IFA41 Lores

Seven Things The Chancellor Forgot To Mention

Latin America – Where Next?

Compliance Officers –The Crackdown Continues

JULY/AUGUST 2015 ISSUE 41

For today ’s discerning financial and investment professional

STILL THE PLACE TO BE

ASIA

Cover.indd 1 03/08/2015 15:00

Global Multi Asset Income from BlackRockNo one can predict the future, but there are ways to see several steps ahead.

With knowledge and expertise from the best of BlackRock, backed by industry leading risk management capabilities, our team has the foresight to know when to invest and when not to.

This strategy is now available to UK investors via the BlackRock Global Multi Asset Income Fund

For a compelling balance between income and risk, visit: BlackRock.co.uk/GMAI

1Defined as CCC bonds directly exposed to the shale oil market

The team decided NOT TO INVEST

Oil supply increased², plummeting sale prices and devaluing these bonds¹ by more than 23%³

We felt that the level of risk did not reflect the yield available at the time. The team focused on other asset classes

Investors see benefits despite high risk, with attractive income opportunities on offer

MARKET BOOMING for American Shale OilFledgling companies continue to issue low-rated, high-yield bonds1

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Jan’14

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This material is for professional clients only and should not be relied upon by retail clients. Sources: 2. Info Energy Agency – Q1 2015. 3. Barclays High Yield Oil Field Services Index 01/01/14 – 31/01/15, CCC bonds fell by at least 23% (USD). 4. BlackRock as at 31/12/14, AUM based on $4.525 trillion. Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. © 2015 BlackRock, Inc. All Rights reserved. BLACKROCK, BUILD ON BLACKROCK, are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. Ref: RSM-0547

C O N T E N T S

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.

6

News So what did George forget to mention?

10Lento

Latin America’s unlikely saviour

14

Crystal Ball, Anyone?July’s a tough month, says Brian Tora

16Japan Funds

What sorts of patterns will suit your clients?

20 How Many Platforms?Different platforms for different clients

24Asia After the China Upset

There’s still plenty to go for, says HyungJin Lee

28 Powering Ahead We talk to Michael Beveridge at Standard Life

32A Busy M&A Scene

We continue our interview series on exit strategies

36 The Crackdown Continues But keep calm and the regulator will be reasonable

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 details and eligibility at: www.ifamagazine.com

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

7-8/

15

Editor: Michael [email protected]

Art Director: Tony [email protected]

Publishing Director: Alex [email protected]

THE FRONTLINE: Yes, the China crunch was gruesome, but there’s optimism in the air

‘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.

IFAmagazine.com2

Cover.indd 2 03/08/2015 15:00

Ancient History

The global economy had enjoyed a seven-year bull run which had encouraged millions of investors to forget the panics of the previous decade and to put their hard-earned cash back into a market which, according to the American pundits, was set for ever-greater things. The Dow eventually closed the month 44% up on its year-earlier level.

The hideous oil price spiral of popular memory had turned into a rout, with crude prices halving in a year, while consumer prices and interest rates had moderated and life was really looking pretty good. Even though economic growth had just started to flatten off in the US.

If there was one cloud on the horizon, it was that US government debt had been allowed to balloon during one of the biggest Keynesian experiments of the last quarter-half-century. But hey, that wasn’t so bad because it had only helped to reinforce the dominance of the US dollar at a time when European economies had mired themselves in debt that didn’t look nearly so attractive. Yes, there were definite advantages to having the world’s refuge currency.

The month of August began well enough.

Or so we thought at the time

Shipwreck

The year, of course, was 1987, the Keynesian boom had been started in 1982 by Ronald Reagan, and the problem that had been lurking below the surface since the spring, like a shipwreck in waiting, was that the Fed had quietly conceded that its ability to maintain the strong dollar was looking a little thin. But the shock, when it came, it came, was swift.

The savage events of October 1987 are etched into every stock market veteran’s memory. The plunge of 2008 was a mere trifle in comparison, although admittedly it certainly wasn’t over in a few months like its 1987 counterpart. In a few days Hong Kong was down 45%, London and New York by 27% and 23% respectively, and Australia suffered a crippling 42% blow. All round the world, investors reined in their emerging markets exposure - and ironically, the eventual upshot was that the dollar’s suction power if anything increased.

Lessons Learned

And to think, we didn’t see a single bit of this coming as we

returned from the August beaches. Even today, no-one is sure whether the October 1987 panic was caused by big-scale fiscal uncertainty, or Iranian gunfire in the Gulf, or program trading (the favourite villain), or a simple bubble that had ignored a lack of market safeguards?

Nowadays, of course, we have those safeguards. Stock markets shut down automatically when prices drop by a certain amount; reporting standards are much better; and corporate governance has improved.

So why does it trouble me that Shanghai should have hit those very trading buffers at the exact same moment that Europe was facing a nine-digit debt write-down over Greece? And what is it about those unusually high p/es that bothers me at a time when profits are moderating?

The odds against an October panic are long. But a short sharp correction might be another matter.

Mike Wilson, Editor

IFAmagazine.com

July/August 2015

3

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

Ed's Welcome.indd 3 03/08/2015 09:54

Summer of Discontent

You’ll probably have noticed

that this year hasn’t turned out

to be the dream ride that the

equity bulls were forecasting

back in January. But cheer

up, Autumn’s on its way

The expected downturn in the Greek situation turned into a sudden rout as the Syriza government turned upon its creditors with what Finance Minister Yanis Varoufakis was pleased to call Game Theory, and the rest of us would probably call terrible bad manners. It was no great surprise that Germany’s Angela Merkel eventually stopped playing the smiling diplomat and unleashed the Dobermans on Greek premier Alexis Tsipras, with an enforced deal that has shaken many international observers with its ferocity. And which may yet prove to be unenforceable in practice - there are few who doubt that Greece’s €300 billion debt will ultimately prove unpayable.

All things considered, the European equity markets did well to hold onto any of the year’s gains at all, and in the event the EuroFirst 300 picked up by 10% in the second week of July alone. A sure sign, if it were needed, that Varoufakis’s idea of starting a stock market fire that would scare the Troika into submission had been a ludicrous fantasy.

China Panics

Meanwhile, on the other side of the planet, China’s long-awaited equity panic hit the markets just before the June issue of IFA Magazine hit the doormats. (Drat, and we’d worked so hard to warn you in advance.) Intra-day price falls of up to 10% in Shanghai were enough to trigger the safety shutdown routines, thank goodness. But

it was notable how the Beijing authorities responded with attacks on short-sellers and hedge funds before they addressed the problems of their own making. As on 16 July, the Shanghai Composite was struggling around the 3,800 mark, some 26% down from 5,170 on 12 June. Ouch.

And then there were the commodity markets, with oil still bumbling around the $51 mark for West Texas intermediate and with copper rediscovering the six-year lows of $2.50 which it had discovered in January. Even corn futures, at $400, were barely half the prices of mid-2012 and had a long way to go before anyone could call the short-term July improvement a viable trend. Mining companies of every kind are still licking their wounds and worrying about their leverage.

The US Advantage

Was there no escape from all this? There certainly was. The US markets, always a very long way from other trouble spots, continued their steady four-year ascent as if the US had nothing to lose from a weak euro and an overpriced China. That’s the way it goes with having a refuge currency, we suppose. And all the while, Janet Yellen’s guessing game about the timing of the coming US rate rise continued to titillate the markets and to suck in foreign deposits. No sign of that changing, then. Long may it last.

N E W S

IF YOU DON’T SECURE HER A MINIMUM INCOME YOU’LL BE HIT BY MORE THAN A FINE.

In the new pensions environment, people will need advice more than ever. They may have greater freedom about what to do with their pension fund, but an annuity is still the only way to secure your clients a guaranteed minimum income for life. This means they will always have enough to pay for the essentials and won’t outlive their pension savings. And through medical underwriting, an enhanced annuity could be the cheapest* way of achieving this.

With our Target Income Calculator, you can find out how much your clients will need to cover the basics – so you won’t end up paying for your mistake.

Try our Target Income Calculator at partnership.co.uk/revengeofthepensioners or for more information call 0845 108 0443**

For authorised financial advisers only – not for retail clients

*Source Partnership: Actual rates can vary and will depend on individual circumstances. **Calls may be recorded for training and monitoring purposes. Local call rates apply. Partnership is a trading style of the Partnership group of Companies, which includes; Partnership Life Assurance Company Limited (registered in England and Wales No. 05465261). Partnership Life Assurance Company Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The registered office is 5th Floor, 110 Bishopsgate, London, EC2N 4AY.

PART0083_Pan_Ad_IFA_210x297_FAW.indd 1 07/07/2015 12:03

IFAmagazine.com4

There are few

who doubt that

Greece’s €300

billion debt will

ultimately prove

unpayable

News.indd 4 03/08/2015 10:09

IF YOU DON’T SECURE HER A MINIMUM INCOME YOU’LL BE HIT BY MORE THAN A FINE.

In the new pensions environment, people will need advice more than ever. They may have greater freedom about what to do with their pension fund, but an annuity is still the only way to secure your clients a guaranteed minimum income for life. This means they will always have enough to pay for the essentials and won’t outlive their pension savings. And through medical underwriting, an enhanced annuity could be the cheapest* way of achieving this.

With our Target Income Calculator, you can find out how much your clients will need to cover the basics – so you won’t end up paying for your mistake.

Try our Target Income Calculator at partnership.co.uk/revengeofthepensioners or for more information call 0845 108 0443**

For authorised financial advisers only – not for retail clients

*Source Partnership: Actual rates can vary and will depend on individual circumstances. **Calls may be recorded for training and monitoring purposes. Local call rates apply. Partnership is a trading style of the Partnership group of Companies, which includes; Partnership Life Assurance Company Limited (registered in England and Wales No. 05465261). Partnership Life Assurance Company Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The registered office is 5th Floor, 110 Bishopsgate, London, EC2N 4AY.

PART0083_Pan_Ad_IFA_210x297_FAW.indd 1 07/07/2015 12:03News.indd 5 03/08/2015 10:09

Seven Things That George Didn’t Quite SayThe Summer Budget left a lot of pennies that haven’t

quite dropped yet. Here’s our round-up of things

that might still prove to be game-changers

Yes, it was the Budget for Working People and the end of the line for welfare shirkers. That was certainly the happy impression

that the papers got. But, cynics that we are, there are a number of forward implications that we think might still cause complications for some clients.

OneThe £1 million IHT Property Allowance

Apologies all round for starting off with the low-hanging fruit, but it seems that there are still some clients who believe that the surviving member of a marriage or partnership

N E W S

can offset £1 million against the family home in addition to the normal twice-£325,000 IHT allowance. Or, alternatively, that the new set-up “is as good as a £1 million IHT allowance, isn’t it?”

It isn’t. If a client has a million in savings but doesn’t own a home, then all he’s got is the basic £650,000 allowance and your estate will pay the 40% tax rate on that £350,000 as if the Chancellor had never got up to speak.

IFAmagazine.com6

It wasn’t what

George said

in the Summer

Budget, it

was what he

didn’t say

N E W S I N B R I E F

Covert Support?

China’s mid-July rebound from

the very severe panic of late

June may have been artificially

enhanced by measures from

the central bank, a new report

suggests. Caijing, a prominent

Chinese financial magazine,

reported that 17 of China’s largest

state-owned banks lent

a combined Rmb1.3 trillion ($210

billion) to the country’s margin

finance agency by

13 July, in an apparent attempt

to head off the collapse in stock

market values. The news led

to speculation that the 15%

rebound seen so far since the

price collapse had not perhaps

been all that it appeared.

Bridge Over Troubled Water

BP reached an $18.7 billion

settlement of federal, state and

local claims in respect of its

liabilities over the Deepwater

Horizon oil spill in 2010. That

included a $5.5 billion fine for

offences against the Clean

Water Act, which was less than

had been expected. But the

company’s overall pre-tax charge

for the whole affair stands at

$53.8 billion, roughly in line with

early estimates. The news did

nothing much to halt a slide in

BP’s share price since mid-April

News.indd 6 03/08/2015 10:09

Yes, Non-Doms who’ve been primarily resident in the UK for 15 of the last 20 years will pay tax on their worldwide income as if they were UK nationals. So will this mean that the Russian billionaires will forsake London for the bright lights of Monaco or the Virgin Islands? Will the London banking scene crash into insignificance as well-heeled non-dom bankers flee to Luxembourg? And will Kensington property markets be flooded with urgent sell orders that will smash prices? We wouldn’t bet on it.

ThreePISA?

Sorry about that, but you have to think of a fancy acronym for most new products, so perhaps we’ll chance our arm with the image of something tall, artfully crafted and famously wonky because of its iffy foundations. The Chancellor announced, in the most round-about of fashions, that he was encouraging a round of innovative thinking about a new financial product that will combine the best features of a pension with the characteristics of an ISA. There’s a green paper in circulation about the idea.

It’s going to be challenging, of course,

because a pension gets its tax rebates upfront while an ISA relies on getting them only when the decumulation starts. But it fits in with the spirit of the pensions freedom rather well.

It would seem to suit the Chancellor very well, too, because the investment sum that’s currently snowballing in a tax free pensions environment (until decumulation) is currently putting an upfront strain on the Treasury. A PISA will presumably grow more slowly than a well-managed SIPP, because its starting size is smaller. But let’s ask how it might go in terms of tax?

Will it, for instance, prove to be an attractive route for higher earners who are now watching their lifetime pension contribution caps reduced from its original £1.75 million to a puny million? An additional £25,000 a year of eligible PISA contribution entitlements would go a long way toward plugging the gap – although it would still struggle to compare with the tax breaks attached to riskier EIS, SEIS and Venture Capital Trust investments.

We have this feeling, though, that the tax implications will still prove tricky. Watch this space.

Of course, if a client is in that position he may very well be tempted to sell up £350,000 worth of his assets and buy a property PDQ, so as to get the tax break. Which will deliver a nice boost to property prices. And conversely, if he’s been thinking of selling up the family home in his old age so as to invest in a more flexible portfolio - or even simply downsizing – then he’ll need some assurance that he won’t now be penalised for being roofless. Relax, however, those assurances have been given.

Finally, of course, home-owners with estates worth more than £2 million (not just £2 million properties, please note) will find their IHT entitlement progressively scaled back, and from 2020/21 the new allowance will taper away completely for those estates worth more than £2.35 million.

Will the new rule count for properties in shared ownership? For equity release situations? Etcetera? Probably, but we need to see the details.

TwoThe Billionaire Non-Dom Exodus

Hitting the Non-Doms is another idea that sounds better coming from George Osborne than it would have from Ed Balls. Even Balls was prepared to admit (on camera!) that it wouldn’t raise much money, but by the time the Chancellor had got to his feet on 8 July its prospects seemed to have improved.

IFAmagazine.com 7


London House Prices Still Strong

Greater London house prices climbed by an average 7.8% during the year to June, according to Rightmove, with average prices at £615,115. But the pressure was heaviest in first-time buyer territory, where prices rose by 1.1% in June alone. Nationally, prices rose by 5.1% during the year to July, and information from the Council of Mortgage Lenders suggested a 15% annual increase in lending.

Inflation at Zero

UK consumer inflation dropped

to 0% in June, the Office for

National Statistics confirmed.

The fall, which had been widely

expected, was said to be due

to a 2.2% annualised drop in

food prices and a 10.2% fall in

petrol and diesel costs. But in

view of the strong UK economic

growth announced in the

Budget, there were few fears of

any major deflationary pressures.

Sure enough, on 16 July the

Bank of England governor Mark

Carney dropped a heavy hint

that UK interest rates might rise

around the turn of the year.

News.indd 7 03/08/2015 10:09

N E W S


Comfortable Nest

Seven of the 11 Nest funds run

by the National Employment

Saving Trust have outperformed

their respective benchmarks

since their foundation in 2011,

the trust’s annual report and

accounts claim. Star billing

goes to the NEST ethical fund,

which achieved an annual

12.42% growth against a target

of CPI plus 3% (effectively

4.88%). The NEST system now

covers 2 million employees

from 14,000 employers and

manages almost £420 million.

The report can be found at

http://tinyurl.com/phdzklf

FourChanges in the Buy to Let Market

Yes, the decision to scrap private owners’ eligibility for tax relief at higher rates is likely to shake things up for smaller landlords. Starting in two years’ time, tax relief will be reduced in scope until by 2020 it’s only available at the basic 20% rate. And from next April the automatic 10% ‘wear and tear allowance’ will be applied only if the landlord has actually replaced furnishings, instead of merely wishing he had. Expect an impact on the BTL market, which may well result in forced sales.

FiveThe Dividend Raid

The removal of the 10% tax credit on dividends from next April is to coincide with the introduction of an annual tax free Dividend Allowance of £5,000. Once that Dividend Allowance has been exhausted, tax will be payable at 7.5%, 32.5% and 38.1% for basic, higher and additional rate tax payers respectively.

There’s no disguising that this will imply a need for a major policy change for some investors, notably those with larger portfolios – effectively, a £250,000 fund earning a 2% yield (say) will break even on the deal, but bigger portfolios will be disadvantaged,

sometimes significantly. The progressive tax hike will probably squeeze some higher earners right out of income investing. Although it may also encourage fund managers to restructure their total returns in ways that blur the line between income and capital gain.

Six“The National Wage”

The same as the minimum wage, to all intents and purposes, except that it sounds better. The newspaper headlines were all about that headline figure of £9 an hour. What they forgot to mention was that it won’t happen until 2020 (when, purely coincidentally, Mr Osborne may be pitching for re-election as prime minister). Next

IFAmagazine.com8 Job No: 49694-3 Publication: IFA Magazine Size: 110x380 Ins Date: 01.03.15 Proof no: 1 Tel: 020 7291 4700

This advert is for investment professionals only,and should not be relied upon by private investors.The value of investments and the income from them can go down as well as up and clientsmay get back less than they invest. Map contains Ordnance Surveydata © 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 - © 2015 Morningstar, Inc. All Rights Reserved. Past performance is not aguide to the future. *Source Morningstar as at 31.12.2014. Based on multi asset funds from the mixed or flexible investment and unclassified sectors where ‘income’ or ‘distribution’ was included in the fund name. Market index from 01.10.11 – 70% BofA ML SterBrd Mkt NUK; 15% FTSEAll-ShareTR; 10% MSCIWORLD EX UK (NUK); 5% GBP OverNight IndexAverage – full history available from Fidelity. Holdings can vary from those in the index quoted. For this reason the comparison index is used for reference only.The fund’stargetyield isbetween4%and6%p.a.onthecapital invested.Theyield isnotguaranteedandwillfluctuate in linewiththeyieldavailable fromthemarketover time.Thefundsshouldonlybeconsideredasalong-terminvestment.Asaresultof theannualmanagementcharge for the income share class being taken from capital, the distributable income may be higher but the fund’s capital value may be eroded which will affect future performance.The investment policies of Fidelity multi asset funds mean they invest mainly in unitsin 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: fidelity.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%

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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-profiled by Distribution Technology. And all are available

via FundsNetwork™ Navigator.

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course for reliable income.

News.indd 8 03/08/2015 10:09

April’s £7.20 an hour is all that the poor will get in the meantime.

Which industries will the £9 National Wage hit the hardest? Care homes, nursing, “country-sports” staff, car park attendants and those helpful old folks in B&Q. There are some policy anomalies here, aren’t there?

SevenWhoopee, We’re a Tax Haven

The announcement that Britain’s corporation tax levels will be axed to just 18% by 2020 has aroused a certain amount

of grumbling from outside these shores. By our reckoning, an 18% corporate rate will make Britain the lowest tax area within the G20 group. It will also amount to more than a third off the 28% main rate that was being levied as recently as 2010. (The current rate is 20%, falling to 19% in 2019.)

Make no mistake, this was a grudge match. The Chancellor had already been stung, back in February, by a report from Oxford University analysts that had accused him of kissing goodbye to £7.5 billion of tax revenues

with his tax incentives up to that point. Predictably, its reaction after the 8 July Budget was that he was now risking protests from other European governments about his “aggressive” and unfair “race to the bottom” policy on taxation. (Incidentally, you can find KPMG’s own comparison of international corporate rates at http://tinyurl.com/bj5d7wk)

Will the Chancellor mind stirring up the dust in Europe? It seems doubtful as long as Ireland is able to defend its own 12.5% corporate rate, which has been decried from Brussels as outrageously piratical for the last ten years at least. Bring it on, George.

IFAmagazine.com 9Job No: 49694-3 Publication: IFA Magazine Size: 110x380 Ins Date: 01.03.15 Proof no: 1 Tel: 020 7291 4700

This advert is for investment professionals only,and should not be relied upon by private investors.The value of investments and the income from them can go down as well as up and clientsmay get back less than they invest. Map contains Ordnance Surveydata © 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 - © 2015 Morningstar, Inc. All Rights Reserved. Past performance is not aguide to the future. *Source Morningstar as at 31.12.2014. Based on multi asset funds from the mixed or flexible investment and unclassified sectors where ‘income’ or ‘distribution’ was included in the fund name. Market index from 01.10.11 – 70% BofA ML SterBrd Mkt NUK; 15% FTSEAll-ShareTR; 10% MSCIWORLD EX UK (NUK); 5% GBP OverNight IndexAverage – full history available from Fidelity. Holdings can vary from those in the index quoted. For this reason the comparison index is used for reference only.The fund’stargetyield isbetween4%and6%p.a.onthecapital invested.Theyield isnotguaranteedandwillfluctuate in linewiththeyieldavailable fromthemarketover time.Thefundsshouldonlybeconsideredasalong-terminvestment.Asaresultof theannualmanagementcharge for the income share class being taken from capital, the distributable income may be higher but the fund’s capital value may be eroded which will affect future performance.The investment policies of Fidelity multi asset funds mean they invest mainly in unitsin 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: fidelity.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, diversified 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-profiled by Distribution Technology. And all are available

via FundsNetwork™ Navigator.

So click or call today – and set your clients on

course for reliable income.


Taxman with Teeth

One of the less widely noted clauses in the Budget – which didn’t make it into the Chancellor’s speech – is that HMRC is to be given greater powers to recover money from bank and savings accounts, including cash ISAs. ‘This government will introduce legislation to modernise and strengthen HMRC’s powers to recover tax and tax credit debts directly from debtors’ bank and building society accounts, including funds held in cash Isas”, the small print confirmed. Expect more detail in the autumn.

News.indd 9 03/08/2015 10:09

S O A P B OX

China looks at Latin AmericaThe region’s battered economy is about to get a major boost from the

other side of the world, says Michael Wilson. But will it be enough to

make a difference? And what of the geopolitical implications?

Let me start with an apology. An apology for intruding on your thoughts at this nerve-wracking time of Greek and Chinese disaster with a deliberation about a part of the world that’s hardly figured in our consciousness for five years at least.

Well, most of us anyway. Just over two years ago, IFA Magazine ran a leader article about how the bright hopes for Latin America that had started the century had been giving way to pessimism, confusion and gloom. The troubles greeting Brazil’s new president Dilma Rousseff were largely of her own making, we said – corruption, social discontent and a lack of investment – but many of the bigger issues came down to the actions of the US Federal Reserve.

By threatening to reintroduce a strong-dollar policy with the end of quantitative easing, we said, Fed Governor Ben Bernanke was effectively siphoning out all the hot money that had once flooded into not just Brazil but also Argentina, Mexico and

the whole of Latin America in search of better interest rates – destabilising the fixed interest markets and undermining the stability of many of the region’s governments.

Where We Got It Wrong

And that, we said, was a foul in economic terms. Mexico and Argentina were growing their respective industrial outputs by 3.5% a year, we said, thanks to booming demand from the United States which was creating enormous opportunities for domestic producers. Meanwhile, we said, growing Chinese demand for foodstuffs such as soya, wheat and beef was at least partially

Xi Jinping has

said that Chinese

companies will be

investing $250 billion

in Latin American

economies during

the next decade

July/August 2015

IFAmagazine.com10

Ed's Soapbox.indd 10 03/08/2015 10:14

in the last twelve months.

America has reopened its embassy in Havana and has eased the travel restrictions that used to prevent the citizens of both countries from free (or even legal) passage. In April the US Congress voted to remove Cuba from its terror list. By the time you read this, Washington and Havana should have resumed full diplomatic relations. And even the Chinese are now starting to pull their money out of a traditionally socialist country to which they once felt distinctly protective.

The Commodities Slump

But by far the biggest factor in the bigger picture, it seems, is the change of economic direction in China. Last autumn’s re-orientation of the Chinese national economy, from export-intensive toward domestically-focused strategies, has coincided with a crackdown on local government spending and has combined with other factors to drive down commodity prices throughout the world.

That’s bad news for much of Latin America, which does much more than simply supply oil and mineral products to Beijing. Brazil and Argentina are massive exporters of maize,

compensating for the undeniable plunge in mining industry prices.

In retrospect, our assessment was too hasty. Firstly, because the Fed’s wind-down of quantitative easing came much more slowly than we expected, and because even today there have been no immediate indications of the feared interest rate hike. (Things may change in the autumn, of course.)

And secondly because we didn’t (and couldn’t have) expected the bigger-picture drivers that have crushed both the hopes and the illusory confidence of many South and Central American states.

The first driver, of course, has been the crashing fall in the oil price, which has weakened the power of oil producing states like Mexico, Brazil and Venezuela – thus putting an axe through their ability to import the goods they want, or even to sustain their own government budget balances. (It’s been calculated that Venezuela needs an oil price of $110 to balance its books – by which reckoning today’s $50 a barrel for West Texas Intermediate looks like a knock-out blow.)

The Left Disappoints

But then there are the political considerations. Yes, Dilma Rousseff has made a bigger mess than expected of running Brazil’s economy – with a growing chorus of dissent and outrage over corruption in high places that has swamped the nation’s biggest oil producer Petrobras. (The company is alleged to have supplied kickbacks of at least $1 billion toward politicians in her ruling Workers’ Party (PT) and its coalition partners.) In Argentina, the government of

Cristina Fernandez de Kirchner goes into this October’s general elections with its reputation deeply sullied – not least, because the international organisations such as the IMF flatly refuse to accept the authenticity of its economic records. (Ms Fernandez de Kirchner is not standing because her maximum two

terms are up.) And in Mexico the authority of President Enrique Peña Nieto, of the Institutional Revolutionary Party (PRI) of Mexico’s president, has faced unprecedented pressure from a political opposition which has lost no time in exploiting a public disaffection with the status quo.

If the governments of the region have not exactly been covering themselves in glory, we’d have to add that the main bastion of leftist support have been left hanging and powerless n their own right. The key mover here has been the death of Venezuela’s hugely influential left-wing president Hugo Chavez – who was replaced by a stool-pigeon who has since failed to spread his wings. If you’re wondering why, consider what we just said about the impact of a falling oil price on Caracas’s state revenues.

Now, there’s no doubt that chavismo had once exerted a powerful influence over impoverished states like Peru, Bolivia and Cuba, all of which had been happy to embrace the battle against the evil tentacles of US imperialism for as long as Mr Chavez was on the platform doing all the shouting. But you might have noticed that things have moved on a bit

Protest marches in dozens of cities

across Brazil have put pressure on

Rousseff over unpopular budget cuts

and a corruption scandal that has

snared leaders of her political coalition

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Ed's Soapbox.indd 11 03/08/2015 10:14

soya and pigmeat products to China’s domestic product – and that’s dealt a crushing blow. Overall, Brazil’s exports to China are reckoned to have fallen by a quarter since the first quarter of 2014.

Back to China

Is there light at the end of the tunnel? Very possibly, but from an unexpected quarter. China itself is now pumping foreign investment into South America

S O A P B OX

– and not just into oil, gas and mining, as you might have supposed a few years ago. (A model that’s worked well enough for Africa, but which somewhat misses the point in a continent that’s geared for manufacturing.)

China’s President Xi Jinping announced in January that Chinese companies will be investing a whopping $250 billion in Latin American economies during the next decade – almost quadrupling the current level of investment. More to the point, perhaps, Beijing is getting into a wider range of activities, including food manufacturing, farming, consumer goods manufacturing and transport and energy infrastructure. (By improving the region’s rail links, it believes, it can significantly lower the cost of moving anything else that it requires.) China has ended its ban on Brazilian beef imports, and it’s shopping for Embraer jet aircraft

That’s not all, because Chinese loans are fast becoming the most attractive option for Latin American development projects. The fading of US interest in developing the south, and the declining importance of the major multilateral development banks, have coincided with a very real Chinese wish to get involved in foreign growth.

And Chinese institutions lent a whopping $24 billion last year - much of it to Brazil and Argentina, but also to Venezuela, Ecuador and other destinations. Unsurprisingly, Washington is slightly unsettled to see that so many of the recipient governments are left of centre. Could that perhaps be why Barack Obama is loosening up on Cuba?

That’s an open question. But China’s Premier Li Keqiang declared in May that he wants to see his country’s annual trade with Latin America passing the half trillion dollar mark predicted that annual bilateral trade could hit $500 billion. News reports in the US are not treating that prospect with

any great enthusiasm. But how will things pan out in reality?

The Bigger Picture

Well, the least worst thing to say is that Latin America’s collective economies have not deteriorated by very much in the last six months. Despite flatlining growth in Brazil and Argentina, and a probable 4-5% collapse in Venezuela this year (possibly much more), the overall picture has remained in the positive numbers, with some positively good-looking growth in the region of 3% expected for Mexico, Chile and Colombia.

Where it’s going wrong at the moment is that Janet Yellen’s intimations of a US rate rise at the Fed have been sucking speculative money out of the region’s currencies. Venezuela recently ‘revised its methodology’ for economic growth but hasn’t released any official figures for inflation since last year - which leaves the market suspecting that its current rate may well have exceeded 120% in the last year. Mexico’s peso has been sliding for a year now, and is now estimated at 20% below the levels of a year ago.

All of this may, of course, make the region’s exports more attractive for importers in the United States, but it’s also likely to feed into steeper import bills for Latin America’s manufacturers – and, by implication, a squeeze on profits and wages.

For what it’s worth, we know that last month’s LatinFocus Consensus Forecast produced an expectation that the region’s economy will grow by just 0.5% in 2015, followed by perhaps 2% next year.

That, of course, will be good news if it comes to pass. But at present, with so much else to worry about on the global stage, global investors may struggle to find the incentive to reinvest in a region which is being badly tossed around by external factors. Nothing new there, then.

By improving the

region’s rail links,

China believes, it can

significantly lower the

cost of moving anything

else that it requires

July/August 2015

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Ed's Soapbox.indd 13 03/08/2015 10:14

B R I A N TO R A

July has always been

a tough month to call,

says Brian Tora.And this

year more than usual

A Turbulent Month

Deadlines can be a blessing and a curse to financial journalists and others writing any form of commentary on those issues that can be affected by events on a daily basis. They act for the good in ensuring what you are writing is delivered on time. The less good aspect of deadlines is that circumstances can change between the time you commit your thoughts to paper and when these same thoughts are available to be digested by an eager (I hope) readership.

Seldom has the opportunity existed for considered comment to be overturned by events taking place between the deadline and publication dates

as now. In the investment world we are assailed with a whole raft of fast moving events with little certainty of what the final outcome might turn out to be. Greece, China – even the first Conservative budget in the UK for close to two decades – all have the capability of turning perceived wisdom into irrelevancies.

Greece and the Euro

Take Greece. By now we doubtless know whether a deal was reached allowing this over-indebted country to remain part of the biggest financial experiment in recent times – the creation of a single currency to accommodate a wide and varied group of nation states. Nobody yet knows what

the real consequences will be for whichever route is taken, but there were plenty of highly qualified people arguing on both sides of the fence in the run up to the to the final decision.

Indeed, the debate ranged thick and fast in the days following the result of the 5ty July referendum. On the one hand, allowing Greece to exit the Eurozone would result in massive losses to creditors and might open up an option to others anxious to reassert control over monetary policy and the level of their domestic currency. On the other, saddled with such a stifling amount of borrowing, perhaps the only sensible solution is Grexit and the establishment of a new drachma, despite

July/August 2015

IFAmagazine.com14

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 Office: 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 [email protected]

www.jmfinn.com

LONDON BRISTOL LEEDS BURY ST EDMUNDS IPSWICH CARDIFF

Brian Tora.indd 14 03/08/2015 10:15

the short term chaos and pain. Only time will tell.

China’s Panic

China is a longer-running saga which is unlikely to have reached a conclusion this summer – although, as I write these words, I realise what a dangerous comment that is. That a bubble developed in Chinese equities is clear. It burst in a way reminiscent of the crash of 1987 – or arguably 1929. Having peaked in early June, it fell 30% in just three weeks – a fall that qualified as a proper bear market and was sufficient to prompt the authorities to step in with stabilising measures, which had yet to prove effective at the time or writing.

As with many bubbles, the real issue for China is that it was fuelled on borrowed money. Those that were late on board

The Summer Budget

Perhaps the one positive event recently has been the budget. The plans put forward for our financial wellbeing by successive Chancellors have usually exerted little real effect on market behaviour, though just occasionally a measure here or there sets pulses racing – as when Nigel Lawson announced the ending of joint mortgage interest tax relief and prompted a spike in house prices a quarter of a century ago.

Nothing from George looked likely to provoke a similar reaction this time. [Ed - The 3.5% rise in the Footsie during the two post-budget days was more probably due to optimism over Greece than any profound sense of a change in Britain’s own the economic wind.] But then I still have the gap between writing and publication to get through.

for this latest surge will have suffered comprehensively, which could well have knock-on effects for the Chinese economy. Presently the expectation for this year is growth of 7% - down from last year’s 7.5% - but this may not be achievable either if Chinese consumers start drawing in their horns.

Quite why those responsible for setting the tone in what is after all a command economy allowed this bubble to develop unchecked is hard to assess. Perhaps they hoped to sell off more state assets to an eager investing public at premium prices? But the fact is that a number of new flotations have been cancelled as a consequence is an indication of the seriousness of the situation. Slower growth in China will impinge on world economic performance and will do little for commodity prices.

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15

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 Office: 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 [email protected]

www.jmfinn.com

LONDON BRISTOL LEEDS BURY ST EDMUNDS IPSWICH CARDIFF

Brian Tora.indd 15 03/08/2015 10:15

P R O D U C T S

80s RevivalAfter success in the 1980s, Japan has endured a

couple of tough decades, says Nick Sudbury. But, like

a long forgotten pop group, it is hoping that a radical

new front man will bring about a revival of fortune

The election of Prime Minister Shinzo Abe in December 2012 provided a much needed shot in the arm for Japan’s moribund economy. His three-pronged strategy of fiscal expansion, monetary easing and structural reform was designed to kick start domestic demand and put an end to 20 years of stagnation.

Abenomics was a real leap in the dark at the time, yet it is hard to see how anything less radical could ever hope to succeed. Japan has never really recovered from the end of the economic boom of the 80s and is also now having to deal with the worst demographics in the Western world.

Some Risk

The new policies have been broadly welcomed, but they are not without risk. In April 2014 the government felt

with the money reallocated into Japanese and overseas equities. It is expected that other public pension funds will follow suit.

Nobody knows whether Abenomics will have the desired effect, but it has certainly provided a welcome boost to the local stock market. When the first round of QE was announced in April 2013 the Nikkei 225 index was trading at around the 12,000 level, but by early July it was up above 20,400.

The sharp increase has enabled Japan to be the second best performing sector of the market in the last 12 months. According to FE Trustnet, the average Japanese fund returned 20.5% over the year to July/August 2015, despite the considerable depreciation in the value of the yen. But in the light of the summer’s tumbles in China it remains to be seen whether the revival can continue - or in what form.

impelled to raise its sales tax for the first time in 17 years in an effort to reduce the fiscal deficit. Unfortunately, however, this undermined consumer confidence just when they were trying to encourage people to increase their spending.

One of the most tangible benefits is that the massive programme of Quantitative Easing has sent the yen sharply lower on the foreign exchanges. This has made Japan’s exporters more competitive and boosted profits, although much of the extra cash is being hoarded on the balance sheets rather than passed on to investors or the workforce.

In order to encourage greater investment in the stock market, the Government Pension Investment Fund, which manages more than $1 trillion of assets, has reduced its target government bond weighting from 60% to 35%,

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Products - Japan.indd 16 03/08/2015 10:16

There are only four investment trusts operating in the sector, but the performance of these closed-enders compares favourably with their more numerous open-ended peers. The most successful over the last 5 years has been the Baillie Gifford Japan Trust, with a return to shareholders of 160.7%. And partly, this was down to the fact that the shares have moved from a discount to NAV of more than 15% to a premium of 2.5%, as a result of the improvement in sentiment.

The manager, Sarah Whitley, invests in a portfolio of 40−70 medium to small sized Japanese companies that she believes have above average growth prospects based on a 3 to 5 year view. It is about as far from a closet tracker as you can get, with the fund having an Active Share of 88%. (This is calculated by subtracting

Premium Rating but the manager is encouraged by more positive trends, such as the increase in wages, the recovery in property prices and the strength of exports. The weak yen has led to many companies moving production back into the country and there are other welcome signs including a greater emphasis on shareholder returns via share buy-backs and higher dividends.

December’s snap election that saw Prime Minister Abe returned to power with a bigger majority has given him the green light to continue with his economic reforms. This suggests that the policy of QE will continue and that there will be more reductions in corporate taxes, which should be supportive of higher shares prices. If that is the case the Baillie Gifford Japan Trust should carry on delivering healthy returns especially given its 13% gearing and low ongoing charges of 0.9%.

the percentage of the portfolio that overlaps with its Topix benchmark from 100.)

Whitley controls the stock specific risk by limiting the size of each weighting, with the largest holding only making up 3% of the fund and the top 10 just 25.1%. There is also a decent spread across the sectors with Commerce & Services the biggest exposure at 25.7%, followed by Manufacturing & Machinery 19.6% and Electricals & Electronics 14.6%. It’s an approach that has really paid off as over the decade to the end of April the shares are up 195.8% compared to the increase in the index of 84.2%.

Recent economic growth in Japan has been disappointing,

P R O D U C T S

Baillie Gifford Japan Trust (BGFD) Type: Investment Trust

Sector: Japan

Fund Size: £314.6m

Launch: January 1981

Yield: 0%

Ongoing Charges: 13%

Manager: Baillie Gifford

bailliegifford.com

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17


Shiozumi looks for companies with annual earnings growth of more than 20%, but that he considers to be attractively valued. Because of this the portfolio has a very high weighted average PE ratio of 32 and a price to book of more than 11. There are no household names that we would recognise here in the West and although the majority of the stocks are not all that small there could be liquidity issues in the event of a forced sale.

Legg Mason Japan Equity was launched in October 1996 with a separate hedged share class created in February 2014 and has attracted modest AUM of £276.2m. It is an extremely unusual fund and might be suitable for clients with a high tolerance for risk who are looking for long-term capital growth. It could also make a good second holding in the sector alongside one of the more mainstream options.

n Healthcare, which is seen as one of the country’s last remaining growth industries.

The fund aims to generate capital growth and is benchmarked against the Topix index, which it has beaten hands down except over the last 3 months. Shiozumi has a highly idiosyncratic approach, which explains why the returns are so different to the rest of the sector. The end result is a highly concentrated portfolio of just 33 holdings, with almost 40% of the assets invested in the Health Care sector and a further 24% in Information Technology.

Indisputably, the top performing open-ended fund in the sector over the last 5 years has been Legg Mason Japan Equity with an impressive gain of 185.7% - more than 80% better than its nearest rival. Most of these excess returns came at the start of 2013, however; since then the numbers have been more in line with the rest of the peer group.

It’s an interesting fund, as it is managed by Hideo Shiozumi of Shiozumi Asset Management, with Legg Mason providing the means of access for UK investors. Shiozumi is a growth orientated stock-picker and has built the portfolio around three main themes:

n The ageing society and the opportunities that this creates;

n The use of the internet as a sales channel; and

Local Know-How

Legg Mason Japan EquityType: UK OEIC

Sector: Japan

FundSize: £276.2m

Launch: October 1996

Yield: 0%

Ongoing Charges: 1.85%

Manager: Legg Mason Global Asset Management

leggmason.co.uk

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P R O D U C T S

Passive investors have also done well recently, because there are plenty of ETFs in the sector that have delivered healthy returns over the last few years. Cost -conscious clients who like this sort of approach, but who are concerned about the risk of a further weakening of the yen, might be interested in the iShares MSCI Japan GBP Hedged UCITS ETF, which was created in July 2012 and which is up by an impressive 130% since inception.

The ETF uses physical replication to track the MSCI Japan index, which is a free float weighted benchmark that provides exposure to 85% of the leading Japanese companies. There are currently 314 holdings and these include many well-known businesses such as Toyota, Honda, Mitsubishi, Canon, Sony and Hitachi, as well as numerous others. The

Hedge your Bets Despite the extra cost of

the hedge the TER remains extremely competitive at 0.64%, due in part to the return from securities lending of 0.02%. The charges are further minimised by using sampling rather than full replication with the re-balancing of the index taking place on a quarterly basis.

Exchange rates are notoriously difficult to forecast, so it is hard to know whether it is sensible to use a hedged ETF given the extent to which the yen has already depreciated. If you don’t think it advisable there is an unhedged version available with the code IJPN. Since the end of July 2012 this is up less than 50% compared to the 130% achieved by its hedged equivalent, but it is possible that situation could reverse in the future, especially as the governor of the Bank of Japan has said that it is unlikely that the currency will fall further.

three main sector weightings are Consumer Discretionary 21.75%, Industrials 19.25% and Financials 19.22%

IJPH has attracted a considerable £608.2m in assets under management. It is unusual because it incorporates a monthly hedge using one month forwards to reduce the impact of currency fluctuations between the yen and sterling. This has really paid off over the period since inception, with the yen down around 36%, but it remains to be seen whether it will continue to work in the investors’ favour.

iShares MSCI Japan GBP Hedged UCITS ETF Type: ETF listed in

London

Sector: Japan

Fund Size: £608.2m

Launch: July 2012

Yield: 0%

TER: 0.64%

Manager: BlackRock Advisors

ishares.com

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Mind the Gap

G U E S T F E AT U R E

Today’s platforms need to include direct-to-consumer

offerings, says Defaqto’s Gill Cardy

This means that the data we collect is not just about propositions which are available through insurance brokers, mortgage brokers and financial advisers. It means that our process includes products which are solely available direct to the consumer. Defaqto currently monitors data on 65 propositions from 46 providers, of which 27 propositions are direct to consumer offerings.

What is also interesting is that, when we consider other product types which are only available in the direct-to-consumer market, there tends to be a marked difference in the quality of the product. Products designed for distribution by intermediaries typically offer more features, or features with more comprehensive definitions. Yet, when we

As I’m sure readers will know, Defaqto is an independent financial research company, specialising in collecting, researching and sharing financial product information. What may be less well known, though, is that we collect information on all financial products available to retail consumers.

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Guest Feature - Defaqto.indd 20 03/08/2015 10:24

on sums between £5,000 and £24,999 (which is, after all, two ISA allowances).

Equally, there has been increasing discussion around the availability of advice, client capacity to pay fees for ad hoc or initial advice, and the advice gap. Indeed, the level of provider contact in the early days of pension reforms advice does suggest a large number of clients who - rightly or wrongly - are seeking to make their own financial decisions, without access to an adviser.

Confusingly, personal investment firms report that only around 50% of their business is advised - the balance being categorised as non-advised, a market statistic which may interest the regulator and which puts the issue of advised or non-advised, intermediary focused or direct-to-consumer front and centre of any discussion about achieving good consumer outcomes.

What is clear to any industry observer is that consumers with assets on adviser platforms are increasingly likely to be orphaned. In addition, as the popularity of corporate platforms designed to facilitate auto-enrolment alongside ISA investing increases, more and more clients will find themselves investing on platforms and forced to make potentially complex and life-changing financial decisions without access to personal advice.

A Seismic Shift

So, we at Defaqto see a number of trends developing which on their own may not be very significant, but which taken together could represent a seismic shift in the dynamics of the platform market.

More statistics. A report by Cass Business School indicates that 94% of adviser firms will use at least one platform, with 27% using a primary platform and 69% using “a number of different platforms”.

the total net sales, 55% came from retail advised channels and 20% came from direct to consumer channels.

But this market information needs to be considered in the light of trends in the adviser space.

n There are around 9,300 firms authorised as Appointed Representatives of networks or other associations, and around 5,200 directly authorised firms.

n The number of advisers working within financial adviser firms is currently reported at around 23,600 whilst the number based on professional standards data (including bank, building society, and wealth manager investment advisers) totals 41,500.

That represents a drop in the total number of advisers of around 25% over the last five years, and a 12% drop in the number of advisers working in adviser firms. Yet average revenues per firm and per adviser have increased dramatically over the last 5 years - up by 53% and 70% respectively.

Orphaned Clients?

Some more facts. Around 70% of product sales are currently attributed to pensions, 10% to annuities and drawdown, 9% to bonds and 7% to ISAs, OEICS and investment trusts. And the vast majority of these are facilitated on platforms.

Now, while many advisers publish profiles on adviser finder sites hinting at minimum investible assets in excess of £250,000, research published by Fidelity Worldwide Investment showed an appetite for advising clients with considerably lower levels of investible assets.

24% of the respondents told Fidelity that they would advise clients with £50,000 - £74,999, while just 1 in 10 were prepared to advise clients

look at platform propositions, the difference in the breadth and depth of the proposition does not vary according to the distribution channel.

Development of Today’s Platform Market

Historically - and you wouldn’t need the memory of an elephant to trace the development of the platform market - advisers first accessed fund supermarkets which offered access to a wide variety of unit trusts and open ended investment companies (OEICS).

Increasingly, wraps were then brought to market which offered access to a significantly greater variety of tax wrappers and investment products. And today, assets on platform continue to increase - by a massive 17% in 2014. And of

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21


But would advisers ever include a direct-to-consumer brand in their advice proposition? Just because a client does not meet the usual wealth segmentation criteria does not mean that they either don’t need advice, or would not pay for it if they needed it.

Furthermore, if clients are paying fees for advice, why does it actually matter if the recommended and most suitable solution is a brand traditionally associated with a direct-to-consumer offering, or a white-labelled product, or the direct-to-consumer version of an adviser proposition?

Cost Considerations

So the introduction of a number of direct to consumer offerings, including some from brand names better known in the adviser space, suggests a greater willingness amongst product providers to deliver solutions to consumers who either wish to make their own investment decisions, or who find themselves without an adviser.

The Cass Business School Research also indicated that functionality is typically the most important selection feature for users (46%) with only 20% of advisers ranking cost as the most important factor in choosing a platform.

Costs are not, and are unlikely to ever be the primary driver in the platform recommendation - especially in the adviser space, where breadth and depth of comprehensive solutions are considerably more highly prized. Yet cost can sometimes be correlated with the comprehensiveness of a proposition.

Two Levels?

So, rather than simply observing market distinctions in terms of distribution channel, we can identify a distinction between two levels of service offering: a full, open architecture platform and one with a more restricted range of services and investment options.

Defaqto’s own Platform Service Review published in December 2014 revealed that adviser firms, on average, are using 2.6 platforms, and that 30% of firms changed at least one of their platforms in the 12 months prior to the survey.

Conclusion

Platform use was, and remains, a key question for advisers who still seem to struggle with how to incorporate a limited number of platforms which deliver administrative efficiencies to their clients and to their businesses, with the ‘comprehensive and fair analysis’ requirements for demonstrating Independence.

Equally, delivering suitable platform strategies at a fair cost to clients who are likely to be investing without advice, for whatever reason, at a number of points in accumulation or decumulation, may need advisers to develop a solution which accommodates this varied journey.

Assuming that clients are always advised and never need or want a direct-to-provider approach could just be the assumption that truly does make an ass of you and me.

Welcome to London Capital ClubYour space in the heart of the City for

meeting, dining and networking

We look forward to welcoming you to London Capital Club

A Space for MeetingLondon Capital Club is the perfect location formeeting with clients over an informal coffee, a spot of lunch, or in one of our sumptuous privatemeeting spaces.

Restaurant Fine Dining

Events & NetworkingWe host a range of networking events, as well as keynote speaker events. We have spaces for members’ events and can accommodate up to 150 delegates in a variety of room set-ups.

London and Beyond

T: 0207 717 0088E: [email protected]: 15 Abchurch Lane, London EC4N 7BWW: www.londoncapitalclub.com

Enjoy the brasserie-style ambience in our public bar and restaurant, @15, formal dining in our members’ restaurant The Walbrook Grill, or hold a private function in one of our historic rooms for an outstanding fine dining experience.

Club members receive the same exceptional service in over 250 clubs worldwide, which make up the IAC network, as well as access to further benefits, such as discounts at some of the country’s best golf courses and hotels.

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IFAmagazine.com22


Welcome to London Capital ClubYour space in the heart of the City for

meeting, dining and networking

We look forward to welcoming you to London Capital Club

A Space for MeetingLondon Capital Club is the perfect location formeeting with clients over an informal coffee, a spot of lunch, or in one of our sumptuous privatemeeting spaces.

Restaurant Fine Dining

Events & NetworkingWe host a range of networking events, as well as keynote speaker events. We have spaces for members’ events and can accommodate up to 150 delegates in a variety of room set-ups.

London and Beyond

T: 0207 717 0088E: [email protected]: 15 Abchurch Lane, London EC4N 7BWW: www.londoncapitalclub.com

Enjoy the brasserie-style ambience in our public bar and restaurant, @15, formal dining in our members’ restaurant The Walbrook Grill, or hold a private function in one of our historic rooms for an outstanding fine dining experience.

Club members receive the same exceptional service in over 250 clubs worldwide, which make up the IAC network, as well as access to further benefits, such as discounts at some of the country’s best golf courses and hotels.

Follow us @LondonCapClub

Find Us: Bank Cannon Street Monument


I FA V I E WJuly/August 2015

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IFA View - Barings Asset.indd 24 03/08/2015 10:27

“And actually it doesn’t probably want to grow at that pace, because growing at that pace likely will create more stress on the economic and social systems than is necessary. We think that the Chinese economy will slow a bit more - but that’s probably a good thing in order to have a more balanced growth profile.”

But it’s important to remember, he says, that China is only one constituent of a much wider Asian region, some of which have what Barings regards as even better investment opportunities.

The backdrop here consists of three fundamental trends which are fuelling growth: rising consumption, positive political and market reforms, and the strength of the technology sector.

“In the long term - and we are very much focused on the long term - we still like the faster-growing economies in South East Asia, as well as India - and actually, even in markets where the economy is not growing as quickly, such as Taiwan, or Korea, we’re still finding exciting places to invest in.”

Attractive Valuations

The really good thing, tough, is that despite all these positive factors the region is not currently being priced at a premium – rather, he says, it’s roughly one standard deviation below the historical norms. This, says Barings, is lower than it has been for years and indicates an attractive opportunity for investors.

“Rising Asian consumption, driven by supportive demographics across the region, is a key theme that underpins many of the companies we favour in the Baring Eastern Trust. As Asian consumers spend more on

It’s good to report that the Chinese investment scene is making a comeback after six weeks of price uncertainty that rattled the bars of the international markets in no uncertain fashion. Two precarious weeks in June and early July briefly knocked almost a third off the Shanghai stock exchange, as sudden uncertainties about the economic re-orientation and the recent crackdown on local authority spending created a frisson of sudden fear among an international public that had only recently been allowed access to it.

So it was a relief to see the Shanghai Composite staging a 15% comeback during the middle two weeks of July. And what better time to catch HyungJin Lee, the manager of the Baring Asia Growth Fund and the Baring Korea Trust, during a quick visit to London?

Lee doesn’t seem too fazed by the recent gyrations. Yes, he agrees, it’s generally true that China’s economic growth has been slowing down over the last few years. “China used to grow at around 10% - not so long ago. But obviously, the scale of the economy is such that it can’t continue to grow at that pace.”

travel and leisure, as well as on cosmetics and healthcare, we’re find companies with attractive valuations and good execution potential that are benefiting from these growing markets.”

Let’s look at travel and leisure. As an example of the recent Chinese thirst for travel, Lee cites one company which took 6,400 of its 12,000 employees for a 20th anniversary bash: four days in France!

The bookings for this trip alone included 4,700 hotel rooms, 7,500 high-speed tickets and 146 tour buses. The Chinese visitors spent around €33 million in Paris and the south of France, and that didn’t even include shopping. The upmarket department store Galeries Lafayette closed its doors to all other shoppers for a whole morning to cater for them. Perhaps unsurprisingly, French Foreign Minister Laurent Fabius was on hand to greet them.

“As the economy matures and incomes rise,” he says, “the average Chinese is able to go on overseas trips for the first time.” But not all of the Chinese tourism market is so far-flung. When Chinese tourists select their own holiday destinations, Lee says, we find that Thailand is one of the top destinations at present.

“I mean, when you’re going overseas for the first time, you’re probably not going to go to Rio de Janeiro. Instead you tend to stay close to home - first going to Hong Kong, which is an easy one - and then a little further away to countries like Korea, Taiwan, or Japan. And once you are more comfortable with that, and you are looking at more places in South East Asia - and especially Thailand, one of the more developed tourist destinations in the region.”

Still a Powerhouse Neil Martin interviews

HyungJin Lee, Head of

Asian Equities at Baring

Asset Management,

about the prospects

for a regional market

that’s been rattling

nerves recently

IFAmagazine.com

July/August 2015

25


I FA V I E W

Technology

And then there’s the technology angle. “The potential of technology has been a long-term theme across Asian markets in general,” he says, “but this time the companies are global brands and the opportunities are larger. Recent falls in commodity prices have allowed Asian manufacturers in some industries to benefit from improved profit margins. Add to this the effect of structural change in the region, and we think the outlook for earnings growth for companies is favourable - particularly when compared with emerging market peers.”

Regarding technology, the focus is on key technology subsectors on the next wave of growth; globally competitive manufacturers; the global brand footprint and the rise of the Asian brand; and, productivity gains and industrial automation. Specifically, it’s the rise of Web 3.0 and Big Data which is proving of most interest.

Lee is aware of Big Data’s potential: “Data consumption on the internet is growing exponentially, so we are invested

in companies which will benefit in the creation and consumption of data. For example, everyone uploads pictures of their lunch, I don’t know why, and the people are watching YouTube on the train. All this consumes a lot of data and it all has to be stored, transmitted, and then filtered.”

And then there’s the associated potential for structural development: infrastructure, financial and SOE reforms, and of course, environmental development and clean energy.

There is still a huge amount of infrastructure needed says Lee. “Especially in economies such as India and Indonesia, there’s a shortage of basic roads, ports, railways and so forth - and certain companies will benefit from the increased spending of their governments on infrastructure.”

Lee also reminds us of the growing opening-up of financial markets in the region. “The new Hong Kong Shanghai Connect programme is a route for foreign investors to buy domestically listed shares on the Shanghai index - very measured, and with daily quotations. And of course, conversely, it allows domestic Chinese investors to buy Hong

Kong listed stocks. Generally, the opening up of Chinese financial markets to the outside has been done in a very controlled and measured fashion.”

A Favourable View

Barings is well aware that events in the Asian region are being closely followed by the UK investment community. The company’s own research indicates that 82% of IFAs in the second quarter of 2015 said they were ‘favourable’ towards Asian equities - an increase of 23% since the first quarter of 2015.

With his series of meetings and presentations over in the City of London, Lee was off to catch a flight to Hong Kong and his home base, no doubt keen to get back in the middle of what he regards as one of the most dynamic and exciting regions in the world.

A Thirty Year History The Baring Eastern Trust was first launched back in 1985 and sets out to investing in economic sectors in Asia and the Pacific, excluding Japan, through securities in any country.

It currently has around 50 holdings and the top ten (which account for just over 40% of the portfolio) are AIA Group, Baring China A-Share Fund plc, Largan Precision, Tencent, Baring India Fund, China State Construction, Huaneng Renewables, SK Hynix, Ping An Insurance and PAX Global Technology.

As of 17 July 2015, the fund was up 18.5% year-on-year.

July/August 2015

IFAmagazine.com26



I FA V I E W

A Perfect SwingNeil Martintalks to

Michael Beveridge,

Head of UK Wholesale

Sales at Standard

Life Investments, who

sees a lot of positives

in a busy sector.

When your employer sponsors one of the key competitions in a sport you love, then, says Michael Beveridge, Head of UK Wholesale Sales at Standard Life Investments, it can be “absolutely fantastic.”

More shortly on how Beveridge keeps busy during his hours out of the office. But first, as he told IFA Magazine, he believes the

IFA sector to be in rude health - especially when you consider that there used to be so much speculation about adviser numbers after RDR. Recent statistics have shown that the number of regulated financial advice firms is up 5.9 % since December 2011.

“It’s really robust at the moment,” he told us. “There are more directly authorised firms, and there is definitely

a trend in the regions for a lot of M & A. Some of the regional firms are getting pretty strong, to be honest.

“Maybe that’s just where we are in the cycle at the moment. But there are definitely challenges. Firms have to deal with the new regulatory framework and getting new people through the system, of course.” And all that’s before we get to the new

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called Intuition. Essentially whether you are studying for CFA, or it’s your first day in the industry, there are online generic investment modules that people can access 24/7.

Learning Gateway, originally launched in June 2011, is what Beveridge describes as “a dedicated, content-rich, online training resource” which operates as a solutions-based educational portal, aimed at helping intermediaries to maintain the professional standards requirements of the day. The point, he says, is that advisers can use it to access up-to-date training that’s free of charge and which will be relevant to their role but still flexible enough to fit around their busy schedules.

“Statistics show that there are about 5,500 people have who signed up to join so far,” says Beveridge. “We complete around 1,700 modules a year - they take about half an hour to do, and there is testing at the end of it, so it’s a structured CPD. We’re aiming to help the next generation of people, obviously, but also to work with those who have been in the industry for longer, to keep their skills relevant and up to date.”

A Wider Remit

But all this, he says, is just a part of the Standard Life Investments’ campaign to attract IFAs and add value to their businesses. This includes a team in Edinburgh which builds CRM systems and teaches the do’s and don’ts of using such systems.

As for communicating with IFAs, Beveridge’s team is pro-active in getting themselves out there amongst the advisers. Beveridge the group has a 20-strong force of regional sales teams who offer support and organise industry events, which he says are “always very popular. And then we have an organised conference

pension freedom rules, which Beveridge considers have been a real stimulant to the industry

The Learning Gateway

That’s where Standard Life Investments’ training and skills upgrading programme comes in, he says. “We offer asset class training via an online CPD solution called Learning Gateway which we partner with a company

call schedule with key fund managers and key thinkers throughout the business.”

Standard Life Investments also organises paraplanner events which try to provide generic help in terms of investments and educational training.

The Pensions Challenge

Although Beveridge believes that the outlook for the sector is bright, he admits there are a number of key challenges, and one of those is the new pension changes. The problem is having the right number of advisers to cope with the new changes, he says - something that’s proving tricky. And another other worry, on the regulatory side, is a lot of angst about the FSCS levy which is proving tough to deal with.

Beveridge does not see the rise in pension interest as a blip. “I think in the UK there’s around £700 billion in DC plans and £1.4 trillion in DBs. So much is dependent on how things go, and on whether the government might change the rules - but if people were to move their assets from DBs to DCs, there’d be a huge market that needs to be supported with ongoing advice. I know that some people talk about using online advice, but if you’re making a decision like that you really do want to have face to face advice from a chartered financial planner.”

That Golfing Connection

Beveridge has spent his entire career at the Standard Life Group and joined the main business after graduating from University in 1994. He moved across to Standard Life Investments in 2000. “People forget that Standard Life Investments only started as a standalone entity in 1998 – and it’s been a great journey from where it was then to the global business it is now. It’s tremendous to be a part of it, a real privilege.”

When not commuting between the headquarters in

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29


I FA V I E W

Edinburgh and the group’s office in London (he’s usually in London between two to three times a week), and when not helping out with his three children, Beveridge tries to play as much golf as possible. A useful attribute, given that in February 2013, Standard Life Investments became the first-ever Worldwide Partner for the Ryder Cup. A ground-breaking

agreement with the Ryder Cup Europe and the PGA of America meant that the global asset management company became a Worldwide Partner to both the 2014 and 2016 Ryder Cups.

The reasoning behind the choice of the Ryder Cup was clear, explains Beveridge: “The whole firm is incredibly proud of it and it fits with

our ethos within the firm – a leading global asset manager with strong performance and a distinctive team cultureBut I guess the thing that makes me really think that is that it is broadcast to around 544 million homes around the world. The actual reach is phenomenal - which is of course a great boon for us all.”

July/August 2015

IFAmagazine.com30


The About Us page is the second most important page on your website – only behind the home page. This is your one chance to talk about yourself, and not about your customers. This is the opportunity they give you to impress them. Your “About Us” is your audition - Seems self-evident to make it quality, right?

1 – Make your Branding Message

Who are you? What do you do? Clients want to have a deeper understanding of the people who they will be dealing with if they select your company. And remember, it’s also a chance for you to talk about areas of speciality and identify who your ideal client is – this can be a good way of weeding out the unsuitable clients at an early stage.

2 – For Potential Employees

When people hear about your company’s job openings, they will almost assuredly visit your website and check out your About Us page. Having a video that prospective applicants can watch is a great idea. They can get a feel for who you are and who you serve. They should also gain a greater understanding of your values and your mission. It’s also a great idea to include your staff in the video so that the job seekers get a feel for your company’s diversity and the attitude and demographics of the people working there.

Prospective clients and job seekers should also learn the history of the company. Through all of this subtle information, the applicant finds out whether they might be a good fit for your company and whether your company is a good fit for them. Today’s employers realize the value of recruiting someone who feels at home and will stay. The About Us video is another tool for engaging prospects and helping to reduce the wasted time of interviewing someone who really wouldn’t be a good fit and doesn’t realize it until they show up at your office.

ADVERTORIAL

3 – For Current Employees

Having an About Us page isn’t just about new employees. It’s to help focus and align your current ones as well. A good About Us page gives your employees identity and a sense of proudness to be working for this company. It’ll also help your employees explain who they work for and what they do.

For more information on how we can help with a home page video, or any other aspect of video marketing, please get in touch: phone: 01453 810914 email: [email protected]

You can also view examples of our work at: www.halofilms.co.uk

Peter Georgi of Halo Films talks about why IFAs needs an “About Us” Video

With thanks to Kirstie of WarroomInc.com


E X I T S T R AT E G Y

Having just acquired Ashcourt Rowan, it’s fair to say that Towry has had its hands full of late. That’s not to say that Andy Cowan, who looks after acquiring IFAs for Towry, has closed the door to new advisers, or to firms.

But for the next few months at least, he thinks that what Towry is after are individuals with businesses which would be really easy to integrate into the Towry model. Cowan cites one example recently of a one-man-band IFA who was able to walk right into the Glasgow office and, because he was such a good fit, effectively started work from day one.

So what’s a small business? “I mean anything from one guy to maybe 20 advisers. Anything in that spectrum we would see as a relatively small firm - and we are potentially interested actually in all of them, and really interested where there is the right talent.”

The Consolidation Imperative

What Cowan notices is that, without question, even small firms are favouring operating on a larger scale these days. And they welcome the chance to drive down costs through greater efficiencies. Add to that the recent changes in technology, and he thinks we have a dramatically changing environment for the smaller firms.

Those small firms who are not thinking about selling their entire businesses, says Cowan, may have a different plan in mind: “They are looking at outsourcing more of what they do - so that could be investment platforms or investment management services, or CRM systems, or even compliance.”

How can they manage the transition? “They could join a network of advisers, of course - maybe not quite as popular now - but with the idea being to pool resources, but to also maintain a profile of their own business above the door.”

Another option for firms, says Cowan, is to consider using a consolidator, which has the attraction of having a greater degree of central control and support but still allows them their own identity within a franchise.

A Different Approach

Towry’s approach and sales pitch for those firms joining the fold is different. “Our vision is to be a scaled national brand,” he says,

Choosing the right exit

strategy is probably the

biggest decision an IFA

will ever have to make.

In the third of our series,

Neil Martin talks to Andy

Cowan, Head of Private

Client at Towry Limited

“where consistency is a really important part of that brand.”

“Our argument to small firms is that if you join us either as a practitioner with a long term career ahead of you, or even as someone who might only be looking for a couple of years to reallocate his client book and then retire off into the sunset, or whatever, we are a really good place to be. And here’s why: we have a huge amount of central support.”

“Before the Ashcourt Rowan deal we had about 180 advisers, but now it’s about 240. And we also have around 70 paraplanners who write reports for advisers, and about 90 client service administrators.”

The objective for Towry is to get the IFA spending as much time with his clients as possible, and not to get tied down in the back-end administrative processes.

Does Towry insist that the IFA stays around after the deal? “Not exclusively so,” says Cowan. ”But generally it’s true, and the reason it’s true is because of the huge importance and value that we place on the [existing] relationship between the adviser and their clients.”

Towry are happy to welcome a wide range of advisers, as long as the clients are put first in any deal. “An adviser who might be into his late 50s, early 60s, might want to stick around on a really good package, with the knowledge that there’s a good career here for the next couple of years, and simply talk to his

Looking for the DoorMarked Exit

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clients. Then gradually we will involve other longer standing advisers, so as to securely integrate the client into Towry.”

Then again, admits Cowan, they also had an adviser who just wanted to hand over his clients – and, because they were a good fit, Towry did the deal. The adviser got his cheque and withdrew.

What’s the Business Worth?

As for what Towry is prepared to pay, it all does depend on the individual involved, the client list - and of course whether the adviser is looking to build a career, oversee a lengthy transition, or head off for the beach. In the case of the latter, payment would usually be spread over a number of years and still involves a detailed transition.

Cowan is clear on what Towry is prepared to offer. “It really is bespoke, we don’t have a formulaic approach to this. What we’re really asking is, what is the value of this business to Towry? It’s not a question of the intrinsic value, nor the market value, nor the floating value.”

“Where there are great synergies around the propositions and methodology, etcetera, there might be huge value to Towry - in which case we would be prepared to pay more than what would be deemed the market price. And other occasions where there is less value to Towry and we’d pay less.”

What sorts of formulas are applied? It can vary from 2% to 3% of assets under influence, he says, or it might be five or six times the profit number. Or three to four times the turnover figure.

Unsurprisingly, Cowan says, they always think that they are worth an awful lot more. “But we explain the rationale behind the pricing, and in some cases we do pay very well if the book of clients looks very similar to our kind of sweet spot.”

And that sweet spot, says Cowan, is where they find that they are able to deliver most value to the new clients.

As for the client profile, Towry looks for “…middle market clients…” which are not those with less than

£100,000 investable assets, but probably with between £250,000 and £1m.”

The Current Situation

Asked whether Cowan thinks the ‘market’ for selling, or retiring IFAs is competitive at the moment, he gives an honest answer. “I’m not really sure that’s true. I know that businesses are very often quite attractive, but how many firms, without blowing our trumpet too much, are in our position? We are a pretty strong firm, with a pretty strong balance sheet, plenty of cash, very profitable, and we can pay well for these businesses. How many other firms are in that fortunate position?”

“Our younger advisers have a great career path, and the framework to support them. We are a very attractive proposition, we are keen to grow, and know that it’s all about people.

“Just because there are issues in the sector and people are struggling with regulation and other issues, it doesn’t mean to say that it’s not brimming with talent.”

Towry IFA Retirement Offer – At a Glance

n Towry are quite particular about who they are looking for

n Can handle very large firms as well one-man-band deals

n Vision is to be a national brand with a comprehensive proposition

n IFAs are preferred who can seek a career path within Towry, or at least facilitate a smooth client transition into Towry

n Towry needs to see synergy with advisers’ clients

n ”We are very happy to talk with businesses where we recognise a strong cultural fit.”

For more info or for a confidential introduction to Towry, please email [email protected] or speak to our Publishing Director on 07974 708771

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Exit Strategy - Towry.indd 33 03/08/2015 10:30

Twenty Four SevenIFA Magazine, Britain’s premier online

portal and print publication for

financial advisers, has launched its very

own app designed to help you stay

up to date with all the latest financial

and economic news as it happens. Main Features:

Reviews

Features

Funds

Market and Economics

Trading Expert

FCA

Compliance

Jobs

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IFA Magazine App.indd 1 21/11/2014 09:43Aviva Investment Doctor.indd 34 03/08/2015 10:31

Cyclically Speaking We take a closer look at a different way of assessing price/earnings ratios

INVESTMENT DOCTOR

Let’s get this straight. Cyclically Adjusted Price/Earnings Ratios (CAPE) are a Marmite thing. Either you think they’re the most reliable indicator in the stock market, or else they’re the work of the very devil, and fit only for fools.

Every other popular indicator you can name – trailing p/es, forward p/es, even dividend yields – is currently telling us that shares are fairly valued – in mid-July, the trailing twelve months (TTM) p/e on the S&P 500 index was running at 20.8, which was above its historical mean of 17, but not high enough to denote a bubble. But the CAPE boys are insistent that the stock market recovery has gone quite far enough, thank you, and that the ‘real’ level of share prices in relation to corporate earnings is 70% higher than its long-term average.

So what do they mean by a ‘real’ average? In most cases they’re referring to a 10 year average of inflation-adjusted price/earnings ratios, according to a formula originally calculated by Professor Robert Shiller of Yale University back in the 1980s. By eliminating the distorting effects of short-term factors such as inflation, the advocates say, the CAPE calculation can give us a clearer picture of what’s really going on.

And, according to the CAPE fans, the headline ratio for the S&P 500 in mid-July was heading for 28, which they reckon is the stuff of bubbles. Especially since the long term CAPE average is closer to 16.5.

Strictly speaking, CAPE wasn’t entirely Prof Shiller’s idea. Some 75 years ago, Ben Graham and David Dodd were bemoaning the fact that

been rising inexorably, its TTM p/e has rarely been more than 7 points short of the CAPE during the whole of that period. Indeed, if anything the gap between the two appears to be narrowing slightly at the moment.

What does this tell us? On the face of it, that there is no runaway bubble happening here. We’d have more cause to be worried if the CAPE were heading for the startling 44 that it hit during the dotcom boom of the late 1990s – to be followed, in due ignominious turn, by the stone-cold bottom of 14 that it hit in 2006. (Illustrated in our chart.)

But the sceptics insist that the jury is out. They agree that CAPE did a marvellous job of warning in 1999 that the markets were set for a terrible fall – and that the rally of 2001 would end in tears. But, they say, it has twice failed to tell us – notably in early 2011 – that stocks were cheap and that a major upgrade of equity markets was on the cards. The enormous bull market since then has been something of an embarrassment. The failure, they say, was due to other short-term factors like inventory cycles getting in the way.

What’s the reality? We’ll try not to sway your mind unfairly either way, because like we say there are two camps. But if we’ve whetted your appetite, do take a closer look.

conventional trailing p/es could be kicked about quite mercilessly by the changing fortunes of the business cycle – for instance, because a market emerging from a period of low profit would throw unnaturally large p/es at us, while a market entering recession might sustain attractively low p/es for much longer than was sensible. Dodd and Graham proposed that, instead of focusing on the last year’s profits, we should improve the calculations by building in a five or ten year average of prices and earnings.

The Figures

Shiller’s refinement established the 10 year yardstick for comparisons, although you’re always welcome to apply different terms for your own averages, or course. There are no shortages of rival calculations, but Shiller’s own downloadable spreadsheet at www.econ.yale.edu/~shiller/data/ie_data.xls gives his own fascinating view of how the US market has behaved since 1880, while http://tinyurl.com/omw6463 offers an illuminating view of the near term, also using Shiller’s own data.

The Awkward Truth

And here’s the surprise. Although it’s absolutely true that the CAPE on the S&P is pretty high, that’s simply the level it’s been at for most of the last five years. While the headline S&P index itself has

Shiller PE Ratio Value 2005-201530

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IFAmagazine.com

July/August 2015

35

Twenty Four SevenIFA Magazine, Britain’s premier online

portal and print publication for

financial advisers, has launched its very

own app designed to help you stay

up to date with all the latest financial

and economic news as it happens. Main Features:

Reviews

Features

Funds

Market and Economics

Trading Expert

FCA

Compliance

Jobs

Co

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atib

ility

: R

eq

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s IO

S 6

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Ava

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.

IFA Magazine App.indd 1 21/11/2014 09:43 Aviva Investment Doctor.indd 35 03/08/2015 10:31

The Crackdown Continues

Compliance officers’ accountability is being rigorously enforced, says

compliance consultant Lee Werrell. But it isn’t all bad news

in practice, only time will tell.

Individual AccountabilityWith the recent wave of global investigations for rate fixing, there have been vocal media and political calls for individual’s accountability. Clearly, the focus on individual accountability has been identified as a key priority by the FCA in its Business Plan 2015/2016, in which it stated:“... We must ensure that senior individuals in positions of responsibility are held personally accountable for how their firm operates, and for the consequences of misconduct.” This resonates with the Fair and Effective Markets Review issued in June 2015 by HMT, the BOE and FCA, with a key principal recommendation being to “raise standards, professionalism and accountability of individuals.”

Commensurate with such individual accountability is the so-called moral dimension, described by Tracey McDermott (Director of Enforcement and Financial Crime at the FCA) in the following terms: “... Our focus is on how we, and you, ensure that your firm does the right thing – if not every time then almost every time – not because the rules say you should but because that is ‘the way things get done around here.’”

It is unsurprising, given the above context, that compliance officers find themselves the subject of greater individual attention.

not just with CF10 oversight but also delegated responsibility. There are lessons from recent events that suggest best practice for compliance officers when confronted with increased scrutiny of their actions.

Although the SMR is affecting Solvency II Firms (Banks & Insurers), it is also applying to small firms (Credit Unions and smaller Building Societies) and there will undoubtedly be a cascading and reflection of expectation to the present Controlled Functions in non-solvency II firms over time.

The SMR has produced criticism from various quarters regarding the controversial ‘presumption of responsibility’, whereby compliance officers are considered guilty of misconduct unless they are able to present to the FCA that they took reasonable steps in order to avoid the relevant breach.

However, one potential benefit for those with CF10 compliance oversight responsibility (in its new SMF16 form) will be the greater clarity in respect of the responsibilities of that role, both with the statement of responsibilities and, as regards those of other Senior Managers, with the mapping of responsibilities that the FCA is to require. This should go some way to delineating more clearly the nature and extent of the compliance oversight role - and how that plays out

Recent regulatory investigations within the financial arena have generated headlines on a global scale - along with fines measured in billions of dollars. Worldwide, and particularly in benchmark investigations, we have seen an expanding directory of individuals in various jurisdictions now facing criminal prosecution.

The powers of holding individuals accountable have been in existence in FSMA since implementation, and also in its predecessor’s legislation. Increasingly, however, the FCA - following the FSA as part of its ‘credible deterrence’ strategy - has exhibited a passionate desire for continuing taking action against individuals. This has generated action against individuals who were actively working in the investigated area of wrongdoing, with such individuals holding full or delegated CF10 responsibility. Obvious since 2008 is the development of increased focus on compliance officers who are being held accountable for failings within their oversight role.

SMR 2016The incoming Senior Managers Regime (SMR) from March 2016 brings finer delineation of the responsibilities of Senior Managers. Now may be the opportunity to consider features of the decisions regarding those

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Compliance Doctor.indd 36 03/08/2015 10:32

COMPLIANCE DOCTOR

responsibility for [the Firm’s] compliance with regulatory requirements lay with him as the significant influence holder. He did not take adequate steps to ensure that [the Firm’s] regulatory obligations were met after delegating the performance of certain tasks to others.”

It is manifest that the person with CF10 responsibility will be expert in the compliance area. It should be similarly manifest that the members of the compliance team will also be experts in their areas. With the recent increase in demand for compliance resources, securing compliance team members with appropriate experience and expertise will be a challenge. In any event, having recruited the correct people, there is then an expectation that they will be trained and monitored.

EVIDENCE 3: Resources and RecruitmentThe individual with CF10 responsibility must ensure that he has sufficient time to devote to the role and that he has adequate resources to support him.

Individuals need to be able to demonstrate that they are able to - and do - dedicate sufficient time to compliance matters. In one of the very earliest cases against a compliance officer (in respect of his compliance responsibilities) the FSA commented that “it was inappropriate for [the defendant] to have sought to discharge [the responsibilities of jointly managing the business and the role of compliance officer], and it should have been obvious to [him] that in the circumstances

statutory and regulatory restrictions on the promotions of UCIS to retail customers, to the standards required for CF10. The fact that the compliance officer in that particular case had reported his inadequate knowledge to the board was insufficient to exonerate him, as he was expected to go further and to seek the withdrawal of the CF10 responsibility from him.

The regulators have little tolerance of an over-reliance on systems and controls and a lack of such challenge. The FSA has commented that “individuals approved to hold the Compliance Oversight (CF10) significant influence function are a fundamental part of the regulatory system and provide front line protection against market abuse for the firms for which they work and the wider market.”

EVIDENCE 2: Delegation of Compliance Functions Within FirmsThe nature and boundaries of any internal delegation must be clear and properly monitored.

Delegation to junior members of staff is commonplace. It is inevitable in all but the smallest of firms that the person with CF10 responsibilities will need to delegate some of those responsibilities to others. Legally, care must be taken not to equate delegation with transfer. Ultimate responsibility cannot be delegated. As the FSA commented in 2012: “Although [the compliance officer] was entitled to delegate certain tasks to other individuals,

The figures for cases against CF10 authorised individuals clearly reveal a trend. The old FSA issued only 12 Final Notices In the period 2005-2009 (inclusive) in relation to persons who held CF10 responsibilities, but it increased to 48 during the 2010-2014 period and six during the first half of 2015 alone.

In some of the Final Notices, the CF10 responsibility was ancillary to the principal breaches by the individual. Even so, this demonstrates a clear trend towards the regulators focusing on compliance officers when problems have been discovered within a firm.

The EvidenceWithin these Final Notices, there are common themes that you can draw guidance on the areas of interest to the regulators. Some will be more obvious than others but all bear some review. From here you can glean approaches to ensure that you do not fall foul of the regulators’ increased scrutiny.

EVIDENCE 1: Appropriate ExpertiseCritical to success is to have expertise in both the broad and narrow areas in which the CF10 authorised individual operates, and to understand the entire legal and regulatory footprint of the business of the regulated entity.

The regulators naturally expect compliance officers to have expertise in the area in which their firm operates and also in respect of the products which the firm provides.

One recent example concerned ignorance of the

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[he] could not properly discharge [his] controlled functions.”

Complaining that compliance officers do not have adequate resources to assist is accorded little sympathy by regulators, particularly where that is offered as an excuse for failings in communication with the regulator.

In bringing together your team, the adequacy of recruitment processes has also been an area of focus for the regulators. Simply bringing in people to fill a role is not sufficient; they must be experienced and capable. In this regard, employing an individual “to perform the role of compliance assistant even though he had no previous compliance experience or qualifications and had never worked in the financial services industry” was an obvious failing.

EVIDENCE 4: Outsourcing Compliance ResponsibilitiesEngagement of external consultants must be properly managed and relied upon prudently.

Sensibly, the regulators acknowledge the merit in outsourcing some compliance work to external consultants, and the Final Notices show that they welcome the seeking of external comments and validation of internal compliance work. However, they sound a note of caution as well.

As the FSA noted in 2013: “A regulated firm may seek advice from a specialist compliance consultancy on compliance matters and may reasonably rely on that advice. However, as the regulated firm remains ultimately responsible for ensuring compliance with regulatory requirements, the FSA does not consider it reasonable for a regulated firm to rely entirely on an external consultancy to manage its internal compliance process without oversight or supervision from the regulated firm itself.”

the fact that “Mr Lawton could not recall any specific examples of where he challenged any of the Board directors during the Relevant Period ...”

EVIDENCE 6: Co-operation with RegulatorsIt is critical to maintain openness and transparency with regulators and to implement promised remedial actions.

The expectation of transparency with one’s regulator has received recent prominence in some recent decisions. In the context of compliance officers, the FCA has emphasised its reliance on them for such transparency; “Compliance Officers have a significant influence on the conduct of a firm’s affairs, and the Authority must be able to rely upon any confirmations received from a Compliance Officer that actions have been completed and risk mitigated or resolved.”

Therefore, and obviously, where remedial actions are requested by the regulators, they will expect to see demonstrable evidence of compliance. This was particularly so where an undertaking had been given to the regulator indicating that remedial steps (following a Final Notice in respect of the firm) had been taken and that the compliance officer was satisfied of that when that was not the case.

Given the resource constraints which compliance officers face, it is notable that the regulators consider the level of cooperation and transparency expected from compliance officers to be unaffected by the circumstances of the compliance officer and his firm. The FCA has recently stated (in the context of actions mandated by the FCA following supervisory visits) that the defendant had “suggested that he was not provided with sufficient resource to conduct his role as Compliance Officer at [the Firm], that at times he felt under pressure from senior management to be ‘careful’ in his communications with

COMPLIANCE DOCTOR

When instructing external advisers, the regulators have expected to see a degree of structure to the process, and an organised and documented engagement with the external consultant. In addition, if the regulators have been involved (e.g. following discussions at the supervisory level) in the appointment of external consultants, they will expect to be kept informed of developments regarding progress in that consultants’ work.

Finally, having engaged external consultants for advice or other roles, the compliance team is expected to take the recommendations and act upon them. As the FCA highlighted of one case in 2015, “When he did receive compliance advice ... he did not pay adequate regard to it.”

EVIDENCE 5: Robust Interaction and Challenge With ManagementCompliance oversight requires robust engagement and challenge with management on compliance issues regardless of resistance.

Regulators expect those with CF10 responsibilities to stand up to management where compliance with regulatory standards and requirements is at risk. In the words of Tracey McDermott, “... your job ... is to force the board to ask the difficult questions – how do you positively reward those who highlight problems, do you take whistleblowing seriously, do you use the wealth of information from complaints to drive improvements, do you really learn from the mishaps of your peers?”

Increasingly, failure to do so is being focused on by the regulators and being punished. Fear of an adverse reaction to raising the alarm is no excuse for not doing so.

As a practical issue, where there is doubt as to such challenges having been made, evidence may be required. In a 2012 case, the FSA relied on

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COMPLIANCE DOCTOR

the Authority and that he was not given ‘licence’ to explain issues fully to the Authority. Nonetheless, as Compliance Officer, Mr Wills was under a personal regulatory requirement to be open and cooperative in all of his communications with the Authority.”

ConclusionsWith all of the above actions, ensure that actions taken are recorded in files which are maintained to demonstrate control of the compliance team and processes.

The trend towards individual accountability and the heightened regulatory scrutiny of the work of compliance officers is set to continue. The failings identified by the FCA in the increasing number of Final Notices fit largely predictable subjects, but the increasing frequency with which such cases are appearing would suggest that there are still lessons to learn.

There is a ray of sunshine in navigating the challenges of a compliance officer with the FCA suggesting a collaborative approach. Tracey McDermott recently said:

“It is important to work through the challenges together – ask us for advice, tell us what is on your worry list, and we will tell you ours”. Start writing!

If you need to review your arrangements and test their functionality, contact an external compliance consultancy with qualified and experienced staff or go to www.complianceconsultant.org

See also the listings of the latest FCA Publications on Page 40

“Regulators expect those with CF10 responsibilities to stand up to management where compliance with regulatory standards

and requirements is at risk and failure to do so is being focused on by the regulators and being punished. Fear of an adverse

reaction to raising the alarm is no excuse for not doing so”

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FCA Publications

F C A P U B L I C AT I O N S

OUR MONTHLY SUMMARY OF THE LATEST OFFICIAL PUBLICATIONS

Pension Wise – Recommendation Policy

Policy Statement

Ref: PS 15/17

3 July 2015

18 Pages

This Policy Statement reports on the main issues arising from CP15/12 (Pension Wise, April 2015) and publishes the FCA’s recommendation policy. The initial introduction of Pension Wise was something of an interim affair, with many of the finer details and regulatory points being left until June to be explained in more detail.

Although this policy primarily affects the designated guidance providers delivering Pension Wise, it will also be of interest to:

n Consumer representative bodies interested in the outcomes of Pension Wise

n Charities and other organisations with a particular interest in retirement advice

n Individual consumers

n Pension scheme trustees, advisers and providers.

Smarter Consumer Communications

Discussion Paper

Ref: DP 15/5

25 June 2015

The FCA is signalling a wish to signal its appetite to explore opportunities and initiate change in how firms communicate key information to consumers.

The discussion paper, at http://tinyurl.com/qfrhqlt,

is detailed and is intended to provoke an industry-wide conversation about the relevant issues.

Reform of the Legacy Credit Unions Sourcebook

Consultation Paper

Ref: CP 15/21

24 June 2015

72 Pages

The FCA is consulting jointly with the Prudential Regulation Authority (PRA) on reforming some of the rules for credit unions, which were inherited from the former FSA.

The PRA’s proposed responsibilities deal exclusively with matters affecting the financial safety and soundness of credit unions, whereas the FCA’s proposals concern the ways in which credit unions conduct business. The FCA does not envisage any significant changes to the existing sections of CREDS, whereas the PRA wants to delete CREDS in its entirety, replacing it with a new Credit Unions Rulebook Part.

Consultation period ends 30 September

Developing General Insurance Add-ons Market Study – Remedies: Value Measures

Discussion Paper

Ref: DP 15/4

24 June 2015

42 Pages

This paper marks the fourth and final stage of the former Financial Services Authority’s extended study into general insurance (GI) add-ons. The study looked at the effect of the add-on mechanism in GI markets and found that

competition for add-ons is not effective. This part of the process examines options for introducing a measure, or measures, of value in General Insurance markets.

Of interest to firms involved in the underwriting, sale and/or distribution of general insurance products and the wider financial services industry. It will also be of interest to consumers who buy general insurance products. Consumers may want to consider what indicators of value they might find useful.

Strengthening the Alignment of Risk and Reward: New Remuneration Rules

Policy Statement

Ref: PS 15/16

23 June 2015

122 Pages

The FCA and PRA released new rules for remuneration of banking staff, following recommendations made by the Parliamentary Commission on Banking Standards (‘PCBS’).

The FCA says that the behaviour and culture within banks played a major role in the 2008-09 financial crisis and in conduct scandals such as PPI mis-selling and the attempted manipulation of LIBOR. One of the key drivers of this was reward incentives that drove excessive risk-taking and poor conduct in firms and which collectively gave rise to significant detriment.

The new rules seek to strengthen the alignment between risk and reward by introducing measures including longer deferral periods and clawback for all risk takers. They are primarily directed at:

July/August 2015

IFAmagazine.com40

FCA Publications and IFA Calendar.indd 40 03/08/2015 10:39

Datesfor your

DiaryAUGUST 20157 European Securities and

Markets Authority (ESMA) revised guidelines on the Markets in Financial Instruments Directive (MiFID) come into force To be superseded by MiFID II in 2017

20-24 The Ashes, Fifth Test England v Australia The Oval, London

SEPTEMBER 20154-9 IFA Consumer

Electronics Fair Berlin, Germany

12 St Leger’s Day Race Doncaster, UK

15 Parliamentary elections in Denmark (date TBC)

27 Consultation period ends for CP 15/21 (Reform of the Legacy Credit Unions Sourcebook)

n Banks

n Building societies

n PRA-designated investment firms (which are dual regulated)

n Branches of non-EEA banks or building societies

FCA Regulated Fees and Levies

Policy Statement

Ref: PS 15/15

23 June 2015

67 Pages

The regulator is publishing rules on its 2015/16 regulatory fees and levies for the FCA, the pensions guidance levy, the Financial Ombudsman Service general levy, and the Money Advice Service.

They will also enable the Pension Wise service, provided by the Treasury, to be funded in 2015/16.

For further details of the proposed fees, see CP15/14

Investing in Authorised Funds Through Nominees

Consultation Paper

Ref: CP 15/20

22 June 2015

14 Pages

In this consultation, the regulator proposes to revoke rules and guidance in the Conduct of Business sourcebook that are currently scheduled to come into force at the end of this year.

Consultation period ended 17 July 2015

Proposed Guidance on the FCA’s Registration Function Under the Co-operative and Community Benefit Societies Act 2014

Guidance Consultation

Ref: GC 15/14

18 June 2015

67 May 2015

This draft guidance sets out our views on the

setting of interest rates, our concept of a ‘bona fide co-operative society’ and our names policy.

Restrictions on the Retail Distribution of Regulatory Capital Instruments

Policy Statement

Ref: PS 15/14

12 June 2015

16 Pages

The report looks into whether general insurance intermediaries and insurers provide information to their customers, when arranging premium finance. The regulator says that it was concerned that, if firms are not meeting the information needs of their customers, then those customers might not be achieving fair outcomes when choosing to pay in instalments when buying insurance.

Guaranteed Asset Protection Insurance: Competition Remedy

Policy Statement

Ref: PS 15/13

10 June 2015

39 Pages

This statement reports on the main issues arising from Consultation Paper 14/29 (Guaranteed Asset Protection Insurance: a Competition Remedy) and publishes the final rules.

The new rules, the FCA says, will empower customers when making decisions about purchasing add-on GAP insurance, and limit the point-of-sale advantage of add-on distributors. The rules come into force on 1st September 2015, and firms will be expected to comply from that date.

Firms distributing GAP insurance in connection with the sale of a motor vehicle (add-on GAP) will be required to:

n Provide customers with prescribed information to help them shop

Continues overleaf

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July/August

41


F C A P U B L I C AT I O N S

Datesfor your

DiaryOCTOBER 20151 New permanent

rules under PS 15/14 (Restrictions on the Retail Distribution of Regulatory Capital Instruments) come into force

5-7 Institute of Financial Planning annual conference Newport, Wales

31 Tax assessment deadline for paper forms only

31 Rugby World Cup Final Twickenham, UK

HAVE WE FORGOTTEN ANYTHING?

Email [email protected]

This Policy Statement broadly confirms that the feedback received to the proposals contained in CP15/3 was supportive of the FCA’s proposals in the light of the Mortgage Credit Directive Order 2015, and that the final Handbook rules and guidance on implementing the Government’s legislative regime for consumer buy-to-let (CBTL) mortgages have accordingly been prepared.

Under the new legislation, firms wishing to lend, administer, intermediate, arrange or provide advisory services in relation to CBTL from 21 March 2016 will need to be registered by the FCA to do so. The FCA aims to start accepting applications later this summer.

Fair, Reasonable and Non-Discriminatory Access to Regulated Benchmarks

Consultation Paper

Ref: CP 15/18

3 June 2015

18 Pages

This Consultation Paper is aimed primarily at benchmark administrators but is considered to be of interest to financial institutions and, ultimately, consumers too.

PS15/6, published earlier in the year, contained the regulator’s final rules for regulating and supervising the seven additional benchmarks coming into regulatory scope, following recommendations by the Fair and Effective Markets Review and the Treasury’s subsequent consultation on the recommendations.

However, concerns have persisted regarding the unconstrained ability of administrators to set the prices of benchmarks, and accordingly the FCA has called for comments about further amendments and additional rules.

Consultation period ends on 3 August 2015

around and be more engaged when making decisions about purchasing the product.

n Introduce a deferral period, which means GAP insurance cannot be introduced and sold on the same day.

Proposed Changes to Pension Transfer Rules, Feedback on CP15/7 and Final Rules

Policy Statement

Ref: PS 15/12

8 June 2015

55 Pages

This Policy Statement also fulfils the regulator’s promise in March to overhaul the change in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO), which make advising on the conversion or transfer of safeguarded pension benefits into flexible benefits a regulated activity

Although primarily aimed at financial advisory firms, pension providers receiving transfer business and employer sponsors of defined benefit (DB) schemes and employee benefit consultancies, the statement is also likely to be of interest to retail consumers seeking to transfer benefits from DB schemes, or from pension policies with Guaranteed Annuity Rates (GARs), to defined contribution (DC) arrangements.

The new rules came into effect on 8 June 2015.

Buy-to-Let Mortgages – Implementing the Mortgage Credit Directive Order 2015, Feedback on CP15/3 and Final Rules

Policy Statement

Ref: PS 15/11

5 June 2015

48 Pages














Jan’14

Jan’15


July/August 2015

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Jan’14

Jan’15


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