London boroughs of Westminster, Kensington & Chelsea and the City were sold abroad’
As the owners may not be resident in the UK they might not appreciate the impact of inheritance tax (IHT). Individuals who own UK property will be liable to UK IHT even if they are non-UK resident and not domiciled in the country.
IHT in the UK is mainly linked to domicile and a non-UK domicile will pay tax on any immoveable assets based in the UK. This, by definition, will include any UK property.
If these individuals become UK resident then once resident in the UK for 15 of the previous 20 tax years, they will be deemed UK domiciled and be taxed accordingly, paying UK IHT on their worldwide assets.
Wealthy individuals who own a UK property, even if they do not become deemed UK domiciled, could leave a significant tax liability to their family when they die.
In the UK everyone is entitled to a nil-rate band of £325,000 and a residence nil-rate band of £125,000. After this everything is taxed at 40%, unless at least 10% of the net estate is given to charity, in which case they would benefit from a reduced rate of 36%.
Using the 40% rate, consider an individual who owns a property in London that is valued at £5m. On their death they would potentially leave an IHT liability of more than £1.8m, which would need to be paid before the assets can be passed on to the heirs.
In the past, many non-UK domiciles created an overseas company to buy the property, as IHT was not charged on assets held in overseas corporate structures. In recent years, however, the UK government has made ownership of property in this way much more onerous and expensive.
Company-owned properties can be subject to higher rates of stamp duty than personal ownership, the Annual Tax on Enveloped Dwellings (ATED) may be payable and ATED-related capital gains tax could apply.
In addition to these taxes, the UK government now charges IHT on the death of an individual who holds shares in a company that owns a UK residential property. The value used for the tax is the value of the shares that represent the underlying property.
Taking corporate ownership a stage further and using trusts to hold the shares in the overseas company that owns the property means the shares that represent the value of the UK property will not be excluded property and potentially subject to tax.
‘The costs associated with holding a property in a trust and corporate structure can be unattractive’
As the taxes and costs associated with holding a property in a trust and corporate structure can now be unattractive, many consider owning the property personally. This means they must find alternative ways of meeting the IHT liability.
Home away from home: One Knightsbridge in central London is a popular property investment for overseas buyers
The easiest alternative is to insure the potential IHT liability.
Take the example of the case study: a property worth £5m owned by a non-resident, non-UK domiciled individual. The owner could insure their life for £1.8m with a policy designed to pay out to their family on death.
An insurance company would then provide a lump sum to cover the potential IHT liability. The cost of cover could vary depending on state of health, lifestyle, country of residence and so on, but could be significantly cheaper than the various taxes and fees associated with more complex and convoluted ways of owning a property. It would also be much easier to explain to family members.
The use of a suitable trust could ensure the sum assured is paid out quickly and without any unnecessary taxes, but this would depend on the policyholder’s country of residence.
For those not resident in the UK, or who opt to use the remittance basis, the use of a non-UK insurer may be attractive. If the individual has sufficient foreign assets to justify the remittance basis charge, then they can fund any policy using unremitted funds.
If the sum assured became payable and was brought to the UK there may appear to be a remittance, in which case the derived remittance would equal the premiums paid to the extent they had been paid from foreign income and gains.
As the remittance basis user would have died prior to the remittance being made, there is a question of who would have to pay any tax, especially if the sum assured was remitted in the tax year following the death.
Looking at HMRC’s Residence, Domicile and Remittance Basis Manual, section RDRM33600 states that, “Foreign Income and Foreign Chargeable Gains of a remittance basis user that arose or accrued before his or her death but which are brought to the UK after the date of his or her death will generally not be regarded as a taxable remittance.”
On this basis, the lump sum may not be taxed when being remitted anyway; but it is important to clarify the tax position when considering any remittance to the UK.
A life assurance solution also provides simplicity if the property is disposed of during the individual’s lifetime. If the property is sold and the proceeds moved away from the UK, the IHT liability would fall away. Any life assurance would therefore be surplus to requirements, the individual could cease the premiums and the policy would lapse.
Sometimes simplicity is the most suitable solution – and life assurance is certainly more straightforward than some more complex financial arrangements.
Why digital disruption is good
Five ways the digitalisation of the finance industry can help your business and improve your efficiency
We’ve all heard the buzzwords – cloud, digitalisation, integration, big data, AI, etc. Our industry is investing heavily in fintech, which has led to dramatic change in how investors interact with their investments and engage with their advisers.
It also is disrupting the way financial services businesses operate. But this disruption is a good thing. Here are five ways digitalisation can help you manage your clients and business.
There are many benefits to businesses moving to the cloud, eg secure data storage, cost effectiveness, remote access to information and simplified IT systems. And it is much cheaper in the long run.
Being cloud-based means more than sending and receiving emails from your phone. Many businesses are now moving their entire back-office and customer relationship management (CRM) systems into the cloud to create a single source of truth for their business and for their clients.
Using a CRM means that a business is easily able to store all client fact-find information and have investment data feeds from all their preferred product providers. This allows both advisers and investors to see an up-to-date breakdown of all their investments anytime and anywhere.
All documents, staff notes and correspondence can be saved and stored directly to the client record, too.
There’s no more panicking five minutes before a meeting to get valuation statements printed. They’re right there on your and your clients’ mobile devices.
‘Many businesses are moving their entire back-office and CRM systems into the cloud to create a single source of truth for their business’
How in the world can we reduce our use of paper and still meet the ever-increasing burden of regulation? You guessed it – digitise.
Robo-advice platforms were the first to introduce digital on-boarding, helping investors work through the financial planning process, open accounts and invest.
The technology is now available to the rest of the industry, and financial advice businesses and product providers can use platforms to take clients through the advice process in the same easy way. Regulators in most developed financial services markets now accept digital signatures and digital acceptance, so the advice process can happen entirely remotely.
There is no more inputting an address and date of birth a hundred times to apply for an investment, and no more paperwork drudgery that nobody likes. Tech can pre-populate pages and transfer data via integration without sacrificing a single tree.
‘Tech can prepopulate pages and transfer data via integration without sacrificing a single tree’
Thanks to the online revolution, almost anything we are interested in requires us to provide an email address. Now we are all receiving hundreds of emails from places we don’t even remember signing up to.
Somewhere there may be an email from my adviser – if only I could find it! New regulations, such as the EU’s General Data Protection Regulation, are putting the onus on businesses to ensure that all their communications are targeted, interesting and appropriate to the recipients.
Businesses must have a reason to communicate and must make it easy for recipients to opt out of further communications if they wish to do so. Without a digital solution, client communications can be time consuming and prone to error.
‘Dear John’ is no longer acceptable as the only means of personalisation. Wealth management e-marketing platforms can now send relevant information about a client’s portfolio (with links to download their reports) in a single-click bulk email. Emails can be sent automatically about upcoming reviews, payments or even a happy birthday message, delivering a high-touch experience for the client without staff lifting a finger.
‘Without a digital solution, client communications can be time consuming and prone to error, and businesses must have a reason to communicate and make it easy to opt out’
Regulatory expectations on financial planning are well known. You must be able to demonstrate that you know your client , understand their attitude to risk and that you have provided suitable advice.
It can be quite a challenge to look retrospectively at how advice was delivered, prove that it was appropriate at the time and that clients are being regularly reviewed.
Building the right workflow in your technology platform can allow you to store all communication in chronological order, scan and store IDs and documents, keep track of meeting notes and tasks, and ultimately be able to demonstrate every step in the implementation of advice.
And there is no longer any need to be afraid of the auditor as you can run all your reports in a matter of minutes.
The more clients we have, the more portfolios we need to manage. For many of us, once a figure such as 100 portfolios is reached we can start to struggle, and eventually there is not enough time to effectively keep it all in line. We can’t take on more clients without sacrificing service.
A centralised investment proposition is a step toward scalability. With a set number of model portfolios that together can serve the entire client base, suddenly the upper limit of the client book can be extended.
However, the challenge remains to keep portfolios in line. Rebalancing portfolios still requires client acceptance of recommendations, requiring individual submissions and limiting scalability.
Managed accounts are a better way to administer portfolios. Clients can invest into a strategy that is managed by a model manager. As the manager instructs a change, a single rebalance across all portfolios can be executed in one instruction, saving time and sharing the transaction costs across all participants. This is cost-effective for the client and scalable for the adviser.
As I hope these five points emphasise, embracing digital technology is easy and can be transformative for your business and for your relationship with clients. Are you ready to digitise?
Stuart McCulloch, The Fry Group’s \market head Middle East, discusses \the advantages of building a new \team in the region as well as the opportunities to be found there
When The Fry Group decided to venture into the Middle East, it was Stuart McCulloch who was tasked with leading the business expansion.
McCulloch comes with a CV you would struggle to fit on two sides of A4 paper. He was previously head of operations at the Bank of Singapore in Dubai and, before that, head of operations, Middle East, at Coutts. Both roles were based in the Dubai International Financial Centre (DIFC).
However, it was in the UK that McCulloch first got into the industry after attending one of the recruitment drives routinely held by the banks and big insurance companies in the early 1990s.
“I started in the industry in 1991, in a regulated role with Prudential. I was, what you called at the time, a financial consultant.”
It was a job where he got “to know people and their stories”.
McCulloch later moved to London with Halifax before returning home to Edinburgh, where he worked at Standard Life for nine years. It was in November 2011 that McCulloch relocated to Dubai with Coutts.
He was introduced to The Fry Group after he had moved to the Bank of Singapore.
“I had conversations with chairman Jeremy Woodley and David Pugh, head of marketing and sales. I then put together a business plan for them about how to open in Dubai.”
On the back of this, McCulloch was asked to head up the new venture.
“I am market head for the Middle East and that means I’ll be setting up and running the office in Dubai. Ultimately, once we have established a foothold in the UAE in Dubai, we’ll be looking to branch out to other places in the region, like Oman and Bahrain, where there are a lot of British expats.”
When the application is accepted and the doors open, The Fry Group will operate from the DIFC under a category 4 Dubai Financial Services Authority (DFSA) licence. “From there it’s about building out, gaining momentum and hiring good quality staff. The Fry Group has a clear vision to grow the business over the next five years and the Middle East is a key part of that strategy.”
As McCulloch explains, “there are more than a quarter of a million Brits living in the Middle East compared with approximately 30,000 in Singapore”.
‘The Fry Group has a clear vision to grow the business over the next five years and the Middle East is a key part
of that strategy’
Stuart McCulloch, market head, Middle East, The Fry Group
When it comes to recruitment, “we apply the same conditions as we would in the UK in terms of qualifications”, he says. Although finding the right adviser could be challenging, as he admits that “the talent pool in the Middle East and Dubai is relatively shallow, but there are some good guys out there”.
“I’ve been speaking to a lot of people over the past few months and we’ve managed to identify an initial core team of very good-quality individuals.
“It’s also an opportunity to bring in younger people who won’t have the baggage of other advisers. We can develop them from scratch to become a really good Fry Group adviser.”
McCulloch has made one such hire for the Middle East and is confident that the firm will be able to build him up to be a “top-class financial planner”.
Like the rest of the group, the UK expat market will be the focus for the firm’s Middle East office.
“The Fry Group has been effective at dealing with British expats and providing them with a full remit of tax, estate and wealth planning, as well as a robust investment proposition.
“But we are also a firm that is well adapted to supporting people moving back to the UK or from Dubai to somewhere else in the world with the help of our global footprint.”
So, the focus won’t be exclusively on UK expats, he says. “If we have clients who aren’t British but they are a good fit for us, in terms of the suite of services we provide, then we would certainly consider working with them.”
Emiratis and other Gulf Cooperation Council nationals who have invested in UK property will likely be hit with UK inheritance tax, meaning there could be a significant pool of UAE clients in need of specialist advice.
Dubai consistently ranks highly as a top destination for expats.
The introduction of a visa in 2019 that allows expats to stay after they retire is another string to the region’s bow, and it will mean more money made in the UAE will be spent there.
“At a very senior level in Dubai they are looking at how they can make it a more attractive place for expats. There is a momentum to address the issues that have made things more challenging for some people to settle here.
“The government in Dubai is clearly trying to set up this market as a go-to destination for investors and for expats to come and have a good quality of life,” says McCulloch.
But he cautions any prospective expats that it’s not as easy as it seems to just up sticks and relocate to the Middle East.
Dubai is becoming a go-to destination for expats
On the paper trail
It has been a torrid 2018 for emerging market government debt but volatility has opened some \attractive entry points in Asian government paper for those prepared to take on risky assets
Since the beginning of 2018, government debt denominated in US dollars has been under pressure due to the normalisation of the Federal Reserve’s balance sheet and rising rates. Debt in dollars is more attractive to investors as the dollar strengthens but weighs on the issuer’s finances as the value of their currencies falls.
The most commonly used index for measuring government bonds denominated in hard currencies, the JP Morgan EMBI Index, is down by 5.6% year to date in USD terms, through October 2018.
The sector’s recent troubles highlight the inherent risks of investing in emerging markets government debt. Some countries have a current account and/or budget deficit, and are therefore more dependent on the export of goods. Even China, which for many years exported more goods than it imported, reported in the first quarter of 2018 its first current account deficit since 2001.
The pain for investors in Asian government paper is exacerbated by the the price of oil, which has risen by more than 16% in one year, through to the end of October, in USD terms.
Feeling the pinch
As major oil importers, countries such as India and Indonesia have seen their current account deficits widen. For example, the Indian rupee fell by more than 11% in a year compared with the US dollar and the Indonesian rupiah by more than 7%.
Although China is not formally part of the EMBI index, many countries in this index are important trading partners of China, and are vulnerable if trade volumes trickle down.
In this context, during the first 10 months of 2018, emerging market government debt denominated in dollars has underperformed in relation to other risky assets, such as high yield corporate bonds.
Nevertheless, many emerging market portfolio managers argue that the sector still offers compelling investment opportunities at the country selection level, and that current valuations can provide attractive entry points.
‘EM government debt denominated in dollars underperformed in 2018 but current valuations provide attractive entry points’
The sector includes sizeable funds with different investment strategies and risk profiles.
• Templeton Emerging Mkts Bd A, which carries a Morningstar Analyst Rating of Bronze, is the largest fund in the Morningstar Global Emerging Markets Bond category. Sonal Desai (pictured) will be stepping down from the fund’s helm at the end of 2018 to take over as CIO of the firm’s fixed income group. Despite this, the fund’s deep analyst bench and distinctive approach remain strong marks in its favour.
The fund plies a benchmark-agnostic approach, building the portfolio based on the team’s meticulous fundamental sovereign and currency research that incorporates feedback from local market participants. The contrarian-minded group attempts to find those opportunities early on –even in unloved or illiquid market corners – and then watch its theses unfold over several years.
For example, the team stuck with its near 10% stake in conflict-torn Ukraine in 2014-15 as the country restructured its debt; it also held onto a 15% stake in Argentine local bonds during its recent political turmoil.
• Pictet-Global Emerging Debt is another one of the category’s heavyweights. The fund’s Morningstar Analyst Rating was downgraded from Bronze to Neutral in May 2018, following the departure of Pictet’s head of emerging markets debt Simon Lue-Fong (pictured).
Guido Chamorro and Philippe Petit, who have been part of the team since 2007, have been appointed provisionally as heads of this fund’s hard currency strategy.
Pictet is also planning on hiring a senior investment manager to add to the team and will only make a definitive appointment after the new member is on board, which adds an element of uncertainty.
This fund has a substantial amount of freedom to deviate from the benchmark. Up to 33% of assets can be invested in local currencies and local bonds, and developed market debt and currencies.
High-conviction strategies have been the best performers in the past three and five years.
• Neuberger Berman Emerging Market Debt Hard Currency, rated Silver by Morningstar, ranks as one of the best funds in its peer group over three and five years. Its team, which joined in 2013 from NN IP and is led by Rob Drijkoningen (pictured) and Gorky Urkieta, focuses on bottom-up country selection, with top-down beta management, (spread) duration positioning and corporate allocation playing secondary roles.
The fund can invest off-benchmark in EM corporate bonds, which has added to its volatility over time, though its risk-adjusted track record remains strong compared with both active and passive competitors.
• Vontobel Emerging Markets Debt, rated Bronze by Morningstar Analysts, has also delivered category topping returns over three and five years. Luc D’hooge (pictured) and co-manager Wouter van Overfelt have managed it since inception in 2013.
This is a high-conviction, bottom-up approach, focused on finding relative value opportunities among mispriced securities across currencies, curves and issuers.
As a result of the search for mispricings, the fund treads more heavily in less liquid frontier market issuers than its index. This is a source of risk, particularly since the strategy has grown substantially ($2.9bn as at Oct ’18), though we remain confident on its merits.
During the past three years, there has continued to be new fund launches in the category. In particular, concerns on a rising interest rate environment seem to have spurred launches of short-duration emerging market debt funds, such as NN (L) EM Debt Short Duration Hard Currency, launched in April 2018, or BSF Emerging Mkts Short Dur Bd, launched in December 2017.
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