Back to the future

Fraser Donaldson – Insight Analyst (Investments)

The first newsletter of the year always presents the opportunity to take a look back at what has happened in the previous year while also taking a peek in to the near future to see what we can expect to happen. With any luck, this should give us a feel for how the industry is developing and help manage everyone’s expectations.

Big is beautiful ?

A good indicator of how the market is developing is to take a look at what's new. One of the stories of the last year or so is the emergence of vertically integrated companies that are encompassing most if not all links in the distribution chain. Old Mutual have advisers (Intrinsic), platform, discretionary managers (Quilter Cheviot) and of course a range of tax wrappers and other financial solutions. More recently, Standard Life launched adviser firm 1825, which also makes use of Standard Life Wrap, discretionary managers Standard Life Wealth and the range of Standard Life tax wrappers.

From a regulatory point of view these are quite tricky structures. The tax wrappers, discretionary managers (investment engine) and platform all have to be suitable for the client and evidence produced to justify this. With the exception of single tie arrangements, this means that each of these organisations does have to offer solutions from other providers or restrict themselves to clients where suitability is not in doubt.

What happens if DFM performance goes off the boil or tax wrappers do not have that all important feature that a client requires? Avoidance of ‘shoehorning’ would be difficult without strict, preferably independent, oversight and governance. It will be interesting to see if the same sell disciplines apply to the house solutions as they do to the third party solutions. Given the regulatory complexity, the approach to house solutions should be very strict indeed.

While vertically integrated firms will achieve more control over the client and be able to offer more consistent advice founded on one culture and philosophy, we would not expect many more corporate structures to look like this because of the regulatory complexity and the need to make each link in the chain to be robust and of enough quality not to be called in to question.

What’s new ?

Defaqto cover some 190 discretionary propositions from 82 discretionary firms. 77 bespoke portfolio services, 52 Managed Portfolio services (MPS) available direct from the discretionary firms and 61 Managed Portfolio Services available on adviser platforms. Of those 61 MPS available on a platform some 25 are only available on platform.

It is a sign of the times that there are more MPS portfolios available through a platform than there are direct with the discretionary managers and that the growth area is very much platform only propositions. While there are a few holdouts, still unwilling to put their propositions on platform I think the formerly shaky relationship between platform and DFM, mostly as a result of who holds custody of assets, is well and truly behind us.

80% of the MPS on platform propositions have been launched since the beginning of 2010, so what has been going on in the market over the last five years to encourage the DFM marketers to explore this distribution channel?

We have seen very few new DFM proposition launches over the last couple of years, the peak of DFM launches being 2010 to 2013, leading up to and just after RDR implementation. This suggests that the DFM market has, in the main, positioned itself already for the near future. Not a mature market, from a retail point of view, but certainly beginning to settle.

What have we to look forward to ?

MiFID ll: Having lived through the 5 or 6 years leading up to RDR, I am getting a sense of déjà vu with MiFID II. Leading up to the end of 2012 and the implementation of RDR there were great swathes of the industry that were in denial, convinced it would be scrapped and equally convinced that there was, broadly, nothing wrong with the industry that needed such an overhaul.

It was perhaps only in the last 18 months to two years leading up to the end of 2012 that the majority joined the minority and accepted that RDR was going to happen, and more importantly with little change to what was proposed in the first discussion paper back in June 2007.

I see a similar approach to Mifid ll with very little coverage around the real effects on the retail financial market, despite debate on MiFID ll starting as far back as 2009, but a significant amount of coverage around how it may be delayed, should be delayed by 1 year or 2 years.

How long it takes to implement is still up for debate, but the proposed rules will still be written and published in a policy statement from the FCA in June this year, and despite all the talk of delays in implementation it is still slated for 3^rd January 2017. I you haven’t already you need to swat up on requirements and regulatory expectations – sooner rather than later!

The good news is that we feel one of the knock on effects will be much greater transparency from investment firms and this can only be good for those undertaking due diligence in the market.

Robo advice: Seen by many as a possible answer to filling the advice gap. Taking a more cynical view it is also an opportunity to gather assets relatively cheaply. I believe the FCA are broadly in favour of the concept, with this being the subject of the FCA’s first ‘Project Innovate’ week long forum back in October 2015, but I think it has yet to be tested in terms of being a fully compliant solution, resulting in delivering suitable advice and likely to provide good client outcomes.

Very much early days and we await launch of the inevitable FCA Thematic Review. There is no doubt that the conclusions of FAMR (Financial Advice Market Review) will have a strong bearing on the future and structure of Robo-advice.

So, we are looking at a more settled DFM market, with the majority of players positioned for the future, but with some significant pieces of new legislation and regulatory policy to deal with over the next year or two. Same ol’, same ol’!