Banks bolstered by depolarisation rules

The new depolarisation regulations are dramatically changing the face of the UK fund management landscape. In a market where insurance companies have traditionally been the dominant product manufacturers, and independent financial advisers the principal distribution channel, UK banks have now the opportunity to increase their distribution market share and acquire new customers by offering third-party products on a best of breed basis. In order to make the most of their new position in the depolarised environment, banks have to learn about how to give best advice, to treat customers fairly and to select the best products for their clients. Fund selection, the emergence of multi-managers, the use of platforms and wraps to facilitate clients’ investments, prospects for foreign fund management groups as well as the changing role of private banks were the themes discussed at the fourth in the European Fund Series of afternoon conferences, hosted in London by PWM in association with BNP Paribas Asset Management. “The phrase wealth management is itself one of the most telling indications of the changing face of the market,” Sir Mark Weinberg, president of financial services provider and consulting firm St James’s Place and one of the most influential figures in the UK financial services market, said in his keynote speech. “Managing wealth sounds much better than selling life insurance or unit trusts to a prospective client”, he said. However, the change in the market is much more than superficial, Sir Mark explained. There has been a dramatic increase in the number of wealthy people. In the UK, for example, the number of high rate taxpayers has doubled to 3m since 1992.

Weinberg: outlined four key rules for governing choice of investments

High-net-worth and mass affluent people require more sophisticated advice, in the light of development of more complex financial instruments such as hedge funds, which have secured themselves a place in the main menu for wealthy people. This demanding environment opens with renewed vigour the themes of asset allocation and manager selection. In fact, there are four key rules that should govern a person’s choice of investments, or the advice that the adviser should give the investor, said Sir Mark.

• Before you start investing money you should have enough liquidity set aside to live well;
• Spread and diversify across asset classes;
• Invest for the long term;
• Select the best possible managers.

What is clear, said Sir Mark, is that depolarisation has created new challenges for UK players who want to offer their clients the proper choice of products to which they are entitled under the new regulation. The future of the traditional IFA model was long debated at the conference. In the UK, the number of advisers has shrunk from 230,000 to 55,000 since 1992. Of those, explained Clive Holmes, chairman of the Gateway IFAs Consortium, only 25,000 are actively working in a sales capacity. Their average age is 56, and their fund picking role in an environment characterised by “product fatigue” is seriously questioned. “Ninety per cent of those 25,000 firms are turning over less than £50,000 (?73,000) a year,” said Mr Holmes. And the vast majority of people in the IFA community do not have the money or the capital to invest in technology. “The concept of IFAs sitting in their office and making fund selections, considering that there are over 25,000 funds to choose from, is just frightening” stated Mr Holmes. The fund of fund manager or the head of manager of manager funds should be responsible for fund selection, said Mr Holmes. This is the type of model recently introduced by Barclays retail bank. Steve Ingledew, head of IFAs at Barclays, who has been recently recruiting independent financial advisers to work in the bank branches, in a panel debate on fund selection and distribution channels said: “We wanted to move away from a product-led model to one that puts clients’ needs, the clients’ attitudes to risk and what they are trying to achieve at the forefront.” “Barclays has objectively selected through research and evaluation the best products, solutions and funds for clients in particular situation that give them the advice and element of choice,” added Mr Ingledew. Barclays employs 28-29 underlying managers in its multi-manager offering. The belief that “the one-stop asset management solution is dead”, to quote Anthony John, managing director at Investment Manager Selection (IMS) and that IFAs can no longer be given the huge responsibility for selecting managers will ensure that there will always be space in the market for multi-management businesses such as at IMS, said Mr John. Having had success in the institutional arena, the firm is now looking to make an impact as fund selector for private banks and wealth managers. “We are faced with the dramatic need to go and see a lot of fund managers and properly assess the qualitative factors. That cannot be done anymore by IFAs, as they have not got time to do that. It needs to be properly resourced and needs to be a full time activity,” he said. A hybrid sub-advisory model has been developed by St James’s Place. The mainstream products on which they advise are created in-house, but they are outsourced on a sub-advisory basis to external managers. In practice, clients are given a choice of underlying fund managers for their investments. A strong supporter of the sub-advisory approach as a solution to offer customers the best products is James Bevan, chief investment officer at retail bank Abbey. And, although Abbey’s new owner Santander, through its own fund selection platform Allfunds Bank, has clearly demonstrated preference for selling external funds off-the-shelf rather than delegate management, Mr Bevan’s beliefs are strongly held. In a panel debate, it emerged that going forward, the challenge for private banks, who want to succeed in their role of wealth managers, is to put their newly developed asset allocation and fund selection systems at the forefront of their service of to clients; they need to understand what clients want, and differentiate themselves very clearly from their retail counterparts. “Open architecture is a prerequisite, a condition of being a member of the club,” said James Ellis, business development director at SG private banking. However, research carried out in the industry opens the question of how much clients understand about the fund selection process. Catherine Tillotson, head of research at Scorpio Partnership, stated that although private clients think that open architecture is a must because it is a demonstration of independence at some level, it is unclear whether they understand the selection process and what it is going to generate for them.

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Ingledew: Barclays aims to give clients advice and an element of choice