SCENE SETTER QUESTIONAIRE FINDINGS - PRIVATE BANKING & WEALTH MANAGEMENT - NOVEMBER 2016

INDEX

 

SENTIMENT

1. On a Scale of 1-10 how would you say you feel about the year ahead?
2. What do you consider are the 3 biggest issues facing your business and/or industry?
3. What do you consider ar are the biggest STRENGTHS of your business and/or industry?
4. What do you consider are the biggest WEAKLNESSES of your business and/or industry?
5. Who or what do you consider offers the biggest OPPORTUNITY to your strategy? 
6. Who or what do you consider poses the biggest THREAT to your strategy and why?

YOUR BUSINESS MODEL - WHO'S IN THE ROOM

Please define your business 

1. What model have you adopted post RDR
2. How do you typically charge for providing investment advice to your clients? 
3. Why do you believe your clients - (U) HNWIs - choose to use your business rather than other Wealth Managers? 
4. What are the most important value drives when pricing up an adviser business?
5. How do you expect your business numbers to change over the next year? 
6. The value chain...who will be the winners and losers@  Please indicate whether you feel wether the various parts of the value chain will grow or shrink ove the next 2-3 years

WEARING YOUR POLITICAL & REGULATORY HAT

1. If you were Chancellor for the day, what three things would you change?
2. If you were in charge of the regulator for the day, what do you think should be at the top of the in tray? 
3. Regulation readiness barometer
4. How have regulatory changes impacted your approach to managing clients' assets
5. What are you most fearful about for your business once Atricle 50 is pushed? 
6. What wold be the biggest gains/oppportunities that BREXIT could offer your business? 
7. When lobbying Brussels, what would be your red lines/must-have? 
8. INVESTMENT PROPOSITION.....21
9. Please indicate your percentage use of in-house products versus external sourcing and your approach.
10. Please indicate your percentage split between active and passive fund management. 
11. What percentage of your business is discretionary, advisory or execution only?
12. What percentage of your client accounts are managed using model portfolios, model allocation or fully bespoke?
13. Please describe briefly areas of specialist investment opportunity which you and your clients are interested in
14. When selling to yoru clients, if you could have anything under the sky what would be top of you wish list? 
15. If you were looking to market fund management services to YOUR company, what would be the first thing you would START/STOP doing? 

1.  On a scale of 1 – 10 how would you say you feel about the year ahead?

BREXIT amongst other things have certainly dented your confidence as over the past two years you have consistently scored 7.3.  This time around you are 10% more gloomy this time around and gloomier about the year ahead when compared with all other UK distribution channels.   

When we asked other distribution channels how positive they felt, this is how they scored and how their score has changed over the past 6-12 months.

 

2.   What do you consider are the 3 biggest issues facing your business and/or industry?

The following have been listed in priority order in terms of what is keeping you up at night.  The numbers in brackets illustrate if the point was made multiple times.

REGULATION

• Regulatory burden (16)
• Regulatory changes (2)
• Regulatory implementation costs (2)
• Central bank monetary policy - Central Bank interference in the capital markets dislocating capitalism

MARKET CONDITIONS

• Wider economy
• Low return environment (2)
• Low/negative Interest Rates (2)
• Market conditions & strength (4)
• Fiscal policy (3)
• Rising taxation on real estate assets

GEOPOLITICAL

• Brexit (5)
• Global Monetary Policy
• Increasing complexity of cross-border tax and regulatory regimes

TECHNOLOGY

• New Technology & Platforms (5)
• Ability to act in a digitalised world
• Cyber security...for the industry

BOTTOM LINE

• Margin pressure & profitability (5)
• Increasing business investment needs and the challenge to profitability
• Costs

BUSINESS MODEL

• Competition (3)
• Differentiation...for the firm
• Relevance to clients

STRATEGIES TO UNDERSTAND AND WIN CLIENTS

• Customer experience
• Demographics....for both
• Winning clients

TARNISHED IMAGE OF THE INDUSTRY

• Poor industry reputation (2)
• Education of Investors

MANAGING CHANGE IN A VOLATILE WORLD

• Uncertainty
• Change Management

CHARGING STRUCTURES

• Defining a fee structure
• Adviser commissions

STAFFING

• Sourcing high-quality, client-centric staff

OTHER

• Highly correlated assets
• Privacy and Data protection
• Historical control failures
• Investment Risk

 

3.   What do you consider are the biggest STRENGTHS of your business and/or industry?

SERVICE & PRODUCT PROPOSITION

• Flight to quality and conservative approach
• Specific expertise
• A complete advisory offering including proprietary fund solutions
• Quality of offering
• Competence

PERSONAL RELATIONSHIPS WITH CLIENTS

• Genuine client focus
• Relationship Management skills
• Personal service - Relationship focused approach
• Stickiness of clients
• Our people

GREATER NEED FOR WHAT WE DO AND FEW PEOPLE DOING IT

• Shrinking number of advisers
• Growing need for professional services
• Long term need for saving due to poor public pension provision
• Growing population with growing prosperity.

AGILITY AND ABILITY TO GENERATE REVENUE

• Ability to generate new business
• Predictability of revenues
• Ability to react fast to global investment challenges and changing regulatory environments.

SCALE & COLLABORATION

• Ability to achieve scale to compete with smaller players.
• Collaboration with other professionals

BRAND & TRUST

• Reputation
• Our value proposition 

4. What do you consider are the biggest WEAKNESSES of your business and/or industry?

Interestingly no mention of regulation this time around.  The following were listed:

• Investing in technology

o    Technology underinvestment and short term management (3)

o    Ability to act in comparison to new entrants in a digitalised world

• Reduced margins

o    Compression of fees

o    Cost pressures

o    Lack of earning power from core products vs risk of promoting new products

• Poor productivity

o    Inefficient administration...still far too paper based.

o    Inability to operate efficiently

• Putting profits before clients
• Ability to attract talent
• Reputation– Anyone who works in Financial Services is a Bankster - lack of education
• Competition
• Ageing demographics– increasing age of typical mass affluent and HNW client base; together with the age of the professionals.
• Lack of transparency– And continued high commissions
• Risk adjustment return difficulties– In this economic environment

5.   Who or what do you consider offers the biggest OPPORTUNITY to your strategy?

• Harnessing technology to improve operational efficiency

o    Partnering up with RegTech firms

o    Technological advances - scaleable platforms which could improve profitability

o    Technology (client service, internal efficiency and big data).

o    Technology and generational behavioural shifts

o    Use of technology...remove paper and enhance communication

• Client need for what we do

o    Desire for truly independent advice

o    Client need for better advice and investment offeings

• Changing pension and tax landscape

o    Auto-enrolment, pensions freedoms

o    Ever changing taxation landscape.

• Consolidation

o    Weakness of competitors leading to consolidation

o    Mergers and weakened competitors

• Experience– Capitalise on our experience when helping clients navigating in current climate
• Ageing demographics– Continued ageing population in UK

 

6.   Who or what do you consider poses the biggest THREAT to your strategy and why?

• Brexit

• Regulation

o    Regulation cost and changes

o    Continued regulation to drive IFA's from the market

• Market Risk– Poor environment for generating performance vs other investment opportunities.
• Profitability– Fee compression and margin reduction
• Competition– From within the industry and new entrants in a digitalised world
• Technology- Millennials trust in tech
• Fear of change – Inertia
• Lack of agility - Inability to move to an agile business model
• Lack of transparency– Charges and clients not understanding what they get for what they pay for
• Reputational damage

 

YOUR BUSINESS MODEL – WHO’S IN THE ROOM

1.   Please define your business

There are an array of business models represented at A Meeting of Minds totalling circa £258.8bn AUM. 

2.    What model have you adopted in the post-RDR world?

There has been a marked increase in the number of Restricted (limited and multi tie) business models. 

3.   How do you typically charge for providing investment advice to your clients?

On average…

• Adviser charge per hour = £412.50/hr
• Adviser charge as a percentage of investment = 95.5 bps 

4.What do you believe are the most important value drives when pricing up an adviser business?

1. What are the most important value drives when pricing up an adviser business?

 

Your reputation; relationship management; and the calibre of your people continue to be the three top reasons why clients chose to do business with you. 

Your value on independence continues to rise. 

5.What are the most important value drives when pricing up an adviser business

‘Profitability’ and ‘having a high proportion of recurring revenue’ continue to be in the top most three important value drivers.  However, ‘synergy potential’ has shot up the ranks to become the second most important value driver.

This year, Wealth Managers are lest interested in ‘demonstrable asset under influence’ and ‘growth potential’. 

How does this compare with last year and how Financial Advisers ranked the value drivers of their own businesses?

VALUE DRIVERS	Rank (and weighted score)
	Wealth Managers & Private Banks			Financial Advisers (2016)
	Nov-16	Jun-16	Nov-15	Southern	Northern
Profitability	1 (87)	1 (109)	1 (83)	1 (163)	1 (164)
Synergy potential	2 (84)	5 (73)	7 (46)	5 (100)	6 (87)
High proportion of recurring income	3 (68)	6 (72)	2 (64)	2 (153)	3 (133)
Demonstrable assets under influence	4 (63)	2= (105)	3 (63)	3 (130)	2 (135)
Scalable business model	5 (61)	8 (65)	5 (52)	9 (48)	8 (56)
Growth potential	6 (54)	2= (105)	6 (51)	4 (105)	4 (123)
Client base - portfolio size	7 (44)	4 (76)	4 (59)	6 (99)	5 (102)
High RM / adviser productivity	8 (31)	11 (26)	9 (30)	10 (43)	13 (29)
Level of adviser qualification/training	9 (29)	13 (12)	12 (9)	8 (58)	10= (47)
Proportion of fee income	10 (28)	10 (29)	11 (12)	7 (77)	7 (72)
Strength and ambition of management	11 (28)	7 (67)	8 (43)	11= (40)	9 (54)
Brand	12 (21)	9 (50)	10 (19)	11= (40)	10= (47)
Level of debt	13 (21)	12 (17)	15 (1)	13 (26)	12 (34)
Track record of consolidation	14 (16)	16 (5)	13 (5)	15= (7)	16 (6)
Salary/bonus model	15 (13)	15 (8)	14 (3)	14 (20)	14 (20)
Proportion of on-line business	16 (0)	14 (11)	16 (0)	15= (7)	15 (7)

  

12.How did your business numbers change over the past year?

2016 has been a great year with more groups experiencing rising AUM; revenues; and client numbers.  However, costs continue to rise and the rate of headcount growth is slowing. 

How does this compare to how you thought you would do 12 months ago…

Not bad… pretty similar!  

13.How do you expect your business numbers to change over the next year?

Looking into 2017, costs will continue to rise and back office headcount will stabalise.   But this will be countered by rising client numbers, AUM an revenues… hurrah!  And you are feeling more bullish about the year ahead, than you were this time last year. 

14.The value chain… who will be the winners and losers? Please indicate whether you feel whether the various parts of the value chain will grow or shrink over the next 2-3 years.

In terms of how this compares with other distribution channels:

WEARING YOUR POLITICAL & REGULATORY HAT

1. If you were Chancellor for the day, what three things would you change?

• Tax

o    Abolish IHT

o    Merge NI and Income Tax. Invest in infrastructure.

o    Reduce capital gains tax

o    Reduce IHT burden. Change CGT to long term and short term.

o    Reduce SDLT from the extortionate level it is at today, look at simplifying the current tax system, abolish inheritance tax.

o    Clarity on the longer term direction of taxation

o    Make the tax system much less complicated.

o    Inheritance tax

o    Regulation and Tax holiday: no policy changes for 2 years. Create a least a small period of stability and avoid the constant annual                   changes, in advance of the wrenching changes likely to result from the Brexit process.

o    Simplify the tax system

o    Tax and pension simplification

o    Address various fiscal stimulation options rather than leaning on monetary tools to prime growth.

• Housing

o    House building policy

o    Remove stamp duty

• Brexit

o    Create clarity & stability for Banks in this new Brexit era

o    The Brexit vote

• Capital Requirementsfor small private banks 

2.If you were in charge of the regulator for the day, what do you think should be at the top of the in tray?

• Consistent and clear communication

o    Clarity of purpose – Fewer laws, greater sustainability

o    Produce a business plan and publish it

o    Clearer guidance and more visible enforcement actions.

o    Consistency in the UK across ALL financial services. Then across the globe.

o    Providing guidance to firms

o    Inconsistent messages from different regulators

o    Provide clear and consistent messages whilst sharing the internal FCA tools and machinations with industry participants.

o    Having a clear plan on regulation post Brexit

• Undertake a review of the status quo

o    A full review of the commerciality of past decisions and a commitment to reduce burdensome regulation.

o    Did RDR make a difference?

o    Recognise the value of offering clients a variety of suitable services.

• Proportionality and not tarring the industry with one brush

o    Addressing the compliance of smaller firms in the industry

o    Finding bad eggs rather than treating every firm as though it was irresponsible and untrustworthy.

o    Visit all firms every 2 years

• Stability- Creating stability for Banks
• Agility– Speeding the whole process up
• Other

o    Allow sensible commissions to stop the "grey" Section 21 investment market and the over-paid "referral broker"

o    Pension encashments and associated advice

o    Reduce direct taxation on RE assets, esp stamp duty 

Interesting, six months ago, you suggested the following;

• Simplification

o    Simplification and committing to a slower pace of change

o    Simplifying Regulation

o    Simplifying MIFID 2

o    Client centred process simplicity

• Communication

o    A more consultative approach. The current thematic drives of the FCA are not necessarily resulting in the best outcomes for clients but instead creating an ever spiralling mountain of paperwork which is leading to rising costs and customer frustration.

o    Better direct communication with firms

o    Get out and meet firms

• Understand the impact and burden of regulation

o    Return on investment - what is the marginal benefit in terms of the regulator's key objectives relative to the cost/effort incurred by the industry (and the regulator itself) in implementing new regulation.

o    Understand the enormous time and financial costs that all the new regulation is resulting in

o    Practicalities of regulation and how to help the industry improve its reputation.

o    Fees and charges

• Europe

o    Impact of possible Brexit

o    Create harmonised rules throughout Europe

• Clarity - Produce a business plan and publish it
• Retail investors

o    Ensuring more retail investors get access to capital markets products without being ripped off or having to do DIY investing

o    The death of advice for the mass affluent

• Ensure clients are receiving good outcomes
• Proportionate and client-specific regulation
• On boarding clients
• Understand digital
• Influence on government policy 

3.Regulation readiness barometer

(The higher the score, the higher the readiness.  Participants we asked to rate their level of readiness from 1-5.)

Regulation	CEO/CIO (Nov ‘16)			CEO/CIO (Jun ‘16)			COO (Oct ‘16)
	Av score	More info required	Not applicable	Av score	More info required	Not applicable	Av score	More info required	Not applicable
MAD II (Market Abuse Directive)	4.57	0%	36%	3.58	8%	8%	3.6	0%	0%
RRP (Recovery & Resolution Plan)	4.38	8%	25%	2.83	21%	14%	3.63	0%	20%
FATCA/CRS (Common Standard on Reporting)	4.36	7%	20%	3.77	7%	7%	3.73	0%	0%
Conduct Risk & Suitability	4.33	0%	14%	4.07	0%	0%	3.91	0%	0%
UCITS V/VI (Undertakings for Collective Investment in Transferable Securities)	4.33	8%	46%	3.27	7%	21%	3.17	20%	20%
TD II (Transparency Directive)	4.25	25%	42%	1.2	50%	17%	2.83	20%	20%
Senior Managers Regime	4.23	0%	13%	3.43	7%	0%	3	0%	0%
CRD III/IV (Capital Requirement Directive)	4.22	8%	23%	3.62	7%	7%	3.57	0%	30%
CASS & Client Money	4.2	0%	33%	3.83	0%	20%	4.5	0%	27%
MLD IV (Anti-Money Laundering Directive)	4.2	0%	17%	3.83	8%	0%	3.7	0%	9%
EUSD II (EU Savings Directive)	4.14	15%	31%	2.4	17%	17%	3.4	20%	30%
Dodd Frank	4	13%	40%	2.2	20%	33%	3.33	10%	60%
MMFR (Money Market Fund Regulation)	4	17%	58%	2.11	25%	25%	2.5	20%	60%
Solvency II	4	8%	50%	2.18	31%	15%	3.29	0%	30%
GDPR (General Data Protection Regulation)	3.73	0%	15%	2.92	14%	14%	3.09	0%	0%
National Thematic reviews	3.71	23%	23%	3.18	15%	15%	3.71	27%	9%
AIFMD (The Alternative Investment Fund Managers Directive)	3.67	7%	50%	3.25	0%	50%	3.4	10%	40%
FTTD (Financial Transaction Transparency Directive)	3.67	18%	27%	1.92	33%	13%	3.33	20%	20%
Basel III	3.63	7%	36%	3.36	6%	31%	2.8	20%	30%
ShRD II (Shareholders Rights Directive)	3.6	17%	42%	0.89	50%	25%	2.5	30%	30%
PRIIPs (Packaged retail and insurance-based investment products)	3.57	0%	46%	3.23	7%	13%	3	0%	36%
CSDR (Central Securities Depositories Regulation)	3.5	17%	50%	2.29	14%	50%	2	0%	70%
EMIR (European Market Infrastructure Regulation)	3.5	17%	50%	2	29%	21%	3.29	10%	20%
SFTR (Securities Financing Transactions Regulation)	3.5	23%	46%	1.55	46%	15%	3	22%	33%
MiFID II	3.23	0%	13%	3.57	0%	7%	3.36	0%	0%
RDR II	3.14	31%	15%	3	14%	0%	3.38	11%	0%
3.91	2.83	3.27

Overall, you are feeling much readier to tackle the burden of regulation compared to six months ago, and are more positive than your COO counterparts.

 

4.How have regulatory changes impacted your approach to managing clients' assets?

• The regulatory balance has shifted from providing much needed client protection to being an obstacle to advice and a burden that adds both cost and complexity to the investment process in the eyes of clients. That balance needs to be re-set.
• Impact on time and cost

o    It makes business slow

o    Time spent on general compliance issues.

o    More time-consuming processes, more documentation, less client-friendly while not achieving a higher level of confidence in a favourable outcome for client or the business.

• It has helped us to focus on improving processes and procedures to be far more efficient and effective. This is beneficial to both the client and the firm.
• Suitability

o    Much more intense scrutiny of suitability and ongoing suitability reviews.

o    Changes made to pre and post trade compliance, enhancement of suitability reviews, investment in tech to support suitability advice

o    Need to review suitability and risk profiling more frequently

o    Longer suitability reviews, failure of low-risk clients to clear value-for-money tests in terms of low-risk models forecast performance net of       fees relative to checking account interest rates

o    More frequent suitability and portfolio reviews.

o    The increased awareness on suitability has helped us tailor our portfolio construction to meet clients' investment needs. Regular suitability       reviews have also helped us engage clients on a more frequent basis, thus furthering the relationship.

• Moving to sophisticated client base and away from retail based clients
• More advisers want us to run portfolios on third party platforms as opposed to directly.
• Our portfolio management systems have always incorporated suitability but regulation has made this more demonstrable in both internal & client reporting.
• Repricing of services across advice and fund management.
• Separation of cherished holdings and other XO assets from managed funds.
• Re-papering.
• A gradually more structured approach
• Considerably - systems, behaviours, monitoring
• Not particularly impacted
• There hasn't been much change as we already had the systems in place. 

5.What are you most fearful about for your business once Article 50 is pushed?

• Loss of passporting

o    How long time it will take until we get clarity on passporting opportunities

o    Exit of business from London due to lack of passporting.

o    Cross-border blocks.

• Long term economic impact
• Continued lower interest rates
• Flat rate of taxation
• Less non doms in the UK.
• No results after 2 years and brain drain from UK
• Poor negotiations leading to no equivalence and increased cost of business.
• Ability to use EU approved product UCITS etc in the UK
• A number were neutral and not fearful 

6.What would be the biggest gains/opportunities that BREXIT could offer your business?

• Reduction in complexity and volume of regulation
• Britain free of the deadening influence of the EU
• Geo-political diversification under a solid and transparent regulatory regime
• More U/HNWI will see the UK as a safe haven which will create more business opportunities
• Weaker Sterling attracting foreign investment in the UK
• Trading / FX revenue increase on volatility.
• Many were unable to list specific opportunities because there was not enough clarity at the moment or they did not feel things would change much (if at all). 

7.When lobbying Brussels, what would be your red lines/must-haves?

• Passporting of services was the biggest must-have
• Single market access
• Single Passport for European mutual funds run from the UK
• Equivalence, grace periods, grandfathering, cross-border
• Free movement of people, free market access
• Best access to the UK market as possible.
• Control of borders, control of law making.
• Brexit
• Delay tactics until UK general election in 2020, when 'the question can be reasked in manifesto form
• Euro clearing 

8. INVESTMENT PROPOSITION

9.Please indicate your percentage use of in-house products versus external sourcing and your approach 

10.Please indicate your percentage split between active and passive fund management 

11.What percentage of your business is discretionary, advisory or execution only? 

12.What percentage of your client accounts are managed using model portfolios, model allocation or fully bespoke? 

13.Please describe briefly areas of specialist investment opportunity which you and your clients are interested in?

• Structured investments in Absolute returns
• Property and debt based securities
• Infrastructure Funds
• Genuine Absolute Return.
• We have the ability to invest across all geographies and asset classes - both open and closed ended. Our clients get portfolios using both on and offshore funds. Our models are solution driven and therefore we are all analysts as well as managers and can invest across the gamut of funds on offer
• Private equity (2)
• Certain aspects of commercial property, residential property and various VC and PE ventures.
• Real estate
• Closed end specialist funds
• Closed Ended Funds
• Alternative income / liquid hedge funds / smart beta
• Generalist
• Infrastructure

 

14.When selling to your clients, if you could have anything under the sky what would be top of your wish list?

• High performance, low risk and superb income on a regular basis
• State of the art technology embracing the traditional values of the firm but highlighting its progress into the 21st century.
• Stronger brand
• US ETFs with reporting status holding sterling assets (unhedged).US mutual funds demonitated in Sterling
• Funds that only ever go up
• Good sterling based US ETFs with reporting status.
• Perfect foresight
• Stable income without paying through the roof for it
• Unlimited marketing budget
• The link between what "Conservative", "Balanced" or "Growth" means in the client's mind and what "Conservative", "Balanced" or "Growth" means based on our statistical VaR models
• Investment Performance and service
• A third party endorsement of our service
• Clients with great technology and IT skills
• A sense of relative competitiveness of fee/cost structure vis a vis competitor peer-group 

15.If you were looking to market fund management services to YOUR company, what would be the first thing you would START/STOP doing?

• Stop...

o    LISTEN. Understand what we do, what we want and how we want to do it.

o    Stop selling and listen to requirements - Start asking about what the firm wants and how it invest, not what the FM company wishes to             sell.

o    First ask...is there anything you have that you wish was better, or what don't you have that you need?

o    Cold calling - Bombarding me with indiscriminate product literature without assessing suitability, relevance etc.

o    Cold emails or mailshots - Sending unsolicited emails. Even in 2015 with access to a wide source of information, recognise that a                     professional salesman really can add value to the relationship we have with providers.

o    I would focus on brand awareness, raising the profile of the company and sending a clear simple message.

o    Less emails more thought leadership/ better macro commentary

o    Deluging me with emails and hard-copy reports/literature

o    Marketing material and NON-manager presentations

• Start:..

o    Positive returns in any market conditions

o    First thing is to work for a credible firm with a clear USP. Next is to speak to the research team.

o   I would start by asking what we are looking for rather than telling us

o    Understand our process - Demonstrating a clear understanding of my company's needs.

o    Demonstrating how you can support me in supporting my frontline client-facing colleagues

o    Target the right contacts, not everyone

o    Grant meeting with the MANAGER.

o    Provide regular performance and transparent cost details