On Investing

Asset managers must adapt to new gatekeeper approach

Asset management businesses are grappling with some serious challenges at the moment. Reshaping their relationships with intermediaries in a post-commission world and identifying who the investment decision-makers really are in the remodelled advised market are arguably chief among these.

The starting point for meeting such challenges is understanding the increasingly important role being played by the company-wide, or centralised, investment process (CIP). For the majority of advisory firms, this has become the way that investment business is done. Almost four-fifths of advisers report that their firm has a centralised investment process in place; 84 per cent of advisers adhere to one if you exclude one-man bands from the numbers. These stats are encouraging. Many firms have responded to regulatory change and gone a long way to implementing processes that help individual advisers deliver investment advice consistently across a firm’s client bank.

The acronym CIP is bandied around, reverberating off the walls of City offices when talk turns to how to engage with today’s (and tomorrow’s) brand of advisory firm. But what actually is a CIP?

Sometimes the P stands for process; other times proposition. Thinking about process, firms are increasingly implementing measures that allow them to deliver consistent investment advice: an investment committee with ultimate decision-making power, risk profiling to help determine asset allocation and a centralised investment proposition to map on to the desired asset allocation. Often, there is also a process through which advisers can make a special case for deviating from the centrally-imposed parameters.


A rising proportion of advisers are buying into the concept of a CIP – both process and proposition. Waning support for bespoke portfolio design is indicative of this general trend, with Platforum research proposing a ratio of bespoke to model solutions (including model portfolios and fund of funds) of 45:55.

Many advisers are embracing model portfolios on the grounds of business scalability. Using an attitude to risk questionnaire linked to a set of model portfolios means that advisers can take on more clients and give more attention to the wraparound financial planning service. This point is of growing relevance to DFM businesses providing investment management for advisers’ clients – there will be a limit to the amount of outsourced bespoke business they can take on. DFMs we speak to echo that bespoke treatment for asset allocation and fund selection isn’t necessary in the majority of cases. Moreover, the additional cost for a bespoke portfolio that looks very similar to one of the model portfolios is being called into question. A minority of clients have particularly complex needs, or simply want the experience of bespoke because they like the feel of the premium customer service. For the rest, bespoke portfolio services probably don’t represent good value for money.

Growing support for model portfolios goes beyond pragmatism, or fear of the regulator. To some extent, the shift seems to reflect a relatively new philosophical belief in how investment advice should be given. Exemplifying the point, one adviser told me: “I believe in a replicable process. I previously worked at a firm where two virtually identical clients were invested in different funds – why would that be? Why would you have a bespoke approach for everyone? You bespoke the tax wrappers but not the fund selection.”

Investment decision-making is becoming increasingly centralised within advisory firms, as well as more broadly. Similarly, client portfolios are purposely being designed to look more alike within individual firms and across the advised market, thanks to CIPs and the shift towards model solutions. Change has been positive insofar as firms have undoubtedly become more professional in how they handle investment business. However, change is also driving greater fund concentration, which in turn raises a number of issues for the industry.

What we’ve been preaching for some time now is that fund houses need to refocus their sales efforts. The challenge is no longer how to sell to individual IFAs; it’s how to sell to investment committees and gatekeepers, as well as individuals in some instances. Moreover, salespeople need to be more alert to where advisers perceive gaps in their in-house or bought-in fund panels, and conversely the product areas for which they really don’t require a ’me too’ fund. Thinking about the implications of fund concentration for the investment team, difficult decisions have to be made about capacity issues, and how one accommodates increasingly lumpy inflows and outflows as funds are added and removed from CIPs. Such are the ugly truths about advisers’ model behaviour.

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 Investing

Managers better start swimmin’

To quote the oft-maligned but brilliant lyricist Bob Dylan: “The times they are a-changin’” – and fund managers need to take note.  Every time we start working on the latest quarterly Adviser Platform and Distribution Guide there are new market entrants to discuss, shifts in the investment strategies adopted by intermediaries, new flavour-of-the-month funds and sectors. Not to get over-philosophical, but it is astonishing how quickly the landscape changes.

The ongoing march towards centralised investment propositions has continued into the first quarter of this year. CIPs are very much on the lips of advisers, providers and the regulator. Model portfolios were used for 42 per cent of an adviser’s clients. Of these, 10 per cent were entirely outsourced and 32 per cent were governed by internal investment committees. Use of models is on the rise in particular for clients with ample portfolios of £100-500k (up 4 per cent) and £1m-plus (up 6 per cent).

Perhaps unsurprisingly, the use of multi manager has declined across client segments and is now used on average for 19 per cent of clients, compared with 27 per cent a year ago – and this percentage falls to a relatively meek 9 per cent for clients with portfolios of between £500k and £1m. With the near-daunting array of options in the multi-asset space, it is becoming ever more difficult for advisers to spot quality, and for providers to stand out in the crowd.

Now that the RDR dust is beginning to settle, will adviser propositions include an execution-only route, to service certain types of clients?

Some 26 per cent will look for execution-only service from platforms in 2013, based on perception that this is the direction that the market is taking. However advisers are fairly tentative in exploring this option in greater depth, knowing that profitability will be a challenge and that it could prove time-consuming to find a solution that is fit for purpose. Those against the idea may feel that execution-only goes against advisers’ core belief in ‘the value of advice’, or be wary of the regulatory quandary regarding ‘is it advice or not’ when you are charging for it.

With advisers still engaging in fund picking for on average 31 per cent of their clients, it is as important as it has ever been to hear from them what products they are considering for them. Other than mutual funds (unit trusts/Oeics), cash products are the most likely to be included in client portfolios this year (53 per cent), followed by bonds (42 per cent) and investment trusts (41 per cent).

Exchange traded funds also appear to be a relatively appealing feature in the portfolio mix, with 38 per cent of advisers likely to include these. In terms of ‘big change’, equities have seen a real boost in propensity to use – up to 37 per cent from 27 per cent in the previous quarter. There are also upward shifts in expectation to include other types of investment vehicle, which may ultimately be driven by some advisers’ desire to remain independent. Watch this space for how many actually will remain so in 12-18 months’ time.

Turning to sectors, the UK takes both first and second place on the list of highest selling IMA sectors on-platform during the first quarter, with UK All Companies and UK Equity Income; these took the second and fifth spots respectively last quarter. For the other sectors to make the top five for highest sales, “The name’s Bond” – Sterling Strategic, Sterling Corporate and Global.

The top selling fund on-platform in the first quarter was Standard Life Investments’ GARS fund, with Invesco’s High Income and Dimensional’s Global Short-Dated Bond funds hot on its tail. None of these made the top three in the fourth quarter of 2012 – in fact Dimensional was nowhere on the top 20 to be seen. First State’s  Global Emerging Markets Leaders and Asia Pacific Leaders are the fourth and fifth highest sellers on platforms respectively.

With £6.72bn new business on platforms in the first quarter and 68 per cent of new adviser business held on-platform, fund managers would be foolish not to keep a keen eye on developments in this market.

To close with a little folksy advice from Dylan: “Come gather ‘round people/ Wherever you roam/ And admit that the waters/ Around you have grown/ If your time to you/ Is worth savin’/ Then you better start swimmin’/ Or you’ll sink like a stone”.