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

Don’t forget the little guys

So much trade press attention is aimed at what the IFA nationals and networks are doing. Are the big guys moving to a restricted model? What do their centralised investment propositions look like? How do these service (or not) the mass affluent, who previously had access to advice but now face being labelled ‘undesirables’ from a profitability standpoint

There is less of a focus on smaller IFA firms, unless it is in the context of consolidation or doubting their viability. The FCA and others have cited a critical mass needed for an adviser firm to run profitably on its own steam.

At one of our Platforum Adviser Roadshows back in April, technical specialist at the FCA Rory Percival commented on how one-man bands would carry the load of new regulatory requirements, questioning their ability to do so without outsourcing some functions. And a recent CWC Research report produced in association with Fidelity FundsNetwork highlights the need for sufficient resource to cover the increased cost of research, compliance and admin, as well as deal with greater complexity of regulation, IT etc. Apparently 13 is the magic number – three managers, eight advisers and paraplanners, and two admin bods.

As part of an ongoing project, we have been speaking to adviser firms across the size spectrum, to better understand how business models are shaping up in the ‘new world’ and which third-party providers have become the biggest influencers in fund selection. It is very much a work in progress, but we do already have a sample of 50 smaller firms we have mapped out in some detail. These have an average of five registered individuals (several are one-man bands) and a median assets under administration of £50m.

platform_660So how are these smaller firms picking funds? Are they outsourcing much of the investment decision-making process, as many in the industry would expect? Showing a perhaps surprising commitment to being whole-of-market, only three firms in this group are restricted and 70 per cent are using three or more fund platforms. Three out of the four only using one platform use Transact, which is certainly one of the most ‘open architecture’ platforms out there.

Two-thirds of the firms in this group tell us they are still picking funds for clients on an individual basis, and two-thirds are utilising model portfolios constructed in-house. In fact, only three adviser firms out of the 50 told us they were outsourcing fund picking entirely.

Looking at the outsourcing going on amongst this lot, they are light on third-party model portfolios; only 16 per cent use these, with OBSR the most popular choice.

It is the use of DFMs that appears to be most common; 42 per cent are calling on their services at least some of the time. Given the number of times Brewin Dolphin is mentioned and cross-referenced with AUA figures, we estimate that it is influencing a maximum of £560m of the total AUA of £5.9bn shared between the 50 firms. Brooks Macdonald looks to be influencing a maximum of £495m, Quilter £221m, and Investec Wealth £170m.

A third of these IFA firms are using multi-manager funds, but naturally those third parties providing the funds are less ‘influential’ than the DFMs in terms of the AUA they command. Architas, Jupiter, Henderson, Vanguard, 7IM and Standard Life feature most strongly, influencing levels of assets that amount to a drop in the ocean when recalling that £5.9bn figure.

The chart illustrates how influential these outsourcing partners are in terms of proportion of the 50 small firms using them, against what that means in assets. So Brewin is Top Gun on both counts. As you would expect, each of multi-manager and model portfolio providers commands relatively tiny amounts of dosh.

Bottom line? The small IFA firms are alive and kicking; they are still big fund pickers and need to be marketed to; and when they are outsourcing this this can entail big sums for providers, not to be sniffed at. We are also starting to have conversations with the biggest adviser firms, so will soon be able to compare and contrast with the investment strategies and specific outsourcing partners they’re using. But for now, the message to the fund management community is this: do not forget the little guys.