Industry Articles – Archive

I just read an interesting McKinsey research paper. It concluded that as more assets shift into the hands of women, wealth managers need to understand the investment needs and behaviors of this large – but as yet underserved – group of investors.

In Western Europe, women investors now control about a third of total AUM, valued at around €4.6 trillion. McKinsey expect this share to grow rapidly over the next few years, partly because of the rising number of married women taking responsibility for household financial decisions. They surveyed almost 3,000 women and 2,000 men in the affluent, private banking, and high-net-worth investment markets and identified how women’s investment needs differ from men’s, and explored how firms could improve their propositions for female financial decision makers.

The research findings provide a rich perspective on women as investors, as well as insights for firms who might want to cater for their needs. For example, 61% of women and 64% of men share the same primary financial adviser as their partner. But when asked whether they would change their bank or adviser if they were separated from their partner, 40%of women said yes; compared with just 29% percent of men. The message is clear: A sizeable portion of women’s assets under management could be at risk in the event of relationship breakdown or bereavement, unless advisers take steps to improve their offerings across this segment.

A substantial proportion of the women investors in the survey expressed a willingness to receive more advice from their financial advisers, especially through digital channels such as web-based advisory and analytical software and mobile apps. In addition, 28% of women said they would be happy to receive more advice over the phone from experts, compared with 22% for men.Unfortunately, dissatisfaction was common for both men and women. 43% of women said they were not fully satisfied with the quality of financial advice they received, as did an even higher proportion of men (49%).Few investors reported being uncomfortable when making financial decisions in their portfolio, but women were twice as likely as men to say so (18% versus 9%).

It seems to me that this is an opportunity for wealth managers: Develop and market your advisory services to support the different stages in women’s lives, such as managing wealth before marriage and after divorce, planning retirement and bereavement. Build your advisers’ expertise in understanding women’s needs for products, services, and solutions and how these needs change as women’s careers progress, their household or family circumstances alter, and they grow older.

The first thing that annoyed me when reading the FCA “Customer Duty” paper was that the regulator doesn’t understand that there is a fundamental difference between customers and clients. The dictionary definition of a customer is: “A person or an organisation that buys something from a shop, store, or business”. So, ‘customer’ is a word that we mostly refer to in regard to casual purchases. But a client is a person or organisation that has a long term and quite intimate relationship with organisations such as accountants, lawyers or financial advisers. An entirely different business model.

The second thing that annoyed me is the term “Fair Value” It looks to me that this is all about metrics and pricing, not value.  Forgive me if I use asparagus as an example. For the last month or so I have been cutting about twenty spears every other day. I planted twenty “crowns” about ten years ago and I expect they will continue for another twenty years. So my asparagus is free. Actually you can buy enough asparagus for a couple of people for about £2.00 but I enjoy seeing my shoots grow. Bear with me!

At Pont De la Tour restaurant near Tower Bridge, a starter of “English asparagus with “creme fraiche” is £17.00 – about £40 for two people including service. But the diners consider it “Fair Value” as or they wouldn’t be there. The River Cafe in Hammersmith is the asparagus equivalent of St James’ Place. Getting a table there can be quite difficult. It has been around a long time and the customers love it. At the moment their current starter of “English asparagus (five spears like the others) comes with anchovy butter and parmesan and is priced at £27.00; say £60.00 for two people with the service charge. £60.00 for something that can be purchased for £2.00! Of course the diners know that, but they are happy to pay. The believe it is fair value. And why not?

As we know, “Fair Value” in retail financial services is more complicated. But from what I hear, financial advisers have something in common with the restaurants mentioned above. Demand exceeds supply. So, why on earth would one want to reduce fees? What’s the problem? Well, I think Customer Duty might require some changes to the financial advice business model. This might reduce some revenue streams; in particular the standard “on-going advice fees” which might be anywhere from 40bps to 100bps.The FCA have been concerned about these fees for years. They have observed that almost every client seems to need two annual reviews and they have been wondering how valuable these are to the clients. Is there conflict of interest? Do advisers and businesses suggest that such reviews and fees are essential? Is it possible that because some consolidators use on-going fees as a metric to calculate the value of the business there is pressure to lock these in?

Also, “fair value” needs to include the costs of underlying products. For example, in drawdown these might include: SIPP fees, DFM fees, underlying OEIC fees, platform fees, as well as the adviser fees. These could add up to about 2% pa. And if we took a £500,000 portfolio we could be looking at around £10,000 PA. That adds up to perhaps £100,000 over ten years and maybe £25,000 of that would have gone to the financial adviser – enough to enjoy asparagus in some very smart restaurants!

When one is building a portfolio 2% isn’t an issue for most people. But in drawdown it’s about 50%  of most clients’ income and that doesn’t look like fair value to me. I’ve recently changed my adviser to one who will operate on a fee for service model. Maybe advisers might feel it appropriate to mitigate any potential conflict of interest by presenting a fee for service arrangement and an on-going fee model and let the client decide.

Provider service has gone from bad to worse, and it’s costing advisers a fortune. So; here is an idea. Establish compulsory provider service standards. They could be developed in conjunction with the ABI, FOS and maybe PFS or some other body. And let’s fine institutions for every failure to meet those standards; irrespective of whether it is the consumer or the adviser that has been inconvenienced.  For example: ‘An email with all necessary details requesting a valuation – 48 hours.’ Of course, the fine needs to be meaningful for missing that standard. £100? £200? The total value of fines paid by providers should be publicised in the same way as upheld complaints are for advisers. Maybe a useful metric when making provider selection decisions? And perhaps, companies that fail to reduce the number or value of fines should be subject to a regime where their fine scale is increased.

I am sure this proposal will not go down well with providers and no doubt many reasons will be given why it is not practical. Initially, FOS and ABI may also be unwilling to get involved. But, anecdotal evidence suggests that second rate service is costing advisers time and money and, maybe, losing them existing or potential clients. It’s important! How many provider CEOs actually know how terrible their service is. How many of the executive team know? And what about the Board? My guess is very little.

If an IFA calls an account manager to complain about something that should have been delivered but wasn’t: Where is the metric? If an adviser picks up the phone to call head office and then decides they just can’t be arsed to listen to music for half an hour. Where is the metric? And if good people leave the organisation because they are fed up with apologising for something that isn’t their fault: Where is the metric?

I’ve been involved in retail financial services for a long time and one of the first things I was told was: “You can’t manage it if you can’t measure it.” And fines might, at the very least, measure it.

I think that the estimated £5trn thirty year intergenerational wealth transfer “opportunity” actually presents a major challenge to financial advisers. Because what I hear and read suggests that the children of most clients have little or no connection with their parents’ adviser. So what? The majority of firms are owned by people who will have retired in the next ten or fifteen years. True. But if the owner wants to sell their firm at some stage, it won’t look that attractive if the revenues will start falling as the clients start dying. I carry out a few commercial due diligence projects relating to Financial Adviser firms, (sometimes called distributors!) and I am beginning to think that client mortality might be becoming important. It seems to me that if a financial advice firm was looking to sell and was well  positioned for intergenerational wealth transfers it is likely that it would be valued far more highly than a firm that might see assets leaving the business when the clients died.  To put in bluntly; for the latter, cash cows will pass away. So, how can you be a winner in this space?

I did a small piece of due diligence on a UK family office last month. In that business all the children and some grandchildren were involved, solicitors were employed, there were options as to the services available. It was very impressive. The average investment was around one million pounds but I guess the clients had other assets such as businesses and property. However, the costs involved in providing the services were quite substantial. So, perhaps some Financial Adviser owner managers might want to consider a VFO – a Virtual Family Office. It could future proof their business and enhance the services available to their clients and their clients’ children. When I say “virtual” I mean partnering with other professionals to create a Family Office experience. It could be that you are already referring clients to, say, solicitors, mortgage brokers and accountants but the VFO would “virtually” wrap around them.

The client proposition would contain access to the VFO solicitors and accountants via the VFO website or face to face. The fees would be lower than standard. Ditto access to  mortgage and insurance brokers and others. So, if the clients or the client’s dependants were buying a house they would have private access to the website and would be able to execute – with or without advice – the mortgage, the conveyancing, the protection insurance and the home and contents insurance. The proposition could also include an unlimited number of quick calls from family members to a solicitor for advice on other issues. And, of course it would also include will writing and other services which could be priced individually. The VPO would need to be packaged, priced and branded carefully. Personally, I would just call it the XYZ Family Office. As for fees; maybe the usual percentage on funds invested plus some small ongoing monthly fees with extra fees for tax returns, any serious legal work etc. Of course, all of this needs to be researched.

Recently I sat in on some customer research where half a dozen clients listened to new ideas (and complained about existing services!) in return for a donation to their favourite charity. Their input on the Family Office concept was positive. Seems to me that such research would make sense for any business looking to ensure a decent valuation when the time comes to sell. Why not give it a try? One last thought. And it’s a bit sober: “Nothing is certain except for death and taxes.”  (Ben Franklin). When a bereavement does occur the loss of a life can be very difficult to bear and all the subsequent administration can make things even worse. Wouldn’t it be good for the family to make one call and most of it could be sorted?

I have finally concluded that the FCA is a busted flush as far as the financial advice market is concerned. It’s not surprising. How can one organisation be capable of regulating global FTSE 100 institutions alongside thousands of small owner managed businesses? It’s impossible; as some recent announcements prove.

Look at the “Customer Duty” initiative: “Put yourself in the shoes of your customers. Ask yourself if you would like to be treated like this. Would you recommend your products and services to friend and family?” Etc, Etc. Does anything  in “Customer Duty” regulation add to “Treating Customers Fairly” regulation’?  Strikes me this is just hot air. Surely the FCA should be focussing on the issues that would make a real difference to consumer outcomes. For example, people who create products such as short-term bonds and cyber currencies and sell them to gullible or greedy consumers.

The FCA seems to be asleep at the wheel most of the time. For example, anyone with any experience or insight in the market should have recognised the risks inherent in DB to DC transfers where advisers only got paid if a transfer took place. A clear recipe for a scandal which will haunt the profession for years and cost a fortune.

But what really annoys me is that over the last 5 years, £125 millions in bonuses have been paid to staff in such a dysfunctional organisation.  Perhaps executives should be putting themselves in the shoes of customers.