Will The Beijing Bubble Burst?

What s Good About Europe?

Eleven Things You Didnt Know About Your Clients

JUNE 2015 ISSUE 40

For today s discerning financial and investment professional

AND AN AGENDA TO MATCH

FIVE MORE YEARS

Cover.indd 1 29/06/2015 16:47

CI063371 05/2015

At Aviva Investors, we believe its time to think di erently. Thats why our entire organisation is united behind one common goal to deliver the specifi c outcomes that matter most to todays investor. By harnessing the exceptional breadth and depth of our global resources, we cut a path through complexity to focus on the specifi c outcomes our clients need.

To fi nd out more call 020 7809 6000* or visit avivainvestors.com/outcomes

investor outcomes

For todays investor

For todays investorAV I VA I N V E S TOR S

Sustainable Income | Capital Growth | Beating Inflation | Meeting Liabilities

Issued by Aviva Investors UK Fund Services Limited. Registered in England No.1973412. Authorised and regulated by the Financial Conduct Authority. Firm Reference No.119310. Registered address: No.1 Poultry, London EC2R 8EJ. An Aviva company. www.avivainvestors.co.uk

For professional clients and advisers only. Not to be viewed by or used with retail clients.The value of an investment and any income from it can go down as well as up and outcomes are not guaranteed.Investors may not get back their original investment. *Telephone calls may be recorded for training and monitoring purposes.

Cover.indd 2 29/06/2015 16:47

Issued by Aviva Investors UK Fund Services Limited. Registered in England No.1973412. Authorised and regulated by the Financial Conduct Authority.Firm Reference No.119310. Registered address: No.1 Poultry, London EC2R 8EJ. An Aviva company. www.avivainvestors.co.uk

AV I VA I NV E S TOR S

CI063371 05/2015

For professional clients and advisers only. Not to be viewed by or used with retail clients.The value of an investment and any income from it can go down as well as up and outcomes are not guaranteed.Investors may not get back their original investment. *Telephone calls may be recorded for training and monitoring purposes.

At Aviva Investors, we believe its time to think di erently. Thats why our entire organisation is united behind one common goal to deliver the specifi c outcomes that matter most to todays investor. By harnessing the exceptional breadth and depth of our global resources, we cut a path through complexity to focus on the specifi c outcomes our clients need.

To fi nd out more call 020 7809 6000* or visit avivainvestors.com/outcomes

investor outcomes

Sustainable Income | Capital Growth | Beating Inflation | Meeting Liabilities

For todays investor

For todays investor

C35241_011a_Aviva_Investors_UK_Retail_IFA_Jun15_297x420_DPS_v1.indd All Pages 03/06/2015 11:42Contents.indd 3 17/06/2015 14:43

C O N T E N T S

IFAmagazine.com4

CONTR I BU TORS

Brian Tora an Associate with investment managers JM Finn & Co.

Lee Werrell a senior compliance consultant and industry adviser.

Richard Harvey a distinguished independent PR and media consultant.

Nick Sudbury known for his columns in many leading financial magazines.

Neil Martin has been covering the global financial markets for over 20 years.

Michelle McGaghbrings a wealth of experience on industry developments.

Abbie Tanner is Managing Director at Gliocas Consulting.

8 News All the big stories that affect what we say, do and think

16Will the Chinese Bubble Burst?

Just another pause for breath, or something more fundamentally troubling? Michael Wilson explores

20 Insurance on Investment PlatformsAt last! What took us so long, asks Defaqtos Gill Cardy?

22Armageddon in April

The Sunset Clause is coming, says Garry Heath. What will it cost the industry, and what can we do about it?

36 Finely Balanced Its been a good run this year, but Brian Tora is still wondering how much longer the mood can last

28So You Think You Know Your Clients?

The unstoppable Abbie Tanner, MD of Gliocas Consulting, lists eleven home truths

33 Ethical Funds Theres more to it than just feelgood, says Nick Sudbury. There are different kinds of getting there

38Why We Need Europe

Marcus Morris-Eyton, VP of European Equities at Allianz GI, on the economy, future and referendum

42 A Cyclical Phenomenon Aberdeen Asset Managements foray into international cycling

Editorial advisory board: Richard Butler, Michael Holder, Ian McIver and Mark Pullinger

06/15

Editor: Michael Wilsoneditor@ifamagazine.com

Art Director: Tony Merlinitony.merlini@thewowfactory.co.uk

Publishing Director: Alex Sullivanalex.sullivan@ifamagazine.com

THE FRONTLINE: All George Osborne has to do now is make the numbers add up. So hold tight for the summer Budget

Contents.indd 4 17/06/2015 14:43

C O N T E N T S

IFAmagazine.com

June 2015

5

44 Burning Issues: Britains Year Ahead Our panel of senior analysts is impressed by the Tories election win. And confident about the outcome

48Rugby World Cup 2015 Hospitality

And your chance to win a pair of tickets for the World Rugby Awards in September

51 Bellpenny: Always Looking Neil Martin continues his interview series on exit strategies for advisers

56MiFID II The Final Chapters

Its coming, ready or not, says Lee Werrell. Do you know what to expect, and when?

60FCA Publications and IFA CalendarIn the news, in print and in court. Our monthly listing of whats new in FCA-land

65Thinkers: Nassim Taleb

The man behind the Black Swan phenomenon

66The Other SideWhos rich, asks Richard Harvey, and whos paying the taxes? One things for sure, theyre different

IFA Magazine is a trademark of IFA Magazine Publications Limited. No part of this publication may be reproduced

or stored in any printed or electronic retrieval system without prior permission. All material has been carefully checked

for accuracy, but no responsibility can be accepted for inaccuracies. Wherever appropriate, independent research

and where necessary legal advice should be sought before acting on any information contained in this publication.

IFA Magazine is published by IFA Magazine Publications Ltd The Old Wheelwrights, Ham, Berkeley, Gloucestershire GL13 9QH Tel: +44 (0) 1179 089686 2015. All rights reserved

IFA Magazine is for professional advisers only. Full subscription details and eligibility criteria are available at: www.ifamagazine.com

Contents.indd 5 17/06/2015 14:43

Ed's Welcome.indd 4 17/06/2015 14:56

The nation is still

holding its breath

for the summer

Budget which

will tell us how

the government

really intends to

balance its books

Five Year Plan

A foolish question, in some ways. At the time of writing, the nation is still holding its breath for the summer Budget on 8th July which will tell us how the government really intends to balance its books. A budget for working people? Yes, probably. A smooth continuation of the current policy line? Unfortunately, that probably wont work.

Why not? Well, for one thing nobody is trying too hard to deny that those pre-election projections left an awful lot of holes. The Institute for Fiscal Studies has gone so far as to claim that, of the 12 billion worth of welfare cuts already announced, only 2 billion has actually been firmly costed. Leaving ten billion thats going to have to be found somewhere else. Or, if you like, a 6.5% slice of the entire 154 billion tax take during the 11 months to the start of March 2015.

Balancing Act

The inference, then, is that we are in for a tough time on taxes if the Chancellor is to get the budget balance even halfway sorted by 2019. Even the Treasury agreed in March that the UK was still borrowing 1 for every 10 we spend.Yes, Osborne can probably scoop up another

As the first month of Chancellor George Osbornes

brand new five-year mandate slips away, what

do the remaining 59 hold in store for us?

five billion by clamping down on tax avoiders although in fact the March Budget envisaged only a 3.1 billion take over the next three years.

And things do seem to be moving in the right direction on getting multinationals to pay their share of UK taxes. Even if the non-doms tax crackdown demanded by Labour has now been consigned to history. But all this is, frankly, chicken feed against a government debt that has ballooned from 38% of GDP in 2008 to 80% in 2014.

We could probably argue the toss about how the Chancellor is to achieve his ambitious schedule of reforms, but we need to consider that a fiscal shortfall is like toothpaste in a tube - you can squeeze it from one place to another. Thus, the 10 billion welfare spending shortfall might be met by a tax increase, just as Labour wanted to fund the NHS with a mansion tax. There are a thousand ingenious ways to fix an awkward hole, and Mr Osborne has access to all of them.

And What of 2018?

The ironic thing, of course, is that the situation might look totally different three years from now. Britain might be out of the EU, with huge implications for

tax flows into Brussels; the slowing Chinese economy might devastate our export revenues in ways we cant even begin to imagine. And last but definitely not least, Mr Osborne himself might be leading the Conservative Party. Then again, we may have been struck by an asteroid. Projections are worth only so much.

Mike Wilson, Editor

IFAmagazine.com

June 2015

5

W O R D S O F W I L S O N

Ed's Welcome.indd 5 17/06/2015 14:56

Two

ScareStories...

.that Europe takes in its stride. Its been hard to know

which country is giving Brussels more grief at the

moment Britain or Greece. The odd thing is

that both countries are convinced that they

have their European contemporaries

undivided attention. But the

evidence suggests otherwise

On this side of the Channel, David Camerons efforts to cosy up to European leaders most recently at the G7 in Bavaria - was portrayed as a brave a constructive attempt to overcome past differences and get other leaders onside for the structural changes which Cameron says hell need if hes to keep Britain in the EU at the 2017 referendum. Meanwhile, down in Athens the news broadcasters talk of nothing else but how the European Central Bank and the International Monetary Fund will

have to see sweet reason and back down if the Greek government is not to be forced into a bigger default on its 350 billion of Eurozone debt.

Life Through a Fisheye Lens

In an important sense, both countries are right. Well, from their own perspectives, anyway. A Greek default that cost the Eurozone bankers 1,000 for every man, woman and child in the common currency zone would be unpleasant, to be sure, but would it destroy the euro even if it happened as a full-scale permanent cessation of debt

relations? (Actually unlikely in the extreme, although a 50% haircut is very possible.) In an economic group with an 11 trillion gross domestic product, it could probably be finessed to such an extent that Germany, France and Italy would hardly feel the bumps in the road.

You could probably judge that from the way that the European financial markets have weathered the Greek uncertainty. Despite a 6% decline in the FTSE Eurozone 300, theres no sign of a panic yet. Why, a 150 billion default has probably been priced into the accounts already.

Dont Call My Bluff

Mr Cameron, meanwhile, has right on his side when he talks about the need to amend some of the rigidities in the EU. And he has a good deal of backing from several other leaders who dont like the ever closer union any more than we do. In this respect his endeavours

N E W S

IFAmagazine.com8

On this side of

the Channel its

all about David

Camerons 2017

EU referendum

News.indd 8 17/06/2015 15:08

seem reminiscent of Margaret Thatchers insistence on EU reforms in the 1980s many of which were ultimately successful, and useful. But when it comes to limiting the border control freedoms, Mrs Merkel and Mr Hollande simply smile and cross their fingers behind their backs.

In a rather odd piece of synchronicity, Cameron and the Green leader Alexis Tsipras are experiencing the same genial brush-off. Europe has spent many decades perfecting its ability to encourage errant nations (sincerely) to stay in the fold, while quietly dismissing them as nutcase nations that need to be humoured, and its paying off now. It would be surprising if Mr Cameron (look, Ive lit the fuse and the bomb goes off in 2017, so youd better start negotiating now) didnt find himself punching the same marshmallow as Mr Tsipras (look, Ive promised my people something unrealistic, but theyre going to lynch me and send in the hard-liners if you dont start being nice to me).

At least Cameron has the advantage of coming to the table with a strong economy behind him. Britains quarterly growth may have slowed from 0.6% to 0.5% in the first quarter of 2015, and the CBI may have chopped its 2015 projection in June from 2.7% to 2.4%, but thats still a lot better than the Eurozone, which is currently set for 1.5% growth

this year, and most of that coming from the northern states.

The Wild Cards

Which brings us back to the unknown unknowns in the European situation. From Spain to Ireland,

from Portugal to Cyprus, there are Eurozone member states that have battled manfully to maintain an even keel during the economic hardship and austerity of the last few years. So how are their governments

going to react if Greece gets the Get Out of Jail Free card from Brussels without having to do anything more than wail about the unfairness of having borrowed so much money and then spent it all?

Not well, we suspect. Their jealous populations may decide to do a little political lynching of their own. So we can probably expect to see southern Europe lining up beside the banks to see that justice gets done. Or at least, to make a good job of concealing any mushy compromise that allows Athens to slip quietly off the hook.

Either way, the current problems with Britain and Greece wont stop the European project in

its tracks. Although both, in their respective ways, have raised valid points. I mean, how stupid did those banks have to be to advance that cash to Greece in the first place? A little hubris wouldnt go amiss.

IFAmagazine.com 9

N E W S I N B R I E F

Whoa there cowboy

The IMF cut its GDP growth

forecast for the US economy

in 2015 from 3.1% to 2.5%,

citing what it called significant

uncertainties as to the future

resilience of economic

growth. In particular, the IMF

feared that the Feds plan to

raise bank rates might cause

problems. There is a strong

case for waiting to raise rates

until there are more tangible

signs of wage or price inflation

than are currently evident.But in Athens

the talk is of

nothing else

but how the

European

Central Bank

and the

International

Monetary

Fund need to

back down Should have sold in May?

World stock markets paused

and drifted downward as

worries about the bond markets

dominated market sentiment.

News that Chinas exports were

flagging added to the pressure.

But oil and gold held firm.

Gulp

Global economic growth in

2015 was also downgraded

by the OECD, from 3.7% last

November to just 3.1%. The

first quarter of 2015, it said,

had been the weakest since

the 2008 financial crisis.

News.indd 9 17/06/2015 15:08

N E W S

Forgotten Treasure

Still on the subject of pensions, new research by insurers LV=

has revealed that the number of savers looking for lost

pension pots has grown by nearly 250% over the last 10

years, from 25,544 in 2005 to 88,757 in 2014

N E W S I N B R I E F

Greecy Pole

Greeces relationship with the

European Union and IMF took a

turn for the worse, as PM Alexis

Tsipras roundly rejected a plan

proposed by RU Commission

president Jean-Claude

Juncker (below). Although

Athens got an agreement

to postpone a 300 million

May payment to the IMF until

end-June, its line continued to

be that a failure to concede

a general loan haircut would

mean the beginning of the

end for the Eurozone.

IFAmagazine.com10 Job No: 49694-3 Publication: IFA Magazine Size: 110x380 Ins Date: 01.03.15 Proof no: 1 Tel: 020 7291 4700

Thisadvert is for investmentprofessionalsonly,andshouldnotbe relieduponbyprivate investors.Thevalueof investmentsand the income fromthemcangodownaswell asupandclientsmaygetback less than they invest.MapcontainsOrdnanceSurveydata Crown Copyright and database right 2013. Source of performance:Morningstar as at 31.12.2014. Basis: bid-bid with net income reinvested. Launch date is 30.04.2007. Copyright - 2015Morningstar, Inc. All Rights Reserved. Past performance is not aguide to the future. *SourceMorningstar as at 31.12.2014. Based onmulti asset funds from themixed or exible investment and unclassied sectorswhere income or distribution was included in the fund name.Market index from01.10.11 70%BofAMLSterBrdMktNUK; 15%FTSEAll-ShareTR; 10%MSCIWORLDEXUK (NUK); 5%GBPOverNight IndexAverage full history available fromFidelity. Holdings canvary from those in the indexquoted. For this reason thecomparison index is used for referenceonly.The fundstargetyield isbetween4%and6%p.a.onthecapital invested.Theyield isnotguaranteedandwilluctuate in linewiththeyieldavailable fromthemarketover time.Thefundsshouldonlybeconsideredasalong-terminvestment.Asaresultof theannualmanagementcharge for the incomeshareclassbeing taken fromcapital, thedistributable incomemaybehigherbut the fundscapital valuemaybeerodedwhichwill affect futureperformance.The investmentpoliciesof Fidelitymulti asset fundsmean they investmainly inunitsin collective investments schemes. Investments should be made on the basis of the current prospectus,which is available along with the Key Investor Information Document, current and semi-annual reports free of charge on request by calling 0800 368 1732.Issued by FIL Investments International, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity Worldwide Investment, the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited. UKM0215/5223/CSO7022/0515

Fidelity Multi Asset Income Fund

web: delity.co.uk/mai

call: 0800 368 1732

Reliable income with low volatility.Guide your clients to the right solution.

Yield

as at 31.12.144.03%

Finding reliable, diversied sources of income for your clients

presents a considerable challenge. Our Multi Asset Income Fund

may hold the solution:

Currently yielding 4.03%, or 5.02% gross in a SIPP

Less volatile than the best-selling multi asset income funds*

Lower capital drawdown than equities

Outperformed its comparative index over 3 and 5 years, and

since launch in 2007

The fund is one of three Fidelity multi asset income options. All are

guided by our proven multi asset approach. All are independently

risk-proled by Distribution Technology. And all are available

via FundsNetwork Navigator.

So click or call today and set your clients on

course for reliable income.

News.indd 10 17/06/2015 15:08

scale of the growth in awareness of the governments Pensions Tracing Service. And, it warns, the number of misplaced pensions could grow significantly as the workforce becomes increasingly transient. It says that todays average 25 year old worker can expect to take nine jobs over his or her lifetime - twice as many as the cohort thats now aged 65 or over.

Todays workers, according to LV=, have an average of just two workplace pensions in place; but one in five has already saved into three or more workplace pensions. Youd suppose that many would have chosen to combine all their savings into one

pot, but only 30% of those with multiple pots have in fact done so. So you can see how the money can so easily get lost.

But theres more to it than that. LV= research reckons that as many as one in ten workers are likely to miss out on pension savings because they incorrectly believe that if they leave a job they can no longer claim the savings they made into their pension while at the company.

From 2016, of course, pension pots will automatically follow workers but, as LV points out, that wont help anybody to track funds that may have been saved before that

41% of all workers with multiple pensions say that they dont know the value of their funds,

says LV=. For these workers, the changes cant come soon enough.

With todays workers likely to take up roles at numerous employers throughout their lives, many could find themselves missing out on a substantial amount of pension savings if they lose track of their pots, said John Perks, Managing Director of LV= Retirement Solutions. Although people dont lose the right to claim their pension if they move jobs, it is worth considering whether it makes sense for them to put all their funds into one place. This removes the chance of someone forgetting or losing track of a pension pot they have saved into and may reduce the charges they pay on their savings.

Lord

Gre

en

LV= says that a freedom of information request to the Department for Work and Pensions reveals the

IFAmagazine.com 11Job No: 49694-3 Publication: IFA Magazine Size: 110x380 Ins Date: 01.03.15 Proof no: 1 Tel: 020 7291 4700

Thisadvert is for investmentprofessionalsonly,andshouldnotbe relieduponbyprivate investors.Thevalueof investmentsand the income fromthemcangodownaswell asupandclientsmaygetback less than they invest.MapcontainsOrdnanceSurveydata Crown Copyright and database right 2013. Source of performance:Morningstar as at 31.12.2014. Basis: bid-bid with net income reinvested. Launch date is 30.04.2007. Copyright - 2015Morningstar, Inc. All Rights Reserved. Past performance is not aguide to the future. *SourceMorningstar as at 31.12.2014. Based onmulti asset funds from themixed or exible investment and unclassied sectorswhere income or distribution was included in the fund name.Market index from01.10.11 70%BofAMLSterBrdMktNUK; 15%FTSEAll-ShareTR; 10%MSCIWORLDEXUK (NUK); 5%GBPOverNight IndexAverage full history available fromFidelity. Holdings canvary from those in the indexquoted. For this reason thecomparison index is used for referenceonly.The fundstargetyield isbetween4%and6%p.a.onthecapital invested.Theyield isnotguaranteedandwilluctuate in linewiththeyieldavailable fromthemarketover time.Thefundsshouldonlybeconsideredasalong-terminvestment.Asaresultof theannualmanagementcharge for the incomeshareclassbeing taken fromcapital, thedistributable incomemaybehigherbut the fundscapital valuemaybeerodedwhichwill affect futureperformance.The investmentpoliciesof Fidelitymulti asset fundsmean they investmainly inunitsin collective investments schemes. Investments should be made on the basis of the current prospectus,which is available along with the Key Investor Information Document, current and semi-annual reports free of charge on request by calling 0800 368 1732.Issued by FIL Investments International, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity Worldwide Investment, the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited. UKM0215/5223/CSO7022/0515

Fidelity Multi Asset Income Fund

web: delity.co.uk/mai

call: 0800 368 1732

Reliable income with low volatility.Guide your clients to the right solution.

Yield

as at 31.12.144.03%

Finding reliable, diversied sources of income for your clients

presents a considerable challenge. Our Multi Asset Income Fund

may hold the solution:

Currently yielding 4.03%, or 5.02% gross in a SIPP

Less volatile than the best-selling multi asset income funds*

Lower capital drawdown than equities

Outperformed its comparative index over 3 and 5 years, and

since launch in 2007

The fund is one of three Fidelity multi asset income options. All are

guided by our proven multi asset approach. All are independently

risk-proled by Distribution Technology. And all are available

via FundsNetwork Navigator.

So click or call today and set your clients on

course for reliable income.

News.indd 11 17/06/2015 15:08

The Equity Sell-Off- Its OfficialUK portfolio managers are taking their feet off the pedals

after several years of heavy buying of UK equities - thanks to

a combination of election worries, tempting opportunities

abroad, a growth of alternative investments - and simply, it

seems, a feeling that the rally has gone on long enough

UK portfolio managers are taking their feet off the pedals after several years of heavy buying of UK equities - thanks to a combination of election worries, tempting opportunities abroad, a growth of alternative investments - and simply, it seems, a feeling that the rally has gone on long enough.

Natixis reviewed 147 model risk-rated

portfolios across 38 British firms during the first three months of the year. It found that equity holdings across all three of the portfolio types measured shrank between Q4 2014 and Q1 2015 with the majority being pulled out of UK equity funds. Now, up to a point we might say that the pre-election period is over, of course, but the sluggish performance of the Footsie in the second quarter didnt suggest anything better was happening.

N E W S

Hello, Alternatives

So where did the money go? Well, the trend toward alternatives such as VCTs and EIS investments has been widely discussed, not least in this magazine but in this instance the bulk of the reallocation to alternatives among Conservative portfolios ended up with targeted or absolute return multi-alternative funds. This, according to Natixis, appears to be a more medium term strategic asset allocation move on top of the UK election issues.

IFAmagazine.com12

N E W S I N B R I E F

Stuck Bits

Bitcoins plateaued at around $225

between April and early June,

Meanwhile a report from card

provider MasterCard declared

that the risks presented by digital

currencies far outweighed the

benefits, not least because on

average it takes 10 minutes for a

block to be verified - and that

digital currencies are far more

susceptible to hacking attacks

Banzai

There was better news from

Japan, where first quarter

economic growth was

retrospectively revised from 0.6%

to 1.0%. The change leaves

Japans growth up by 3.9% on

an annualised basis, compared

to a preliminary reading of 2.4%.

The change was attributed to a

rapid growth in business spending.

Dragon Smoke

China banned smoking in public

places such as shops, offices,

buses and restaurants. But

suppliers to the worlds biggest

tobacco market can relax in

the thought that having a puff

in the street is still allowed.

Q1 2015 portfolio weightings by risk category

Source: Natixis

News.indd 12 17/06/2015 15:08

that by reviewing the allocations being made, we can help advisers identify potential issues before they occur and help build more diverse portfolios by identifying uncorrelated assets.

For example, we found very high correlations between funds in the mainstream fixed income sectors, which could make portfolios more susceptible to losses in the event of adverse market conditions. This means advisers may have to look beyond the mainstream for sources of diversification within fixed income, such as emerging market or long/short debt funds.

The Way Ahead

Portfolios are still performing well, but advisers need to stay

vigilant for the factors that are driving these returns, and accordingly which risks could hurt them. Sharpe Ratios are at historically high levels, it adds.

A future Portfolio Barometer, Natixis says, will be focusing on how advisers balance their fixed income exposures in a world of vast government debt, duration risk and a zero risk free rate, set against the low risk premium available for taking corporate credit risk.

But overall, it says, the best approach to portfolio construction is to build diverse portfolios that are durable enough to withstand all market movements and meet the long-term expectations of clients even if it means short-term underperformance.

Advisers were (perhaps surprisingly) keen on bonds, but this time its been the corporate rather than the government bond scene thats been experiencing growth. Thats partly because advisers are sensitive to ongoing duration risk fears, but more particularly because of a continuing search for yield. And, looking forward, Natixis says that advisers may need to step out of the comfort zone if they are to achieve proper diversification in fixed income allocations..

Overall, advisers did a good job for their clients in Q1 both in terms of risk and return, said James Beaumont, Head of the Portfolio Research & Consulting Group at Natixis. We hope

IFAmagazine.com 13

N E W S I N B R I E F

The Worlds Lo-Cull Bank

HSBC announced a plan to cut 8,000 UK jobs, a loss of about one job in six, as pressure mounted for cost savings. But globally, about 10% of the banks 255,000 employees are to be shed, mainly through natural attrition, the bank said. Meanwhile, HSBC is preparing to separate its retail banking and investment arms, as required by law. It is also expected to decide on a possible change of HQ out of the UK by December.

Better than a pension?

House prices in Britain have

sextupled in 30 years, according

to the Halifax. An 8.6% price rise

over the past year has taken

the average home price to

196,067 in May, compared

with 35,623 in 1985.

Average change in allocation: Q4 2014 - Q1 2015

Source: Natixis

Average allocations to fixed income sectors

Source: Natixis

Good news, bad news

The UK trade deficit shrank to

just 1.2 billion in April, from 3.1

billion in March, according to

new data from the Office for

National Statistics. But it wasnt

a simple story, because a 8.6

billion deficit on goods had been

largely offset by an estimated

7.4 billion surplus on services.

News.indd 13 17/06/2015 15:08

Clarity Dawns

N E W S

IFAmagazine.com14

That, of course, is being a bit harsh on the regulator, which has been paddling hard to keep up with the Governments welter of pension reforms the pensions freedoms, the right to transfer out of Defined Benefits, and most recently the mooted right to sell off an annuity contract for cash. We could speculate indefinitely about what drove the Chancellor to such a late rush of half-thought-through promise, but maybe an election had something to do with it.

Anyway, Policy Statement PS 15/12 (Proposed Changes to Our Pension Transfer Rules, Feedback on CP15/7 and Final Rules) contains a lot of information that should have been here months ago but

which ony came up for discussion in March 2015, weeks before the new regime came in.

First off, the regulator has decided that pension transfers over 30,000 must be carried out or checked by a pension transfer specialist thus applying what amounts to a trivial threshold to the obligations on advisers. The point being that the mere cost of advice for smaller pension pots will look disproportionate.

Slightly more eyebrow-raising is that the new rule requiring professional checks does not apply to pension transfers for defined contribution (DC) schemes meaning, it seems, that the regulator has opted against professional supervision in such cases. The key issue here seems to be that the FCA has excepted situations where the required advice

relates to conversions or transfers in respect of pension policies with a guaranteed annuity rate. (Which would presumably cover the annuities-to-DC transfers as well? It isnt clear.)

The FCA says that over two thirds of the 57 respondents who expressed an opinion agreed broadly with its proposals. And accordingly, the new rules took effect on Monday 8th June.

But the FCA has overruled, for the time being, some demands from respondents that the examinations syllabus for pension transfer specialists should be reviewed in the light of the April pension reforms. Not necessary at this stage, the regulator said but well keep it in mind for the future.

You can read the statement at http://tinyurl.com/p8w874a

Transact VCTs

Transact became the first

UK platform provider to offer

venture capital trusts directly,

following the introduction of

new legislation that removes

the cumbersome need for

VCTs to be first bought by

consumers and then moved

to a platform. The new

project, under which VCTs

can be bought in a nominee

capacity while still qualifying

for tax relief, is in collaboration

with Octopus Investments.

N E W S I N B R I E F

Pop

Chinas richest man, Li Hejun

(below), lost around half of

his $30 billion wealth in 30

minutes as the stock price of

his company, Hanergy Thin

Film Power Group, fell victim to

a sudden panic apparently

because he failed to turn up to

the companys annual meeting.

But it could have been worse:

Dingxiang Loeng, another

billionaire was rumoured last

year to have been killed by a

rogue champagne cork.

The FCA is finally getting down to details on the business of

pension transfers, after only six-months of shilly-shallying about

the rights that have been discussed for the last 14 months and

which have been in force since April. And about time too

News.indd 14 17/06/2015 15:08

News.indd 15 17/06/2015 15:08

S O A P B OX

Will the Beijing

Bubble Burst?

Chinas investment policy isnt just

contradictory, says Michael Wilson

- its crazy

Any time I need a reminder that Im not perfect in every way, the recollection of my investing experiences with China do the job nicely. Somehow I managed to do more than just mistime the market, turning a 40% gain in the early noughties into a small loss.

I also completely misunderstood the funds I was investing in believing that pretty well any diversified fund that worked on a reasonably broad slice of the Chinese market was likely to be able to cash in on an economy that had been growing at 10% a year for two decades and which is still going at 7% even now.

How shall I begin to describe the things I got wrong? I wrongly assumed that what was good for China would also be good for the stock markets. I figured that, even though I doubted the reliability of Chinese statistics or the quality of corporate governance, things surely wouldnt be so far askew of

June 2015

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Ed's Soapbox.indd 16 17/06/2015 15:17

in October 2014. But not for any obviously economic reason.

Rather, the surge was down to a single policy decision in November that effectively allowed foreign investors into the Shanghai A shares market where only the very biggest operators had been allowed any kind of a stake up until that point. That opened the floodgates and the Shanghai SE Composite duly doubled in value during the eight months to mid-June this year.

Curses, Moriarty, Id been foiled again

The Party Rethinks Its Policy

But things have never been straightforward in the Chinese economic system, and there were further twists to come. As youll probably know, last autumns Party congress approved a very important re-orientation of the Chinese economy which effectively requires the nations planners to rely less on foreign investors and more on their own domestic resources.

On the one hand, the

the straight road ahead? And, worst of all, I completely failed to take account of the fact that ordinary foreign investors werent even allowed into Shanghais main market. And that, as a consequence, any fund I bought into was quite likely to be fishing in a rather small pool.

Local Authorities at the Core of It

That second point, about corporate governance, cost me a lot. Had I been older and wiser, Id have taken note of the incipient warnings about how many dodgy infrastructural investments were being undertaken by the thousands of local authorities in China many of them relying on the notion that the state was not even entitled to question their creditworthiness even if it had been inclined to do so.

And yes, Id have realised the folly of giving the local authorities unfettered access to the Chinese banks, which were under government orders to be nice to them. Id have seen that letting the local politicians appoint their own contractors was a recipe for backslapping, nepotism and corruption. I might even have seen how they were buying up land compulsorily and then selling it on for huge profits.

And with a bit of luck and perseverance, I might have spotted the hideous growth of the bad debts on the banks balance sheets, which have spiked horribly this year to 641.5 billion yuan ($103 billion) a 38.2% increase in a single year, according to a report published in April. Meanwhile, the report published by PwC China Banking and Capital Markets also declared that the quantity of overdue loans that could turn bad had increased at an awful 112.6% in a year.

Too Easy to Get It Wrong

All I can say is that I was in good company. Anthony Bolton, the fund manager superhero who had come out of retirement to launch the Fidelity China Special Situations Fund in 2010, got a bloody nose too and was well

advised to leave it to the local specialist stock-pickers who eventually managed to pull the Fidelity fund back from the brink. What had done for Mr Boltons fund? The same factors, largely an over-reliance on the quality of Chinese statistics and the probity of corporate governance.

A Decoupled Market

I had, however, also fallen into yet another elephant trap, by somehow assuming that a thumping rate of economic growth would automatically translate into a healthy performance for my funds. How could I have missed the fact that Chinese p/e ratios were already touching 50 in mid-decade, buoyed along by an overwhelming confidence that the exponential scale of future growth would make it all right in the end?

And that was the next place where I went wrong - but in the wrong direction this time. Having stagnated for a decade, while the p/e dropped to just 10 or 11, the market then began to soar again

Dodgy infrastructural

investments were

being undertaken

by the thousands

of local authorities

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Ed's Soapbox.indd 17 17/06/2015 15:17

markets had decided, China would henceforth be buying a lot fewer raw materials for making exports with. And that in turn demolished a whole slew of international mining companies that had been getting fat on their Chinese customers. On the other, the authorities had announced a crackdown on local government fraud, combined with a general winding-down of lucrative building projects that had been sustaining local economies for many years.

S O A P B OX

The Property Problem

All very sensible, in its own way. There was never any doubting that three decades of 8-10% growth had been creating huge structural strains in Chinas economy. The inflationary pressures alone have been hideous, as some 600 million people have left the land and headed for the newly sprawling cities. (Its estimated that the combined urban population will top 1 billion within ten years.) And all that has needed

managing. Beijings anxious focus on a consumer inflation rate that has rarely exceeded 3% has been understandable.

The only problem was that focusing on consumer prices was missing the point. It might not surprise you to hear that its been the property market that has experienced the really important strains with prices of new homes driven up by as much as 13% in 2013 alone.

A recent report by Nomura claimed that the property sector directly accounted for 15% of growth in Chinas gross domestic product, and substantially more than that if we included construction materials and home refurbishment expenditure. Add to that the fact that around half of all bank lending is now collateralized against property, and we start to see just how vulnerable the whole financial system might be to a collapse in property values.

But heck, that couldnt happen, could it? Not while the urban populations are so desperate to resettle in the cities where the land prices are highest? Well, brace yourself. Chinese property is slumping.

New figures from the National Bureau of Statistics show that the ratio of unsold property to annual sales reached 51.5% in 2014 more than double the 24.7% recorded in 2011. During the first two months of this year, according to JP Morgan, the value of domestic property sales by area fell by 16.7% against year-earlier levels and the volume of sales dropped by 17.8%.

Little by little, the realisation is sinking in that a very large chunk of Chinas wealth is looking down a very deep hole as property prices fall. One of the casualties has been the local authority sector, which can no longer expect to cream off vast profits from land sales meaning, in turn, that urban budgets are being squeezed. And all thats going to get worse before it gets better.

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hear about that, but then again you might not. Despite some recent improvements, Chinese banks have seldom been good at confessing to their weaknesses.)

What we do know is that the volume of non-performing loans among Chinese banks rose by 141 billion yuan during the first quarter of 2015 alone - the sharpest quarterly increase on record, which brought the total of iffy loans to 983 billion yuan ($160 billion). We know that because even the state regulators confessed as much in early May this year.

We also know that Chinas total foreign debt totals $28 trillion - 282% of GDP, according to the McKinsey Global Institute in February. And that McKinsey says $20.8 trillion of that debt has arisen since 2007 - accounting for more than a third of total debt growth globally during the last eight years.

Tokyo 1990?

The darker end of the blogosphere is currently awash

with comparisons to the mess that the Japanese banks got into after their own property bubble burst in 1989. Like China, they had become sucked into a spiral of unwise lending against fast-growing property collateral which then disappeared in a puff of smoke that any conjuror would have been proud of. Like China, the Japanese banks of the day were steeped in obscure practices, and the result was a colossal bad debt mountain which led on into 24 years of stagnation, unemployment, monstrous government debt and a weak consumer appetite which still endures.

That, of course, is not a completely fair comparison. Japans economy in the 1980s was mature, and so was its demography. Unlike China, it did not have the prospect of a vast growing market ahead of it to justify the bullishness of the day. But before you deny that any comparisons exist, make sure youve been through all the facts very carefully indeed.

Non-performing loans

among Chinese banks

rose by 141 billion yuan

during Q1 of 2015,

which brought the total

of iffy loans to 983 billion

yuan ($160 billion)

More Contradictions

So whats my point? Mainly that if were looking for a reason why Beijing should have chosen this puzzling moment to encourage foreign investors into the Shanghai A shares market at the very same time when its telling the Chinese people that they should rely on their own markets and reduce their reliance on foreign investors! weve probably stumbled upon it.

Beijing, Im afraid, is relying on the foreigners to pump liquidity into the financial markets at the very moment when things are looking a bit bleak for Chinese businesses. If the local authorities are no longer in a position to expand their property-building empires, whos going to take care of the next stage in the national renewal problem?

That, of course, is not what were being told. The official reason for last Novembers opening of the Shanghai market was that China was tired of being subject to the volatile flows of short-term investment, and that it wanted some solid long-term investments of the sort that foreigners could most readily supply. It had been expressing concerns for some time that the appetite for those few funds which used to be allowed to deal in Chinese A stocks had been generally lacking, and it wanted to do something about it.

I think wed have to agree that the market-opening move has been successful. The doubling of the Shanghai index since October speaks for itself. But ask yourself what happens now?

Debts and Banking

Weve said that Chinese banks are horrendously exposed to the overheated property sector, which is undergoing one of the steepest cyclical declines of the last 30 years. And that if property prices drop much further, a very real threat may emerge to the Tier One capital ratios of Chinese financial institutions. (You may get to

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A Natural Fit

G U E S T F E AT U R E

freely applied the higher investment advice standards to their protection advice and transactions, simply because it has never made any sense for comprehensive advice to be delivered under two regimes.

Two Ways of Looking At It

I was still a relative freshman in the world of financial advice when I realised that there were essentially two schools of insurance advice. The first says that clients should be insured first

Once I became more familiar with the world of independent financial advice, the six-stage financial planning process and the delights of cashflow modelling and creating comprehensive financial plans, I began to see insurance instead as the underwriting of the long term plan.

Clients are very much happier to plan for the good things in life, retirement, holiday homes, future generations, legacies (which are after all statistically much more likely

Putting life and health insurance programmes on the same platforms as

investment plans is both logical and beneficial, says Defaqtos Gill Cardy

In the days leading up to the implementation of the Retail Distribution Review. there was a great deal of discussion around whether retail investment advisers would continue to advise on protection business. The new rules around adviser charging and the restating of the rules on independence made the differences between Conduct of Business (COBS) rules and Insurance Conduct of Business (ICOBS) rules more stark

and then save later. The catastrophic impact of long term ill heath, critical illness or death on an individuals or familys finances ought to make this a number one priority for any household.

This approach is of course valid and sensible. The snag is, it starts most advice relationships with a sales transaction - and one which is focusing on bad things.

to happen than the bad things). Viewed like that, they see insurance as the mechanism for protecting the plan from catastrophic loss of health or life.

Accentuate the Positive

This now gives the value of the insurance a much more positive and financially quantifiable context, which in my experience increased the uptake of my recommendations considerably. But this does beg a crucial

- but still not, in my view, so dramatically different as to cause advisers to stop advising their own clients on one of the most important aspects of financial planning.

Any commission received could be used to offset the costs of retail investment advice - which may have made advising on ISAs and pensions more affordable for the mass affluent. Advisers have for many years

June 2015

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Guest Feature - Defaqto.indd 20 17/06/2015 15:24

question. If retail investment advisers did indeed stop advising on protection, where are their financial planning clients getting their insurance needs met? Perhaps they are being referred to protection specialists, perhaps insurance is mentioned as an afterthought, and perhaps its not being discussed at all.

But its because life and health protection is vital as the underpin which ensures the successful implementation of the financial plan in the event of death or ill health, that Im delighted to hear that life insurance is now being attached to platform services.

The target sum assured is agreed and a quotation is prepared. On the death of the investor the sum assured, less the value of the relevant portfolio, is paid out. The sum assured can be related to the value of the total platform portfolio, or just to one element of it, such as the pension or the ISA.

possibility of structuring a gift inter vivos cover to ensure sufficient funds are available to protect against potential inheritance tax liabilities.

There is also a case for considering plans which pay out an income on death, in the same way as a family income benefit policy would do so. It is also possible to envisage the introduction of an income protection policy, perhaps to ensure a minimum level of household income when combining investment income and insurance income.

This development, now being more widely marketed, allows the holistic financial planner to highlight the long term value of a successful investment strategy, but to also ensure (and insure) that clients have the right funds in place to provide for their families in the event of their death.

Getting It Right for the Client

All of this places protection right back at the heart of a comprehensive financial plan. Advisers can make sure that their clients really have taken the action to protect themselves that we have always known they should. They can also ensure that the protection their clients are paying for is at exactly the right level, paying for no more and no less than is necessary. They do not have to risk clients taking no action, nor risk referring their clients to other firms.

Although this is not a new concept it looks very similar to the mechanics of older style integrated pension term assurance contracts, or even the death benefits on an endowment policy - the bringing together of insurance protection and financial planning on platform is a genuine market development. Advisers and their clients should welcome this real innovation, and the enhancements which I am sure will follow, in a world where the pace of change has slowed dramatically.

the relevant amount of the insurance therefore changes month by month. All other things being equal, as the portfolio grows in value, the cost of the sum assured at risk reduces, but the actual premium rate increases with the age of the investor. To reduce concerns about changes in the levels of premiums, particularly as investors age, the actual rate per 1,000 of cover is set at the outset.

At the outset an illustration of the likely costs is prepared, based on the assumed growth rate of the portfolio and the age of the investor, so that a schedule of the likely costs over time can be seen prior to application. Depending on which platform is used the premium is taken either from the platform cash account or by means of a separate direct debit.

The death benefits can be written under trust, using the trust facilities made available by the platform itself, or alternatively other trusts may be used. Cover extends to age 75, and it is up to the investor whether the policy is cancelled as soon as the target sum assured is reached, or whether to continue paying the minimum premium for a short while - perhaps to allow for the possibility of a market fall coinciding with the death of the investor, to ensure that the appropriate level of benefit is paid to the estate.

Extending the Concept

So what could the future for this type of insurance look like? At the moment this protection is based on single accounts and single lives assured; but as the market develops it is possible to anticipate joint life insurance becoming available - or even joint life second death insurance, set against the value of family investment accounts.

An extension of the default term of the cover beyond age 75 could also be considered to facilitate some longer-term estate planning. And there is mention of the

Costing and Risk

Clearly, the sum assured at risk changes from day to day as the value of the underlying portfolio fluctuates. And this offering is made possible by the feed from the platform to the insurance provider, which enables the cost of the insurance to be calculated on a daily basis.

The cost of the cover is single premium current costed, and the monthly premium for

IFAmagazine.com

June 2015

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Guest Feature - Defaqto.indd 21 17/06/2015 15:24

T H E H E AT H R E P O R T

April ArmageddonGarry Heath, author of the Heath Report, tells IFA Magazine that

the 2016 Sunset Clause may cost more than 15,000 IFA jobs

their consumer capacity and banks have lost a further 6.2 million of capacity. Thats a total of 13.8 million consumers without potential advice.

Since RDR was announced, he says, 13,500

advisers have left the industry along with a similar number

of administrators. Couple that with the

jobs that could still go, he says, and you have initial job losses in the region of 25,000.

How We Got to Here

The THR2 report looks back at RDRs two main aims which,

he says, was to firstly increase the academic level of all advisers regardless of age and experience (so no grandfathering was offered), and secondly to create a commission free market which would not be tainted by mis-selling.

The problem with the first ambition is that it resulted in 5,750 mostly older and established advisers leaving the industry. And the problem with banning commission, he says, is that you remove access to advice from millions who wish to take advice sporadically and pay for it by commission. It is these clients who lose advice either by their adviser exiting the industry, or else by their adviser filling his lists with clients who wish a regular relationship.

In the past, says Heath, the average IFA Adviser had 405 clients. Since its peak in June 2005, however, the IFA sector has lost 6,500 advisers entailing a probable 2.6 million loss of capacity.

You have to hand it to Garry Heath of Mountain Consulting, the author of The Heath Report, he knows how to get your attention. Heath, who is currently hard at work lobbying the Government and the FCA about the end of trail, is claiming that if legacy trail commission is banned in 2016, as currently scheduled, then the IFA sector may lose well over 15,000 adviser jobs over the next couple of years.

And that even the best case scenario points toward the loss of 7,000 advisers - representing just over 20% of the total IFA base.

Phew. The 15,510 advisers who Heath says might go have a current capacity of three million consumers. And the total potential job losses after trail commission disappears, including ancillary tasks, could even exceed 50,000.

A Heavyweight Voice

Heaths new report, entitled The Heath Report Two (THR2), and subtitled A Report on the Consumer Detriment Caused by the Introduction and Continued Prosecution of the Retail Distribution Review, sets out a bleak future for both IFAs and their clients. But is he overdoing the grief?

Well, Heath ought to know what hes talking about. He was Director General of The IFA Association between 1989 and 1999, and he was a central player in the introduction of regulation into the financial services industry. He was also instrumental in the reform of FIMBRA and the creation of the PIA. He created the Financial

Services department of BIPAR which still exists as the EU body for advisers as well as the Financial Adviser 5 Star awards.

Heath represented the Association as its public face including promoting members interests to Government, the civil service and regulators. He is also a regular media contributor and speaks at industry events throughout the world.

Some Ballpark Numbers

Heath starts out by declaring that historically 23 million consumers have accessed advice via IFAs and Banks, but that since RDR was announced around 15.8m consumers have lost their access to a professional financial adviser. In the last four years, he says, IFAs have lost 7.6 million of

June 2015

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Heath Report - June.indd 22 17/06/2015 15:35

The other 7 million of lost capacity, he says, has come from advisers downsizing their clients from 405 to 231 in 2010 and to just 195 by 2014.

The Trail Issue

It is the trail issue that is at the core of future problems believes Heath. The FCA is of course already insisting that advisers must use the new commission clean funds its the last parts of legacy trail commission that must go by March 2016.

The only practical way this can be done is to move the investment from their current fund and place it in the new clean funds, says Heath. But you can only do this if the client benefits from the transfer, and in up to 40% of the cases the client loses.

Some of the providers of these policies are enthusiastic to cut trail, as they will have to keep an additional 0.5% that they would have paid to the adviser. Different types of advisers are impacted in different ways, with the more established and those who advised on a transactional basis being the most badly hit.

According to Heath, there are two main impacts:

Firstly, there is the loss of income. Research from THR2 suggests that only 1% of advisers have no trail commission, whereas around 51% depend on trail for between 20%-60% for their turnover (and beyond). Which leaves only about 46% of advisers depending on trail for less than 20% of their turnover.

The Value of IFA Businesses

Then theres the loss of value. Clearly, these numbers demonstrate that the removal of Trail will compromise the future of many advisory firms, says Heath. Trail commission used to represent the one income that was easily transferred to another adviser. Before RDR, a business was valued at least three times the annual Trail

If the tipping point is set to include advisers at High Risk and above, then the industry can expect to lose another 7,260 advisers who are currently servicing 1.4 million clients. That would be a loss of 22% of current adviser capacity.

If the tipping point turns out to be as low as Medium Risk and above, it points to a loss of 15,510 who are currently servicing 3.02m clients. That would be a loss of 47%

income. So the sector was valued at circa 9bn. But if 40% cannot be transferred, then Heath suggests that 3.6 billion has been removed from the value of IFA businesses by regulatory interference.

This not only compromises the existing advisers, says Heath. It also creates issues for those who wish to create new forms of distribution, because investors are unlikely to be unwilling to invest in businesses in a regulated market where a companys value can be altered in this way.

The stark fact, says Heath, is that if trail is banned in 2016, between 7,260 & 15,510 advisers are in danger of shutting down, which will compromise a further 1.4m to 3.02m clients.

The following chart is an attempt by Action Consulting, which undertook the THR2 survey, to assess the vulnerability of advisers based on how dependent they were on trail, together with their preparedness for the conversion to service charges:

By firm By advisers

Very high risk 5 4.96% 2.51%

High Risk 4 18.44% 19.63%

Medium Risk 3 32.62% 24.89%

Low Risk 2 25.53% 33.56%

Very Low / No Risk 1 13.48% 14.16%

Other 4.96% 5.25%

increase triggers the potential for another exit, and the sector gets weaker and weaker. Its not just strict numbers; advisers may exit because they deem the industry no longer worth participating in.

New Entrants Deterred

The regulator hoped that new entrants would arrive to take up the slack by offering Simplified Advice Unfortunately the FCA and FOS cannot agree its ground rules.

of current adviser capacity. The Armageddon Scenario

In fact, A survey conducted by Panacea suggests that the final removal of trail would be catastrophic to the future of their businesses for 94% of respondents. That would equate to everything above Very Low Risk being the tipping point. If this is correct, argues Heath, then the sector would be destroyed because the surviving companies could not support the regulatory and compensatory overhead.

Regulatory Costs

The financial impact of these changes have been described by Heath as The Spiral of Decline. The biggest third party cost faced by IFAs is regulatory and compensatory bills, he says. Their division is broadly spread amongst the number of advisers; thus as adviser numbers decline the cost per surviving adviser increases.

Currently, advisers bills are 20% bigger than if the RDR adviser losses had not happened. This will rise to 43% - 55% if the end of trail happens. Each

IFAmagazine.com

June 2015

23

Heath Report - June.indd 23 17/06/2015 15:35

THE DEFINITIVE GUIDE TO BUILDING VALUE IN YOUR BUSINESS

How do you optimize

the market value

of your business,

attracting demand

and increasing

your multiple?

How do you find out

what your business

could be worth

and the steps you

can take to build

value in it now?

How do you make direct

contact with potential

buyers in the market

without compromising

the confidence of your

clients and staff?

AND THEOPPORTUNIT IES FOR REAL IS ING IT

Alex Sullivan Managing PartnerGunner & Co.

Garry Heath ConsultantMountain Consulting

Paul WilsonManaging PartnerGunner & Co.

Peter Welch Intermediary DirectorEquifax Touchstone

Tony Davis ConsultantMountain Consulting

- Prioritise and future proof your business planning now to maximize value at the time of sell, ensuring you are set up to get the premium multiple

- Get the low down on how the sunset clause will affect you and be ready for it

- Understand valuation methodologies and what that means for your current business

- Meet all the key connections to ready yourself for a sell, over the course of one evening

- Evaluate the long-term impact your current approach to risk and reward may have and be able to make informed decisions now

- Meet a range of acquirers and understand the acquisition model that works for you

9TH JULY 2015, 16 :00 21 :00THE LONDON CAPITAL CLUB, LONDON

THIS IS A ONE-OFF OPPORTUNITY TO CONSIDER HOW YOU CAN BUILD VALUE IN YOUR BUSINESS RIGHT NOW:

Brought to you by: In association with:

Places are strictly limited to 24, so register quickly: www.gunnerandco.com/events or email info@gunnerandco.com. Full programme details available on our website.

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Gunner & Co - July 2015 Event.indd 21 17/06/2015 15:30

However if in the future FOS decides that claims made in the Simplified Advice Market should be judged by full advice standards, then every case will be non-compliant by virtue of the information gathered.

There is also the question of parliamentary accountability. Heath maintains that RDR has presented advisers, regulators, consumers and politicians with an excellent example of the danger of the current regulatory structure and in particular its lack of accountability to anyone but itself.

The regulator has forcibly divorced 16 million of clients from the advice they have historically accessed, says Heath. How this can be seen as offering consumer protection, promoting competition or enhancing integrity is a mystery.

An Own Goal on Pensions Reform

The other difficulty is that the departure of 13,500 advisers has happened at the very time when the government wants to liberate the current pension market a process which in turn generates a need for high levels of advice. This, says Heath, makes it a nonsense to be pursuing a policy that may cause the exit of another 15,000.

Heath regards this as impossible situation. We have the regulator and the Government working against each other and yet, under the FSMA 2000, the Government cannot command the FCA to do its bidding.

Worse still, the FCA isnt even accountable to the Parliament that created it. Currently the regulator is free to pursue any policy, fill its committees with like-minded individuals, and ignore any criticism.

Although it can face a Judicial Review, it has the funds to buy the best lawyers and that Judges can be depended upon to give them a home town decision. This, he says, allows it effectively to completely ignore MPs and the Treasury Select Committee.

This presents new entrants with a nightmare scenario, he says. New distributions will need to invest heavily to create an advisory process with a sufficient scale and width to satisfy large numbers of currently disenfranchised clients.

To do mass advice; the entrants will have to cut down

upon on the amount that is known about the clients to just that required to complete that piece of advice. They then will make the assessment of the client needs and the solutions as formulaic as possible. If there was a Simplified Advice standard and the process is judged by it - then little danger might be expected.

T H E H E AT H R E P O R T

The Heath Report Twos Lobbying Agenda n THR2 is calling for legislation to restore proper

Parliamentary accountability to Financial Services regulation. This is required to prevent consumer detriment by unaccountable and unfettered regulation;

n THR2 demands that FCA eradicates the planned removal of Trail Commission in 2016 immediately, so that further damage can be avoided;

n THR2 believes that it is now time to expand the concept of transparency to disclosing the cost of regulation as a separate item. In this way clients can discriminate between the value they receive from their adviser and the cost of regulation over which the adviser has no control;

n THR2 believes that RDR should be seen as the abuse of power that it is. It is a clear demonstration of what unfettered and unaccountable regulation can do to an industry and a lesson to other industries facing similar issues;

n THR2 proposes that a Royal Commission should be set up to define what citizens should reasonably expect from the Welfare State and what they need to provide for themselves;

n THR2 believes that RDR could have been prevented by a more rigorous and robust representation by the IFA trade association which was criticised by the Treasury Select Committees report on RDR.

n As a result: the THR team have set up Libertatem a new trade association for Impartial Advisers. www.libertatem.org.uk

The Heath Report Two can be obtained at www.theheathreport.com/files/101312470.pdf

Hear and discuss these issues directly with Garry Heath,

as well as learning about other important topics

effecting the value of IFA businesses in London on the

9 July at the Gunner & Co Definitive Guide to Building Value in your Business event.

www.gunnerandco.com/events

June 2015

IFAmagazine.com24

Heath Report - June.indd 24 17/06/2015 15:35

THE DEFINITIVE GUIDE TO BUILDING VALUE IN YOUR BUSINESS

How do you optimize

the market value

of your business,

attracting demand

and increasing

your multiple?

How do you find out

what your business

could be worth

and the steps you

can take to build

value in it now?

How do you make direct

contact with potential

buyers in the market

without compromising

the confidence of your

clients and staff?

AND THEOPPORTUNIT IES FOR REAL IS ING IT

Alex Sullivan Managing PartnerGunner & Co.

Garry Heath ConsultantMountain Consulting

Paul WilsonManaging PartnerGunner & Co.

Peter Welch Intermediary DirectorEquifax Touchstone

Tony Davis ConsultantMountain Consulting

- Prioritise and future proof your business planning now to maximize value at the time of sell, ensuring you are set up to get the premium multiple

- Get the low down on how the sunset clause will affect you and be ready for it

- Understand valuation methodologies and what that means for your current business

- Meet all the key connections to ready yourself for a sell, over the course of one evening

- Evaluate the long-term impact your current approach to risk and reward may have and be able to make informed decisions now

- Meet a range of acquirers and understand the acquisition model that works for you

9TH JULY 2015, 16 :00 21 :00THE LONDON CAPITAL CLUB, LONDON

THIS IS A ONE-OFF OPPORTUNITY TO CONSIDER HOW YOU CAN BUILD VALUE IN YOUR BUSINESS RIGHT NOW:

Brought to you by: In association with:

Places are strictly limited to 24, so register quickly: www.gunnerandco.com/events or email info@gunnerandco.com. Full programme details available on our website.

FREE

TO QUALIFYING IFAs,

ONLY 24 SPACES

AVAILABLE

Gunner & Co - July 2015 Event.indd 21 17/06/2015 15:30Heath Report - June.indd 25 17/06/2015 15:35

B R I A N TO R A

The new Conservative

government isnt the

only thing tipping the

balance in favour of

optimism, says Brian Tora.

But its finely balanced

Enjoy the Ride, For Now

May has been an interesting month, if a little less challenging than was feared in the run up to the general election. There was something rather satisfying about seeing the pollsters comprehensively disproved, even if the final exit poll did provide a steer towards the eventual result. One political commentator in the days immediately before the actual election opined that the presence of so-called shy Tories voters who professed not to have made up their minds but always intended to vote Conservative should not be underestimated. He seems to have a point.

The bounce the result gave to markets was short lived, though. In a way that seemed rather strange. A majority Conservative government had been returned, providing a degree of stability, removing the need for protracted and difficult negotiations so that a minority government or a coalition could be formed and probably ushering in a period of lower taxes and business friendly policies. At the very least, investors should be feeling a degree of relief. And, what is more, better than expected jobs figures emerged from the US, while China cut interest rates for the third time in six months.

Cautious Around the Edges

Perhaps this is what is keeping investors on the cautious side of bullish. Slowing growth has led China to join Western governments in monetary easing. The US is already reining back on its quantitative easing programme (QE), though there is little sign of a rise in interest rates there yet. However, the Feds Janet Yellen has already warned of unsustainable valuation levels for American shares, while investors in a

variety of jurisdictions have been driven to buy equities simply because yields are so low elsewhere.

What QE has done is to make available large quantities of cheap money.

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An individual approach

JM Finn & Co is a trading name of J. M. Finn & Co. Ltd which is registered in England with number 05772581. Registered Ofce: 4 Coleman Street, London EC2R 5TA. Authorised and regulated by the Financial Conduct Authority.

At JM Finn & Co, we understand the importance of treating you and your client as an individual. This is why our Tailored Platform Solution is a discretionary service that can integrate seamlessly into your proposition.

Mike MountT 02920 558800E mike.mount@jmfinn.com

www.jmfinn.com

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Brian Tora.indd 26 17/06/2015 17:09

The aim was to help restore economic growth after the downturn brought about by the financial crisis of 2008. That some of this money will have made its way into financial assets is inevitable. Turning off the monetary tap will have consequences that are difficult to gauge at this stage, but this and the continuing geo-political issues that remain unresolved around the world have been sufficient to encourage some investment big hitters to sound words of warning.

Stay in May?

Of course, it takes two to make a market, and for every naysayer you can expect to find a nascent bull. All that this underlines is that the future really remains concealed from us. Better than expected industrial production figures from the UK did little to help

the stock market might indeed close their London homes and retire to the country for the delights of the season.

Little Excessive Hype

While the Cheltenham Festival or Royal Ascot may well see plenty of investment managers enjoying the hospitality of brokers and staying out of the office for a day or two, these days share trading is a 24/7 business. Turning an investment portfolio into cash can be a very risky business. While markets do tend to travel too far, this momentum will occur in both directions.

Presently shares may look fully valued, but there is little evidence of excessive hype. Still, it is likely to pay dividends and adopt a nimble strategy once monetary easing really does start to come to a proper end.

the equity market, but they certainly drove sterling higher. Perhaps currencies are the area on which to concentrate for the time being - though my experience suggests they are as hard to read as any market.

For the time being, the removal of doubt over who governs Britain, alongside an increasingly encouraging economic backdrop, suggests it is worth siding with the bulls. Of course, this is a dangerous call to make in May, the month when investors are encouraged to sell and go away.

The origins of this little rhyme, the second line of which encourages investors to stay out of the market until St Leger day, are believed to be rooted in the days before professional investors came to dominate share trading and ownership. The wealthy private investors that were once the backbone of

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An individual approach

JM Finn & Co is a trading name of J. M. Finn & Co. Ltd which is registered in England with number 05772581. Registered Ofce: 4 Coleman Street, London EC2R 5TA. Authorised and regulated by the Financial Conduct Authority.

At JM Finn & Co, we understand the importance of treating you and your client as an individual. This is why our Tailored Platform Solution is a discretionary service that can integrate seamlessly into your proposition.

Mike MountT 02920 558800E mike.mount@jmfinn.com

www.jmfinn.com

LONDON BRISTOL LEEDS BURY ST EDMUNDS IPSWICH CARDIFF

Brian Tora.indd 39 17/06/2015 15:56

So You Think you Know Your

Clients?

G U E S T F E AT U R E

Abbie Tanner, MD of Gliocas Consulting, Offers Eleven

Invaluable Insights to Kick-Start Your Marketing

When it comes to marketing your financial advisory or wealth management firm, you need a clear understanding of your ideal client - their wants, needs

client value proposition that incites them to take action.

In order to achieve this level of clarity, I advocate undertaking research of your ideal clients either in-person,

and preferences, and the exact messages that will resonate with them. The more detail you have, the better equipped you will be to create a compelling

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by way of an event like a Client Advisory Board, or else, in instances where this may not be possible, using an online survey tool like SurveyMonkey, SurveyGizmo or Smart-Survey.

Broadening Your Horizons

Step forward, the Paraplanner. What if it were possible to go beyond your existing clients and understand the attitudes of retail investors in the broader UK market? Armed with this insight, you would not only understand the wider market but would be well equipped to engage with non-clients - using hooks in your messaging that would allow you to cut through the noise and speak directly to them.

This was the eureka moment that I had last year. I was consulting with advisory firms and helping them research their own clients, refining and packaging their value propositions in a way that would attract similar clients just like them. At the time I felt we could all benefit from a more macro perspective of the retail marketplace, an understanding of the thoughts and opinions of advised and non-advised clients - especially in light of recent and impending regulatory changes.

And thats where my new venture, Gliocas Consulting, was born. Our first research paper, The Investor Engagement Survey looks at the consumer journey from the removal of commissions via the Retail Distribution Review to the introduction of pension freedoms. It sheds light on investors behavioural changes and how they view the many associated issues such as the available pension options, charging, investments, pricing and technology, as well as how they source financial advice and are likely to do so in the future.

Below are eleven key insights from the report that will help you to understand the subtle differences between advised and non-advised clients, and how you can use this insight to refine your marketing strategy and messaging.

1Cost and control are the main drivers for investors to DIYNon-advised investors believe it is more cost effective to manage their own financial affairs. They also believe they will retain full visibility and control over their portfolios if they invest without the oversight of a financial adviser.

I find this very interesting given the use of wrap platforms by UK advisory firms, which serve to provide clients with a consolidated view of their holdings, online, at any time. In my opinion these DIY investors have clearly not received what I call modern day advice so they arent aware of this component of an advisers offering. Cost is perceived as an issue largely because for many years this has been an opaque area with charges often hidden in percentages or product based fees.

Marketing Insight: Demonstrate the value of advice vs. cost in your marketing and show non-clients how they will retain full visibility and control of their investments. Case studies are a perfect way to do this.

2 Advised clients still personally manage some aspects of their affairs

Interestingly around one in three advised clients manage some aspects of their affairs without the oversight of their financial adviser. These clients want advice for complex products like pensions, taxation or trust planning and more sophisticated investments, however they are confident enough to trade on their own account in less complex areas like investing their annual ISA allowance.

Marketing Insight: Show clients that you are happy to collaborate with them on aspects of their affairs that you do not necessarily manage on their behalf. Consider also allowing them to use the wrap technology you provide to initiate these trades.

3 Increasingly, investors are using online resources to find an adviser to work with

Not surprisingly, four out of five advised clients will ask a friend or family member to recommend a financial adviser. By contrast, non-advised clients are prone to conducting online research through search engines such as Google, Bing or Yahoo! or sites specifically dedicated to finding financial advisers.

Marketing Insight: It is imperative you have an online presence that is effectively optimised for search engines and linked through from sites such as LinkedIn, Unbiased.co.uk or VouchedFor.co.uk. you can also no longer afford to ignore social media.

4 Despite front page headlines, one in ten investors are still not aware of pension freedoms

Even those clients with pension savings well above the 2014 UK national average of 44,000 (most of those included in the research have between 100,000 and 250,000 or more) some are still not fully aware of the new pension freedoms. Frighteningly, most of the uninformed are nearing or living in retirement (aged 55 years+).

Marketing Insight: If you have not done so already, initiate awareness campaigns to your existing clients about the new pension freedoms and the implications for them personally. Create educational campaigns for non-clients, to position your firm as a viable source of retirement advice.

5 One in three investors will seek professional advice on their pensionDespite a recent YouGov report to the contrary, citing that large numbers would not seek specialist pension advice, our research shows one in three investors will definitely seek advice from a professional adviser.

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Marketing Insight: This is welcome news for advisers and reinforces the importance of engaging with your existing clients and prospects around retirement related issues. If you have a blog use it to stimulate discussion and display your expertise by posting relevant, topical content.

6 One quarter of investors have no intention of cashing in their pension savings

Contrary to popular belief and despite Steve Webbs now infamous Lamborghini comment many investors have no intention of cashing in their pensions. For those that do plan to cash in the majority will invest in property (23%), a portfolio of investments (22%) or will put their money in the bank (21%).

Marketing Insight: Investors appear have understood the implications of the new rules and intend to invest or save, rather than lash out on consumables (just 6.5% said they would buy

however non-advised clients do not appear to be comfortable trading online, without taking advice. Less than one in three would trade online without financial advice. A further third said that would do so only on occasion.

Marketing Insight: This intelligence reinforces the earlier point that a collaborative approach between financial advisers and clients is needed, so that investors feel supported transacting on their own account. This could form the basis of a client communication or other marketing messaging to attract the attention of prospects.

9 Advised and non-advised clients look for different attributes in an adviserNon advised clients are very cost conscious and the main attribute they look at when appointing an adviser is cost, followed by professional qualifications. These attributes are much further down the list for advised clients who prefer to work with an adviser that will

a car or other luxury items). I recommend creating a series of case studies to explore these three strategies including the implications and risks of each.

7 Charging: Investors least prefer to pay on an hourly rate basisAcross both groups of clients (advised and non-advised) the least preferred payment method was hourly rate charging. Non-advised clients prefer a flat fee and advised clients appear to be conditioned to accept a combination of flat fees and annual service fees represented as a percentage of the amount they are investing.

Marketing Insight: Ensure your fees are both easy to explain and easy for investors to understand. If you have not done so already, look at offering a flat fee charging structure alongside any percentage based fees.

8 Transactional investors are not as wedded to D2C as one might think Awareness of D2C is high,

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be with them for the long-term; someone with whom they can have an ongoing relationship.

Marketing Insight: Advisers need to demonstrate the value of their services throughout their marketing messaging, while also reinforcing the importance of relationships and the stability of their team.

In the past I have counselled advisers out of leading with their professional qualifications (I use the example of a specialist doctor. I would never ask to see her qualifications. I would take it as given that she was adequately trained to deal with my particular health issue). Instead, I recommend you feature the logos of any professional designations prominently on your website and promotional materials. Do however avoid starting any text with We are a Chartered Financial Planners with a combined experience of 187 years [*cringe*]. Instead explain how you help your clients and your particular

mark of quality for clients right across the board. Investors believe the quality of advice they receive will be better from a Chartered or Certified Financial Planner.

Marketing Insight: Once again feature professional designation logos prominently in your marketing: from your website to your business cards, letterhead, email signature and any other promotion featuring your business name, corporate logo or personal details.

I could continue own with many more insights from the Investor Engagement Survey, however eleven is what I promised so Ill have to leave it here. The report contains a raft of additional insights, over 50+ pages, relevant not only to advisers and wealth managers, but financial services providers right across the market. If you would like further information about the report or any of its contents, visit our website at gliocasconsulting.com

areas of speciality, with your designation logos placed nearby.

10 When it comes to sources of advice, bigger does not mean better

Across the board there was a preference for working with a smaller advisory firm with whom clients could build a strong relationship vs. a major bank or institution. One in ten clients said that it would depend on the advice that they were seeking.

Marketing Insight: If your firm is small, dont be afraid to position it in this way. For many years I worked with advisory firms who wanted me to make them look much bigger than they were. The research shows this approach is no longer necessary.

11Do chartered or certified designations carry any weig