On Investing

Drawing to a close or just beginning?

6 April came and went and incredibly, no one spontaneously combusted as a result of flexi-access drawdown-related over-excitement. While product providers and platforms were busy gearing up for the new opportunities presented by the pension reforms, some financial advisers were nevertheless reporting ‘business as usual’ to us.

Of course the reforms do have a substantial impact on the adviser community, and some of those that disagree may simply not be fully aware of their implications yet. But it’s true that for certain segments of the market, 6 April passed uneventfully. Advisers at the top end of the market were already managing drawdown portfolios for clients, and were not bombarded with requests for cash withdrawals. That said, they can get excited about the new possibilities for intergenerational planning: the potential to pass clients’ portfolios down to kids and grandkids free of inheritance tax. Growing the portfolio and managing it in the most tax-efficient way are paramount for such clients.

Other advisers have very different considerations for their (potentially new) retirement clients, who will need to significantly draw down on their portfolios to have an income in retirement. Pound-cost ravaging and capacity for loss are key concerns here; consequently long-term cashflow planning is coming more to the fore. Some firms are planning for a lifespan of 95 years, or 105 years; others are even looking into using a third party to underwrite their clients as part of their cashflow planning efforts.

In terms of the products advisers use to populate drawdown portfolios, advisers are wary of product innovation overkill. Some top-end advisers argue that they should simply aim for total returns from well-designed portfolios to meet any investment need – whether it is derived from capital growth or pension drawdown. Others distinguish between drawdown strategies that are based on the natural yield from sustainable income-related funds and feel that regular capital withdrawals add substantial risk.

A number of product types appear to carry an ‘approach with caution’ label in the drawdown context. Many advisers are concerned that very high yield funds eat into capital value to boost their income yields artificially. Bonds are also commonly seen as problematic in the current market climate, with some advisers picking absolute return funds as substitutes. Few advisers appear game for so-called third way products, i.e. products providing exposure to equity-based returns with guarantees of income and/or capital. They feel that guarantees come at too high a price – monetarily and potentially in regulatory terms as well.

On Investing

How will European IFAs fare post-Mifid II?

Talk of Mifid II has finally hit UK shores, having seemingly taken some time to travel upstream. Perhaps this is due to preoccupation with RDR and the sense we have already implemented the “tricky bit” of the new regulatory requirements: the commission ban.

Mifid II will require all European IFAs to forgo commission. Some may well forgo their independent status instead: “restricted” or “tied advisers” can continue to receive fund manager rebates under the current rules.

Some markets have moved beyond the minimum requirements. As you know, the UK commission ban applies across all financial advice and has been extended to the execution-only space. Elsewhere, the Dutch market has banned rebates for non-independents too, while the Swedish regulator has recently announced it will be enforcing a more all-encompassing ban.

Some believe that Mifid II is a slippery slope to an RDR-like commission ban across Europe. However, our research shows the majority of distributors, platforms and fund managers believe different markets will respond differently to the new rules.

Many envisage a kind of north/south divide, with big retail banks and life companies in France, Germany, Italy and Spain hoping to protect the status quo as far as possible.

While opinions differ on the likely implications of Mifid II, there is consensus IFAs have significant challenges ahead of them. IFAs on the continent already struggle to gain significant market share in retail distribution, overshadowed by the banking giants and their advisory networks. Rather than continue with generalisations about the fate of IFAs in Europe, it is probably best to focus on a few country examples – starting with our neighbour across the Channel.

In France there are around 3,000 IFAs (or CGPIs), which account for roughly 5 per cent of total fund assets. Larger IFA groups are beginning to emerge as a result of consolidation.

We anticipate the consolidator firms will do well in the run-up to Mifid II implementation, as some smaller IFA firms find it difficult to reshape their business practices to comply with the new rules.

At the same time, CGPIs are partly shielded from the changes because most new business goes through unit-linked insurance contracts, which the European Parliament decided should not be subject to Mifid. The major French insurers are lobbying hard to keep themselves out of scope of any kind of commission ban.

Meanwhile, the German IFA market is the largest in Europe, with roughly 40,000 registered, although banks still account for the lion’s share of retail fund distribution.

Both Germany and Austria have moved ahead of Mifid II in implementing a ban on IFAs receiving commission payments. New regulation also requires IFAs to obtain a licence, which entails having damage liability insurance, demonstrating an advice process and sitting an exam among other stipulations aimed at increasing professionalism.

These new requirements are too onerous for many IFAs. Some are tackling the additional regulatory burden by entering into a kind of liability umbrella provided by an IFA pool (similar to our advisory networks), which fulfils some of their compliance-related obligations on their behalf.

Others are outsourcing investment management altogether by arranging for a discretionary manager to run their clients’ money. We anticipate huge contraction in this market, not least because the majority of German IFAs are approaching retirement and reluctant to change their business practices.

Elsewhere, IFAs account for roughly 10 per cent of retail distribution in Sweden. The more “professional” firms already offer a fee-based rather than commission-based service, making them more geared up for Mifid II.

There has been a trend towards vertical integration in the IFA channel, with firms of sufficient scale taking on an asset management functions. Some have been building their own fund-of-fund ranges, while others have been putting together Nordic country ETFs.

Interestingly, the very nascent Italian IFA market has little to lose post-Mifid II.

Established in 2008 following Mifid in its initial carnation, this is a niche, typically fee-based channel consisting of 300 or so individuals across circa 20 firms. Mifid II could in fact give a boost to Italian IFA SIMs if consumers begin to open their eyes to the true cost of investing through banks, factoring in hefty front-end loads and more expensive share classes thanks to relatively high rebate demands. SIMs are also waiting for a public register to be established, which would give them the legal recognition currently lacking.

Each IFA market has its nuances. Overall, we expect some movement of business from the advised market to the D2C channel as a result of Mifid II.

However, the extent to which this takes place depends on the ability and willingness of IFA firms to adapt their business models and embrace new professionalism requirements, as well as the level of prior D2C culture in their home market and whether the banks will eventually have to offer fee-based advice.

In the meantime, expect the European distribution landscape to resemble a patchwork quilt, with cross-border fund houses and platforms responsible for stitching it all together.

On Politics, On Society

In support of multi-cultural Britain, 2010-2015

Digging through old shoe boxes of hoarded tickets, birthday cards and travel memorabilia this weekend, I found my Editor’s Note for a special mini-issue of the uni student journal. The mini-issue, Perspectives on Immigration, was produced to accompany an on-campus photography exhibition, but its publication was also timely because of the subject matter’s relevance to the 2010 general election. It’s no big secret that economic migrants experience more resentment during economic downturns; what was perhaps surprising at the time was the extent to which politicians across the political spectrum seemed to jump on the bandwagon, arguing for greater controls and doing little to sell the benefits of immigration.

Fast forward to 2015. The third of the televised leaders’ debates was heartening viewing, insofar as the nationalist, more left-leaning party leaders united against Nigel Farage in highlighting the net contribution made by immigrants to British social and economic life. They also didn’t overlook the advantages of EU open borders to Brits searching for a warmer climate or job opportunities elsewhere. Yet arguably, Sturgeon and co. were preaching to the converted. Shaping the immigration discourse in this country will take a much larger and more concerted effort. The Con-Lib coalition government entirely shied away from delivering this, despite the importance of foreign talent and investment in maintaining the UK’s status as a global financial hub.

In light of political intransigence regarding the issue of immigration, I thought it worthwhile re-publishing part of my Editor’s Note. The following comments are just as relevant today as they were five years ago, and I suspect will still feel current in 2020. I wanted to put forth these views to remind people before they go to the polls that issues of tax and debt are not the only ones that matter. Community, society and culture receive little airtime unless UKIP raises these – that’s to our detriment. I hope that others with a positive view of multi-cultural Britain agree and cast their vote with issues other than cuts and business interests in mind.

The 21st century has seen opposition to the influx of economic migrants in the UK become a central issue in the public sphere. The tabloid media sits firmly in the anti-immigration camp, with sensationalist headlines beckoning the British public to share in their stance. Even on the left of the political spectrum, politicians have pandered to the public and media on the issue. Anti-immigration sentiment has even permeated popular culture; the infamous Morrissey interview conducted by the NME – in which The Smiths singer lamented the loss of a distinctive British identity – is the example that springs to mind.

Perhaps most troubling is that references made to the “immigration explosion” and “flooded gates” are almost reminiscent of Enoch Powell’s “rivers of blood” speech. Political correctness has prevented the overt racism that characterised the immigration debates of previous generations in this country, but comparisons can still be drawn. It’s true that many people today are merely expressing legitimate concerns regarding the rate of immigration, but there are members of the ‘indigenous’ population spewing the xenophobic prejudices of old. National identity is still frequently viewed as a fixed entity, and thus as something that is destroyed with change. This notion is overly conservative, and entirely untrue; growing heterogeneity in our society marks transformation of British culture, rather than disintegration. Unity in diversity is not an uncommon fact of collective human existence, nor does it amount to a death sentence for national identity.

On Investing

Platforms: A Euro-Vision of Open Architecture

It’s time to admit to one of my guilty pleasures: the Eurovision Song Contest. The early heats are in full swing, building up to the grand finale at the end of May. In tribute to this auspicious pan-European competition, whose geopolitical point scoring, questionable music picks and tacky ensembles oddly enthrall (some of) us every year, I’ve crafted my own European Open Architecture Contest. The three categories are: Most Open Architecture, Biggest European Platform and Platform of the People – the last being entirely subjective but important all the same. Forgive me for being not as funny but just as dry as Terry Wogan or Graham Norton!

While in recent years the UK has consistently disappointed on the Eurovision stage, I’m pleased to award our island nation the coveted Most Open Architecture award. Often we use the investment platform market to gauge the opportunity for fund managers without – or looking beyond – captive distribution channels. The UK platform market is £331bn (€430bn) according to our data at 30th September 2014, taking into account D2C, adviser and institutional platforms and removing double-counting where possible. For example, we have included the all-encompassing assets under administration figure for Cofunds and left out the figure supplied to us by D2C platform Willis Owen, as Cofunds Institutional is the engine behind it.

This market closest in size to the UK is Switzerland with €283bn, followed by Italy at €265bn and then Germany at €207bn – less than half the size of the UK.

Lipper data supports the UK’s victory in this category. The top five fund managers in the UK commanded a 31 per cent share of the retail fund market collectively at the end of 2014, excluding money market funds, fund-of-funds and ETFs. Having almost a third of the market sewn up by a handful of groups does not sound like a particularly ‘open’ situation; however compare this to Switzerland where the top five accounted for 80 per cent of the market, or in Italy where they were 69 per cent.


he UK open architecture market currently has around 30 platforms, but none of the home-grown providers have made it big on the European stage (yet). At 30thSeptember 2013, UBS Fondcenter was the big (Swiss) cheese, with AUA of €122bn. A year on and Santander/Intesa Sanpaolo-owned Allfunds has overtaken to win the Biggest European Platform award, with €147bn in assets versus Fondcenter’s €144bn. Strictly speaking, a small proportion of this total is not European – Allfunds has some business in Latin America – but as some other cross-border platform titans don’t provide a country or continental split to us, we’d be remiss to punish the platform for their transparent reporting to us.

The great shame of Eurovision is the discrepancy between who scoops up points and who actually provides entertainment value – Finnish heavy metal band Lordi’s 2006 win being the notable exception. In the European platform arena, it’s the large, ‘serious’ institutional platforms that dominate. So to shine the spotlight on a smaller platform with a big personality, I award IFA and D2C platform Nordnet with the Platform of the People title.

With 371,000 end users across the four Nordic markets at the end of September, Nordnet has better penetration than Hargreaves Lansdown with 653,000 clients – impressive considering the UK population is more than twice that of Sweden, Norway, Finland and Denmark combined. Now that the Swedish regulator will be implementing a full commission ban on investment advice, we also anticipate a future boost in D2C business as some investors shun explicit adviser fees.

Yet the really interesting thing about this platform is how it is trying to encourage consumer engagement, which I first wrote about in February 2014. By acquiring and integrating social investing site Shareville, users now have the option to share the breakdown of their portfolio in percentage terms and transactions real-time, and ‘follow’ the activity of others on the platform. In addition, Nordnet recently launched a suite of four white-labelled index funds with zero management fees to attract new users. The platform makes light of this ‘try before you buy’ strategy in its marketing comms.

So there you have it – a clean contest where political point scoring didn’t feature at all.

On Investing

How ‘open’ are open architecture platforms really?

In the UK and, indeed, across Europe, investment platforms have been hugely important in powering open architecture for institutions (banks and insurers), financial advisers and the end investor. Platforms are often termed ‘fund supermarkets’; users can chuck anything in their shopping basket with no restraint or possible bias other than affordability, although product positioning and special offers are designed to guide the consumer to the most profitable lines.

One French platform revealed that their top 30 funds typically receive 85 per cent of net inflows; a Luxembourg-based platform reported that 85 per cent of assets are held by the top 20 managers despite making available close to 400 fund managers; and the top 20 names represent 60 per cent of platform assets for a major Swiss platform. What are the reasons behind this concentration, and how ‘open’ are open architecture platforms really?

Concentration has historically been high in Europe, but the tide is turning as major Italian tied networks embrace third-party funds and the banks in Spain gradually open up to non-proprietary products. Across the region the likes of M&G Investments and others with blockbuster funds gain ground with big distributors. MiFID II could intensify concentration as the rebate incentive is removed in some channels, or encourage wider choice as consumers wise-up to cost and demand better options.

In the UK, there have been two conflicting forces at play. On the one hand greater professionalism among advisers has meant a reduction in fund manager concentration overall as they move beyond over-reliance on two or three of the biggest fund houses, or engage with DFMs who pull from a wider range of investment products on their behalf. However, on the other hand some players are including fewer funds in investment propositions to cut down on due diligence work and employ better negotiating power with fund managers, or are using investment solutions instead of bespoke client portfolios.

Fund and fund manager concentration is also driven by the machinations of the platforms themselves. Many providers have asset management capability, and thus are more inclined to promote proprietary products. Others were originally developed to sell proprietary investment products via internal channels, and have only more recently extended their remit to external advisers and third-party products. Looking at the UK market, the clout of an in-house manager varies hugely, accounting for anywhere between 10 per cent and 40 per cent of a platform’s assets.

Old Mutual Wealth (previously Skandia) exemplifies the growing trend towards vertical integration in the platform market. The provider has its WealthSelect range of sub-advised funds for advisers, and the Cirilium range run by Old Mutual Global Investors for the Old Mutual-owned network, Intrinsic. And let’s not forget the recent Quilter Cheviot acquisition.

In a role reversal, D2C leader Hargreaves Lansdown has become a fund manager in its own right by building on its range of multi-manager funds. The Wealth 150 researched fund list is the shop window display, and each multi-manager fund a ‘three-for-two’ offer in prime position on the shop floor.

Where platforms are not running funds themselves, there is still incentive for them to steer flows. The range of funds is narrowed by providing investment solutions and select lists, making it easier for larger platforms to negotiate down asset management costs and bolster margins.

We wanted to give some insight into what products are most commonly appearing in platform users’ shopping baskets. We asked the major UK B2B platforms to share the top five fund managers by assets under administration on their platforms. The groups who responded had combined assets under administration of £208bn at the end of September 2014. The resulting infographic takes into account both how frequently fund managers featured in top five lists and the relative sizes of the platforms.


Naturally, the fund managers affiliated with a platform have relatively strong clout, as well as the likely suspects of Invesco, M&G, Jupiter Asset Management and BlackRock (including iShares). Dimensional and Vanguard have been relatively popular on the smaller, newer platforms that have always had an unbundled pricing model, while investment solution providers 7IM and Omnis (the in-house manager for the Openwork network) also feature as top managers.

One suspects that vertically-integrated platforms will continue to see growth in in-house investment product assets. Meanwhile, the more ‘open’ platforms may see passive fund managers eat into the share of assets held by the asset management incumbents, and thus reduce concentration. The UK platform market continues to support different business models and offerings, in spite of the nay-sayers who believe that the market is too crowded.

On Investing

Pension wrappers set to clean up

While we like to report stats and facts at The Platforum, we also enjoy exploring the odd philosophical question. In January, we asked advisers what they perceive a platform to be.

Sixteen per cent responded that a platform is best described as a tax wrapper provider (as opposed to, for example, an investment solution or piece of technology kit). Not a huge proportion but significant nonetheless.

So looking at the platform market through a tax wrapper lens, what is the lay of the land today? We analyse tax wrapper split data on a quarterly basis, both in terms of assets and sales. It really goes without saying that this is a growing area of interest in light of the new flexi-access drawdown rules. Pensions are becoming more attractive as a means of income tax and inheritance tax planning.

Not all platforms provide consistent data for assets under administration, gross sales and net sales by tax wrapper, so the numbers are not a perfect reflection of the market. However, they give a good indication of its current state as well as the direction of travel.

The chart aggregates the tax wrapper data from platforms that have supplied us with asset, gross and net sales figures for Q4 2014. This encompasses a range of platforms, from life companies to fund manager-owned platforms and “independents”. The bulk of platform assets sit within some kind of pension wrapper, be that personal pension, Sipp, SSAS etc., and the net sales figures look very promising for pension business. Conversely, net sales for Isa business suggest that, although this wrapper continues to see considerable inflows, the proportion of assets held within it is decreasing.

The trend is mirrored on the direct-to-consumer side of things thanks to the increased Isa allowance and new pension freedoms. Working from a much lower base of wrapped business, even the stockbroker platforms have seen a shift in money towards Isas and pensions. These platforms have been working on widening their appeal beyond day-traders in a bid to attract stickier money.


We could see an even bigger boost for pension net sales on platforms in the Q1 data. Will advisers and end investors panic-buy, given Labour’s intention to cut the annual and lifetime allowance if it emerges victorious from the election?

We also hear from conversations with those close to the action that advisers are increasingly looking to consolidate their clients’ pension assets. There is plenty of personal pension business still up for grabs that was formerly in defined contribution schemes. We expect much of this business to move into Sipps.

Does this mean more assets on platforms too? Naturally, our focus is primarily on platform players. Yet there are dozens of non-platform Sipp providers also vying for a piece of the action. While in-house platform Sipps tend to be quite “vanilla”, offering access to mutual funds, listed securities and not much else at relatively low cost, the off-platform specialists can work with commercial property and more esoteric investments, sometimes including Ucis. In recent years, we have seen the plain vanilla platform Sipps scoop up assets at the expense of the specialist products – all signs point to this trend continuing as advisers understandably do not want to pay for functionality they do not need.

In summary, pension wrappers – and especially those provided by platforms – look set to clean up this quarter. I am not sure in the past that platforms would have wanted advisers describing them as tax wrapper providers first and foremost, yet currently it is an advantageous label to have.

On Investing

Annuities: the comeback kid?

In the 2014 Budget announcement, chancellor George Osborne decreed: “Drawdown and Lamborghinis for all!” Except not really, and you can substitute “Nissan” for “Lamborghini” given the size of many DC pension pots.

In any case, major change is afoot. Responding to this change, Fund Strategy sister-magazine Corporate Adviserand The Platforum are working together to enlighten the market on the evolving retirement market.

The first report in a series of Retirement Funding Guides focuses on how advisers are reacting to the new pension flexi-access rules coming into force this April – are they seeing their pension business growing, what kind of drawdown service will they be offering, and what asset allocation and specific investment products will likely sit within this?

Many advisers tell us they are already seeing new pension clients and more still anticipate taking on a greater number of clients. And most advisers we have interviewed expect to use pension wrappers more, versus Isas.

With little lead time from the Budget announcement, providers are racing to get their existing products (particularly pension wrappers) compliant as well as build new drawdown-appropriate investment solutions for the market. Most asset managers and life companies are yet to take new products to the pension drawdown market.

The majority of advisers we spoke to in December could not name any new product that had caught their eye; some lamented the lack of new options. We have seen a trickle of retirement product launches in January – most recently from Schroders – rather than a torrent.

Asking advisers which specific product types they will be recommending as part of advised drawdown, multi-asset comes out on top by some distance – 60 per cent are likely to recommend.

This likely stems from the belief that by diversifying within the fund, there will be less nasty surprises and therefore less capital erosion for the client. However, a number of industry commentators have exposed the flaws in this strategy, and have instead endorsed the concept of “bucketing” retirement portfolios: segmenting so that money needed for short-term income is kept in cash and bonds with short duration, and money for longer-term income is sat in other bonds and equities.

Adviser opinion is liable to change once more provider offerings for retirement go live, and as the debate continues regarding best practice in asset allocation for de-accumulation. Currently 40 per cent are likely to recommend an annuity; I read this as an underestimation of a product well-suited to clients matching a cautious risk profile, and potentially offering a better, more stable retirement income in some cases.

Annuities may well be the comeback kid of 2015 for another reason: the frequently referenced advice gap. Advisers posit that retirement income decision-making is too important and too complex to be left to the less informed, and they do not tend to have much faith in technology-driven non-advised solutions. Yet many advisers do not want to deal with pension pots of £30-40k, i.e. an average-sized pension pot.


So what are those with smaller pension pots to do? Tellingly, the FCA commented in its retirement income market study interim report, “… for people with average-sized pension pots, the right annuity purchased on the open market offers good value for money relative to alternative drawdown strategies…”

On the flip side, we have canvassed opinion on the products they see presenting significant regulatory risks when deployed in the retirement market. Almost a third of advisers take issue with capital-protected structured products.

Investment trusts also do not receive a lot of love. Those advising on relatively chunky assets are more likely to see a particular product presenting risks – does this mean that the swathe of advisers with lower personal assets under administration are less aware of the challenges ahead of them?

It goes without saying that there’s great opportunity for all parties – product providers, advisers and consumers – to benefit from the pension rule changes. But the risk of poor outcomes is also great, if these groups are not sufficiently clued up on de-accumulation strategies.

For some, freedom at 55 could mean financial heartache later in life. If Robbie Williams continues to make music (I hope he doesn’t), his lyric “I hope I’m old before I die” might have to be revised to “I hope I’m not broke before I’m old before I die.”