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HULK SMASH SECONDARY ANNUITIES!

Perhaps I was having a grumpy day (a blip in my otherwise sunny persona) when I wrote/ranted about the truly horrible prospect of a secondary annuity market. Or perhaps it was just a natural reaction to that horrible prospect. In any case, a few aspersions were cast in my direction suggesting I was trying out my famous impression of a certain Dr Bruce Banner after realising someone had taken his last Jammy Dodger.

Three points in my defence:

  1. I was far from alone in my views.
  2. It was a really bad idea.
  3. You should never take Dr Banner’s last Jammy Dodger.

Ergo, Hulk smash secondary annuities.

One of the very few good things to come out of the Brexit result (if not the only one) was the possibility that siphoning Civil Service resources to extricate the UK from the EU would mean the demise of certain projects. And where better to start?

Sadly, it was not to be. The secondary annuity wheels had already starting grinding and that, it seemed, was that. Despite the industry putting on a rare show of unity against the new market, it was made clear that the public would not be denied this flexibility. Even if it came gift wrapped in swathes of ‘significant risk’ with a big ‘for most people, retaining their annuity will be the best choice’ bow.

Governments will legislate, regulators will regulate and scam artists will do what they do. Despite everyone’s concerns, no-one can control how consumers behave and we were bracing ourselves for the inevitable horror stories. But, while providers will provide, and brokers will, er, broker, they don’t have to and things started to look a bit interesting when Hargreaves Lansdown announced that it was having nothing to do with the whole thing. The basis of this decision echoed what many of us have been saying all along, that despite being a good option for a few, the risks to the many massively outweigh this benefit. Greater good and all that.

Now, finally, it seems that sense has permeated the Treasury as it concluded that “over the past few months, following a wide range of discussions, it has become increasingly clear that creating the conditions to allow a vibrant and competitive market to emerge, with multiple buyers and sellers of annuities, could not be balanced with sufficient consumer protections.”

However I or anyone else feels about secondary annuities, it would have provided an exit path for a small proportion of annuity holders for whom cashing in would be the right thing. Removing that possibility is a blow for them but will not have been done without exploring all possible options to make it happen while minimising the risks.

Treasury estimates were that around 5% of the UK’s 5 million annuity holders would have taken advantage of secondary annuities. That’s an initial market of 250,000 but we’ve no way of knowing how many of them would have been making the right decision and how many the wrong decision. And that’s the basic problem which has corrupted the idea from the outset. Not the idea of swapping out an annuity for a lump sum, but the endless list of risks and ways of separating the consumer from more of their fund than can be justified.

There’s also an unavoidable political slant to this news. Would the same decision have been reached had Mr Osbourne kept the keys to No 11? We’ll never know but the smart money says it would have been a lot less likely. Might more Gideon-smashing follow? The Autumn Statement is suddenly looking a lot more interesting.

D2C’s big CPA day out: Nutmeg’s results and Vanguard’s plans

HEALTH WARNING: We’ve had some fun guessing at Nutmeg’s figures in this blog. Our guesses are just that, and we don’t make any claim for their accuracy. We’d love to have accurate figures, but until we do please treat any figures in red as (hopefully) interesting, but no more than that.

If you’re interested in the direct-to-consumer investment space, today is a pretty fascinating day. We got two pieces of news that those of us who study these things have been waiting for – Nutmeg’s 2015 results, and confirmation of US giant Vanguard’s long-awaited direct proposition.

Let’s do Nutmeg’s numbers first.

TURNOVER £1.7m
OPERATING EXPENSES £10.8m
FY 2015 PROFIT (LOSS) (8.9m)
CASH RESERVES £9m
PROFIT & LOSS ACCOUNT (£20m)
HEADCOUNT 58
WAGE BILL £4.4m
AUA Not disclosed
CUSTOMER NUMBERS Not disclosed

So first let’s talk about those losses. Nutmeg clearly works like a tech business as much as an investment one: lots of investment in the early years and (hopefully) gravy thereafter. However, that magical acceleration of revenue and the accompanying reduction in the crucial Cost Per Acquisition (CPA) figure which tells us how much it has to spend to get each customer on board is yet to happen – and Nutmeg has been around since 2011.

I am confident this is all anticipated and expected. But with a £10.8m cost base and £9m in the bank, Nutmeg has exactly enough money if it keeps revenue the same to last one more year without requiring reinvestment. That year finishes in 3 months’ time. If it doubles revenue again (which it might well) and keeps the cost base steady then it can last another six months or so before running out of money. Either way, we predict another fundraise at some point.

If there is another round, it will be interesting to see who gets involved. Massimo Tosato, the Schroders representative on the Nutmeg board, will retire from Schroders at the end of this year and we wait to see if his enthusiasm is replicated elsewhere in the organisation.

Do losses matter? Not if you’ve got ready access to capital. The real question is whether Nutmeg still does.

It’s worth saying that Nutmeg seems to have made big strides in 2015. Its customer numbers are up by over 50%, AUA by over 100% and AUA per client is up over 35%. This is good stuff, although it’s inexcusable that Nutmeg doesn’t disclose its numbers. It’s starting to look like it’s ashamed of them, and it doesn’t need to be.

NEVER MIND, NUTMEG, WE’VE GOT YOUR BACK

Happily, we’re a helpful bunch, so we’ll do some numbers for the Nutmeggers. If they’re wrong then Nutmeg is welcome to correct us. This is the bit that the health warning at the top refers to.

Revenue of £1.7m is our key here. Nutmeg’s charges range from 0.3% to 0.95%, and we’re going to take a composite rate, which allows for the fact that most savers likely have relatively modest amounts, of 0.75%. From there it’s just arithmetic – £1.7m / 0.75% = £227m at end 2015. If we’re wrong and the average charge is half that then we’re up to £450m, because maths. Our estimate is much lower than others have published, but ‘rithmetic is ‘rithmetic.

We’re going with the first of those figures, and we’ll assume that each client has on average about £25k on the platform. That would give the platform just over 9,000 customers, which is quite a nice base to work from.

We’ve done a bunch more numbers behind the scenes – contact us if you want details. It all comes out with a CPA of over £1,000 which might take 7 years or more to recoup.

All of this is guesswork and bound to be wrong. But this kind of process is what you need to do when you consider the economics of online investment platforms and robo-advice (there’s nothing special about advice in any of this). It’s CPA that kills you.

We’re fans of Nutmeg here at the lang cat; we’ve even given it an award from time to time. The market needs its disruptive influence, and its product looks lovely. It might even perform well over time. But if it can’t get CPA under control, it’s never going to get ahead of the curve, and inevitable increases in operational cost will hurt more than they might.

D2C is a hard game.

VANGUARD BREAKS COVER

As if to pile on the misery, Vanguard has broken cover to say that we’ll see its (presumably) LifeStrategy D2C offer within 6 months; we’ve heard rumours of January which would make sense as Vanguard will want its offer out there for whatever ISA season there is in 2017.

What will it look like? We don’t know, but if we were betting cats it would be LifeStrategy plus a minimal additional charge – and maybe no additional charge at all. If we allowed an extra 10bps or so, that would get them in or around the all-in rate of 40bps. That plus the Vanguard muscle and brand name could be a big disruptor in its own right. For sure LifeStrategy money on HL and other platforms should, by rights, flood over – especially if Vanguard can get a white-labelled online pension to market. Just like Nutmeg has done.

The potential difference between the two, apart from total solution cost (which probably isn’t a huge driver)? Cost Per Acquisition again.

It’s getting frisky out there, folks…and if you think it’s bad here then check out what’s happening over the water. Brutal.

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YOU CALL THAT A PLATFORM RE-PRICE? AJ BELL YOUINVEST FLASHES ITS NEW CHARGES

It was only a few days ago that I turned to one of my colleagues (I canâ??t remember who it was. It doesnâ??t matter, itâ??s not that great an anecdote and thereâ??s at least a 50% chance Iâ??m making it up anyway.) and complained that â??Thereâ??s not been a re-price in the direct-to-consumer market for ages now.â?. Well, it seems like someone out there was listening to my prayers. And in other news, Iâ??m utterly sick of neither winning the lottery nor Jennifer Lawrence returning my calls.

Anyhoo, this is just my whimsical way of introducing the news that the boys and girls at AJ Bell Youinvest have not only fundamentally changed its pricing structure but also instantly rendered the pricing tables in our recent D2C guide obsolete. BOOM!

New fund switching charges, new core platform charges, new admin charges, new pension income charges. Whoah there! Thereâ??s so much going on Steve, where do we even start? Letâ??s fire all the main changes into a table and try and get a handle on things.

BellTable

Righto, letâ??s have a look in turn:

  • The removal of the 0.20% + £200 cap appears at first glance to be a biggie. We all know that 0.25% is bigger than 0.20%, yeah? Especially when itâ??s capped at £200. However, itâ??s important to note that this £200 pa cap applied per wrapper. So, if you had a chunky ISA, GIA and pension, then charges were actually capped at £600, see? Important point to make before reaching too readily for the price hike pitchforks.
  • No getting around the fact that the addition of a new custody charge for shares (and by shares, we mean equities, ETFs, investment trusts et al) will cause a grumble or two. There is now a charge where there wasnâ??t one before and fundamentally, thatâ??s a difficult message if youâ??re solely invested there with no fund holdings. However, some of this is offsetâ?¦
  • â?¦if you have a pension and have just seen your annual admin charge disappear. Especially if your SIPP is over £20k where this charge used to be a hundred quid a year. Also further offset ifâ?¦
  • â?¦you were in drawdown but not taking an income (i.e. had taken tax free cash but not regular income yet) where your £50 + VAT charge for this has now been quashed.
  • The reduction from £4.95 to £1.50 in fund switching charges is a welcome change. It wonâ??t make anyone rich, because (1) arithmetic and (2) switching activity on the fund side is low, but is still a nice little alteration.
  • Lastly, the pension lump charges seemed a bit zesty to us so itâ??s cool to see them come down substantially too.

So, how does this all affect our pricing tables? Letâ??s look at SIPP products on the fund side first. (Core platform charges + annual admin charges + 2 buys and 2 sells where providers charge.)

SIPP charges

And ISA/GIA (same assumptions)

BellISA

Shares have feelings too so hereâ??s how investment in exchange traded instruments through a general account with 12 trades per year looks. We always illustrate this one in pounds only as it highlights that the majority donâ??t charge a %-based custody charge for equities.

Shares_Bell_New

Now thatâ??s an awful lot of information to digest. Ultimately, where you stand on this depends on your perspective. With our provider hat on, if youâ??re looking to change prices you either make a strategic shift here or there, some customers win/lose but most stay pretty much as they were, or you make a fundamental change that affects pretty much everyone. Thatâ??s what Youinvest has done here in an attempt to simplify things across the board and itâ??s a bold move.

Through the lens of the customer, we can see from the heatmaps that Youinvest has retained its position as a low cost provider pretty much across the board, with pension customers at the lower end among the biggest winners â?? which we like. So for Youinvest, itâ??s more about managing the messages[1] on the fringes for those affected in the other direction. All the heatmaps in the world arenâ??t going to comfort a customer who sees their charges demonstrably increase for the same service. We think, overall, thereâ??s more to like than dislike about the new structure but ultimately, itâ??s over to the customer. What do you think? Drop us a line, weâ??d love to hear your views.

TL; DR

Lots of price changes. Youinvest still inexpensive on average. If you invest in funds only then your charges are going up a bit, but if you have a modest pot with a pension then they could well be going down. If youâ??re in drawdown, then you might well save a bit as some of the admin charges are reducing. If you invest in shares, then youâ??re facing an additional custody charge that is only really significant if you have a biggish pension pot (but is offset by the removal of the main wrapper admin charge) Phew.

[1] Itâ??s launched a calculator for customers who want to see where they stand. Get it here.

Slurp! Aegon eats Cofunds for BREAKFAST

(Journos reading this – any part of it is attributable if you want it.)

So before we get into this, I need to tell you that the lang cat has been doing a wee smidge of work here and there on matters pertaining to the acquisition (posh) so if that bothers you, stop reading now.

If it doesn’t – wheeee! What a day this has turned out to be. Normally I’d be writing up OMW’s results about now – a third of flows coming through the restricted arm and £225m on replatforming so far, wow – but BAWS TO ALL THAT.

Fresh from scarfing up BlackRock’s DC book, Aegon now takes on the platform industry’s biggest problem child – Cofunds. In no particular order, here’s what I think (important to say that no-one from Aegon or Cofunds has seen this before publication, by the way).

On balance I think this is a Good Thing. I can hear the naysayers coughing up a lung already, but none of that matters too much. Haters gonna hate. The only thing that does matter is that Cofunds desperately needs investment in its tech infrastructure and – for reasons known only to itself – L&G hasn’t been willing to put that in. Aegon is willing, and that’s welcome news for 800,000 clients and 17,000 users in 6,000 firms on Cofunds.

Cofunds’ retail book and the IPS book which has Nationwide et al on it will shift, over time, to an ‘upgraded’ version of GBST’s Composer platform (note: GBST is a client of the lang cat, we’re conflicted ALL OVER the place on this). This will give users increased asset ranges to be sure, but much more importantly it’ll allow a far more integrated pension proposition and it’ll get rid of a lot of the swivel-chair processing that’s a fact of life with Cofunds and FAST at the moment. It’ll also make GBST the biggest platform tech provider in the UK, just ahead of FNZ.

Is £140m the right price to pay? It seems to me there is no really meaningful way to price a business like Cofunds; Aegon isn’t buying it because it loves the profit stream, the tech or even the proposition all that much, I don’t think. It’s buying it to complete a huge transition project that Adrian Grace and team have been working on for the last 5 years. In much the same way that Standard Life worked hard to try and change its DNA from lifeco to ‘long term savings and investment business’ (repeat until blood runs out your nose), Aegon is transforming itself to a platform and protection business. The divestment of the annuity book was a big part of that story. It’s a hell of a transformation – and now that the building blocks are all there, the challenge is for Aegon to make it work.

SCALY MONSTERS

This is a fascinating moment in the platform industry’s journey. Every commentard including us has chirruped that platforms are a scale game for years, but scale has sort of meant somewhere between £10bn and £20bn depending on what kind of organisation you are. Aegon/Cofunds’ £98bn-ish is split across retail, institutional and workplace, to be sure, but to me it clearly redefines what scale means in the retail market – now somewhere north of £50bn.

It’ll be really interesting to watch outflows – anecdotally a lot of the offs from Cofunds we’re hearing about are about advisers moving to restricted or vertically integrated propositions. That’s one of the potential challenges to any scale player that doesn’t have its own version of Intrinsic or 1825. Hard to see it really denting the numbers in this case though.

One thing we’ll all be watching very carefully is the institutional book (to be clear, the pure insto book for wealth managers and so on, not the IPS book). Aegon has no heritage in looking after stuff like this, and Composer doesn’t either really, in the UK at least. So expect the insto book to stay pretty much untouched for a while; there is an open question for Aegon to answer as to whether it can run this huge book successfully and maybe – gasp! – even make a turn or two on it.

ARTHUR, FETCH MY REPLATFORMING PANTS

Talking of tech and so on, this is clearly going to be the mother of all replatforming projects. Aegon’s got plenty of experience in moving stuff from the back book to ARC, but this is a whole new bucket of entrails. Cofunds has done all sorts of business over the years; much of it very low value (there’s big stuff too) and joining all the dots will be a huge deal. I think it’s a good thing that David Hobbs is staying to run it, and it’s also good that Rich Denning, ex Selestia and Novia, is doing the ops on the Aegon side. Everyone is going to have to have on their very best replatforming pants; I’ll come onto this below.

It’s worth mentioning that Aegon says the transfer is planned to be done with the minimum disturbance in terms of contractual arrangements. What that means is that terms and conditions will of course change colour, but according to Aegon no-one is going to be charged more than they are just now, no-one will be forced to change investments and so on. The pension scheme for those in the Cofunds Pension Account may be a bit trickier to deal with, but the principle is that advisers shouldn’t have to do a suitability review.

They – you – might choose to, and that’s perfectly right and proper, but there won’t be a contractual need to. That’s a hard line to walk – I think SL and AXA are probably trying to walk it too – so we’ll have to watch carefully and see how it pans out.

WHAT IT MEANS FOR ADVISERS

So strategically this all works. Cofunds gets an owner that actually wants it and Aegon gets to be the biggest kid in the playground. But does it work as well from an adviser’s point of view?

17,000 users woke up today as Cofunds users; once this all goes through and the transition takes place they’ll be Aegon users (even if the Cofunds brand name stays). Not everyone’s going to be happy with that. Aegon has form in terms of making advisers grumpy when it comes to back books and client relationships. That kind of thing has to be put firmly in the past and Aegon is going to have to work hard to gain and keep the trust of many advisers who wouldn’t select it normally and in fact didn’t select it at all.

But I don’t think there’s any need for immediate action. No-one knows  what the post-takeover proposition will look like yet. I’ve got theories and so will everyone else, but that’s all they are for now. If we phrase this deal as ‘massive company sells massive platform to massive company’ then that’s about as much as we can work with just now.

In just the same way as the AXA/SL deal, there is no immediate change (regulatory approval hasn’t even come through yet). Clients are not in jeopardy. Advisers reading this who hate Aegon – fair play to you, but this is a time for cool heads. Maybe have a moan on the comment boards or something. Oh, you already have…

LISTEN UP

As ever with things like this, I’ll sign off with a point addressed to the Cofunds / Aegon management.

Lads, you’re allowed one (1) day of back-slapping on getting the deal done. It’s a good deal, I think. Once that’s over, it is absolutely incumbent on you to make sure that advisers and their clients – not your clients, theirs – are kept up to date and treated with courtesy and respect. The transition from old tech to new will be huge, and thorny, and full of unexpected bumps in the road – just ask anyone who’s tried it. Don’t try to gloss the difficult stuff; suck it all up and be really honest with advisers. It may cause pain in the short term, but it’ll be worth it.

Rates. How low can you go?

Cash accounts on platforms interest (ha!) me. Whilst no one really should be using a platform to be fully invested in cash in the long term it’s clearly an important facility to have. Strategic asset allocations often require a small cash holding, and most clients like the comfort blanket of knowing they can flee to (relatively) risk free assets if they get spooked.

There is an argument that platforms are becoming increasingly commoditised, all offering the same stuff, and whilst at a high level there might be some truth in this deep down in the operational detail it most certainly is not. Platform cash accounts and facilities are one of the best examples of this, both in the functionality on offer and the rates paid.

We’ll explore the functional side another day (call us if you can’t wait. We’ll be by the phone.) but as rates are cut to a record low we’d like to highlight the rates that platforms are currently paying (or not)

Provider Rate paid Charge levied?
Aegon 0.40% Yes
AJ Bell 0% No
Ascentric up to 0.15% No
Aviva 0.10% below base rate Yes
Cofunds 0.4% below base rate No
Elevate 0.4 to 0.65% Yes
Fidelity FN 0.4% below BOE on ISA Cash Park, 0% on Intl Bond Bank Account. Pension 1% below subject to 0.25% min Yes (on pension)
James Hay 0.00001% (15/16ths of 1% below base) No
Novia 0.15% Yes
Nucleus 0.17% to 0.73% (varies by wrapper) Yes
OMW 0.35% Yes
Standard Life 0.30% Yes
Transact 0.3% (average) Yes
ZIP 0.30% Yes (except ISA and cash account)

 

Prior to today’s interest cut the above shows the rates various providers are paying on cash, held in a cash account, wrapper cash or cash facility, and whether a charge is applied. This pre rate cut position highlights a wide range of approaches and customer outcomes. We’ll be updating this chart as and when platforms update their rates, but it’s clear that for most customers it’s not going to be good news. Indeed, some customers could find themselves paying a charge for holding an asset with zero return. Any platform with customers in this situation would do well to remember their treating customers fairly obligations, and ensure the customers are provided with clear information explaining the changes that the rate cut have brought on.

As for the future? Who knows, but if rates go any lower could we find ourselves in a scenario where clients are charged extra (above the normal platform charge) to hold assets in cash? This remains to be seen, but away from the excitement of rate changes impacting savers and mortgage holders it’s clear the platform investor is also going to feel the pinch.

 

A (slightly resentful) welcome to Scalable Capital

So you go off on holiday, all happy because your new guide to direct platforms and robo-advice has launched. You come back, and some rotten sod has gone and launched while you were away and spoiled all your tables and that.

The rotten sod in this case is Scalable Capital. To be fair, weâ??ve known it was on the way for a while, but too late for us as we went to press with our guide. Sods. But you can’t hold a grudge and so Iâ??ve been taking a bit of a closer look; here are a few thoughts.

First off, itâ??s important to say that SC isnâ??t a robo-adviser in the way that any of the Parmenion-powered propositions or, say, Betterment in the States are. Thereâ??s no advice here; but there is discretionary investment management. Sort of like what you got from Nutmeg before Nutmeg started offering regulated advice.

THE BASICS: NO DICKING AROUND
Also available in English.

Also available in English.

In terms of design, SC looks predictably lovely. I havenâ??t been able to open an account as Iâ??m not stumping up the £10k you need to do so, so Iâ??m depending on filmed demos and so on that you can find pretty easily online. The dashboard looks very similar to other robos â?? again, Betterment came to mind â?? but with a nice dark colour scheme. Everythingâ??s well laid out and if we were car journalists weâ??d probably be saying that all the controls fall easily to hand.

One thing that may surprise some who view online propositions like this as a way to get people interested in dicking around with investments is just how little dicking around you can do. This appears to be quite deliberate â?? SC wants you to trust the process and be hands off from there. Youâ??re really buying into an investment management philosophy with Scalable; Iâ??ll cover that more in a moment.

In terms of the basics, itâ??s GIA-only for the moment, with an ISA to come and no doubt once SC works out that all the readily accessible investable wealth in the UK is in pensions, a pensions wrapper too. Incidentally, look carefully at the next set of announcements from Nutmeg to see whether the addition of pensions has made a difference to its key numbers (the ones it discloses anyway).

Charges are 0.75% flat for the service and 0.25% for the CAREFULLY SELECTED BASKET OF ETFs. No lock-ins, additional charges or ulterior motives so far as I can see.

INVESTMENTS AND THAT

OK, so that investment philosophy. Unlike anyone with sense, Iâ??ve read the 32-page Scalable Capital investment methodology white paper from cover to cover, and what you get seems to my simple mind to be three core components:

  1. Value at Risk, Expected Shortfall and Maximum Drawdown as the drivers of asset allocation, modelled forward via daily Monte Carlo simulations. These lead to 23 risk categories, labelled by VaR. As SC says, â??an investor choosing risk category 12 wants to limit downside risk so that an annual decline of more than 12% should occur on average only once in 20 yearsâ??.
  2. â??Risk clusteringâ?? â?? basically (this is a gross oversimplification) a technique that suggests that it is more possible to predict risk than price based on current conditions. As a result, rebalancing moves from portfolio weighting and Markowitz-style modern portfolio theory, to a risk-driven approach. It is well scientific and that.
  3. Discretion â?? itâ??s possible for the team to step outside the algorithm and change asset allocation when weird stuff is going on. SC has been vocal on saying it made 12% for investors over Brexit; a claim which will certainly come with a few footnotes.

Whether Scalable Capital is for you, then, depends on whether you like this different approach to the more common portfolio management / auto-rebalanced techniques offered by many of the robos. Do you believe that VaR driven management is a good way of optimising allocation, or do you think that it exposes you to sub-optimally priced trades and in fact can accelerate a race to the bottom? Do you think that Engleâ??s risk clustering framework is a goer, or are you all Markowitzy? Are you happy that the humans can trump the machines, or are you suspicious of meatsack bias?

Almost certainly, unless youâ??re an alpha geek, you donâ??t care. On that basis, and if you have £10k or more to invest, Scalable Capital looks really interesting to me. Weâ??ve written before â?? not least in the Guide â?? that the robo market looks like â??different restaurant, same menuâ?? â?? a bunch of pretty websites with broadly the same ETF proposition under each one. Scalable is a new twist on this, and thatâ??s welcome.

In common with all these types of propositions, distribution is the thing that will make the difference. SC may well be being built to sell; in the meantime I suspect it will struggle to find big value pools to attack (although its retargeted adverts are already hunting me round the web). That may not matter to its VC funders, but in a world where you can buy Vanguard Lifestrategy through a decent platform for just over 0.5% all in, thereâ??s a lot to prove. Weâ??ll look forward to watching it play out.

front page imageIn the meantime, if you want to read Leithâ??s leading independent platform consultancyâ??s analysis of the online investing market, along with many pictures of aggressive cats, just click the pic and download to your heartâ??s content â?? itâ??s free.

A right old robo romp

robochairman large

The sun has finally made an appearance at lang cat HQ this week (with some thunder and lightning thrown in for dramatic effect) which means not just one, but TWO great things: summer has finally arrived here in Leith and our free annual guide to direct platform investing has been let loose on the world once again.

The platform market had been looking a bit sleepy in our previous 2015 guide, as the dust settled from all the post-RDR pricing changes. But our third annual guide is coming back with a terminator-style vengeance as we turn our attentions to robo-advice in the aptly titled COME AND HAVE A GO: RISE OF THE MACHINES.

The number of start-ups and new launches currently hopping on the robo-advice bandwagon make this area of the market look like a pretty big deal. But, in reality, ordinary investors are not quite so caught up in the robo-hype, with the majority of people still just trying to wrap their heads around what robo-advice means, let alone actually investing with one of them.

So it only seemed right that this yearâ??s Guide went back to the basics of robo-advice, stripping out the usual bore-fest of industry jargon along the way. Anyone who has ever asked themselves questions like â??what do robos actually do?â?? will find the answers here.

Investors also need to ask themselves some serious questions before going down the robo-route, most importantly the level of control that they like to have over the investment process as well as the degree to which they are happy to accept responsibility for investment decisions and outcomes. To make this part a bit easier, weâ??ve even thrown in a (not-so) scientifically-based, fun-filled, quiz designed to test out a personâ??s robo readiness.

The rise of robo-advice adds yet another option to the direct platform mix, making it more important than ever to help make things a little simpler for investors going it alone. With this in mind, weâ??ve added robos to our now (sort-of) infamous #heatmap on platform pricing and other handy tables, to give a better idea of how our automated friends sit in the wider direct platform market.

Other familiar sights include our coveted Lang Cat Direct Platform Awards, which has seen Hargreaves Lansdown nail the top spot once again as Platform of the Year but surprises elsewhere from Parmenion, which claimed the accolade of Platform â??Heroâ?? of the Year (yes, we know itâ??s not actually a direct platform but all will be explained in the Guide).

A small reminder here for anyone who wants to go even further back to the very beginning of direct platform investing that our original Guide covered everything you need to know to start out in direct platform investing. These basics still apply today so readers can dip in to this earlier guide if they need to fill in any blanks.

At the end of all this, our lovely readers should hopefully wind up with a better idea of which platform can best meet their needs, whether itâ??s a robo, or not, as the case may be. Either way, youâ??ll have to read it to find out. The only thing left to do then is insert yet another conveniently placed link to our page for COME AND HAVE A GO: RISE OF THE MACHINES. Happy reading and, as ever, weâ??d love to hear what you think.

10 years of treating customers fairly

July 2006 is not a month to stir the memories. England had just been knocked out of the world cup on pens, the best-selling album was the High School Musical soundtrack (fist pump of solidarity with all the parents who endured that one) and according to Dr Wikipedia one of the most significant news events of the month was George Bush greeting Tony Blair with the phrase “yo Blair”. Surprisingly, Wikipedia doesn’t record one of the most significant events for financial services. July 2006 was the launch of the FSA’s Treating Customers Fairly initiative, and ten years on the six outcomes still cut to the heart of the challenges and opportunities facing firms. So, a decade on, how has the industry fared against each of the outcomes?

Outcome 1: Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture.

Overall, a lot of improvement here, albeit from a very low starting point. I would question how many consumers feel confident that all of financial services has customer outcomes central to the corporate culture, but there are certainly an increasing number of examples where this is the case. How a firm treats its employees, and the culture this generates is arguably the biggest contributory factor to the quality of the customer outcome. If there is one outcome we’d like to see firms really focus on, this is it.

Outcome 2: Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.

This is an area where there needs to be considerable improvement. All too often the customer “needs” are identified internally with the results being a repackaged version of an existing product line that people hope will sell better than the first version. We see little evidence of genuine customer research to understand their wants/needs/personal traits, and then developing solutions and services to meet these needs. This needs to extend to marketing as well. It is very rare to see a firm clearly state who their product and service are, and are not, suitable for.

Outcome 3: Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.

Generally ok with this one. The way individuals access and consume information has transformed over the last decade, and financial services has had to at least attempt to recognise this. For most firms it is possible to access information online, and whilst the quality and accessibility of this info can vary it is at least there.

Outcome 4: Where consumers receive advice, the advice is suitable and takes account of their circumstances.

Big tick in the box for this one. Financial Advisers are now much more professional and qualified than ever before, and 4 years on from RDR they are increasingly confident in a fee based world. Alongside TCF and RDR arguably the most significant work the FSA undertook in the last decade was the focus on suitability. A personal recommendation will now be at a level of risk the customer is willing and able to tolerate, and the suitability of the costs involved will also have been assessed. Customers who only encountered advisers over a decade ago will see a huge improvement if they work with an adviser now, and with the demand for advice increasing as a result of the pension reforms the advice sector has never been in better shape.

Outcome 5: Consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and as they have been led to expect.

This is a hard one to assess. As mentioned above in outcome two, firms need to do a lot more to set expectations and clearly state what type of customer products are, and are not suitable for, however it’s probably fair to say that service is gradually improving across the sectors. Again, technology has played a part here enabling online self-service to be the norm, but most firms we encounter at least recognise the need to offer acceptable levels of service.

Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.

More work needed here I’m afraid, and with the release this week of their work into cash savings the FCA clearly agrees. There have been some improvements in the last decade, especially in the banking sector, but the barriers are still there. Exit penalties still exist in some pension products, and we are hearing talk that even 4 years after RDR re-registration of assets between platforms/asset managers is still not as slick as it should be.

So, overall a mixed bag. TCF was a hugely important initiative and it has delivered a number of improvements but more work is needed. When we work with our consulting clients it’s still noticeable how the six outcomes often give them the answer to the problems they are wrestling with. If you are embedding each of these outcomes into your firm, and especially outcome one you won’t go far wrong.

Ten years in we would urge firms to reconsider their approach to TCF, and to step back and review how they are addressing each of the six outcomes above. Is our view above accurate? If not, we’d love to hear your comments below.

Learning the language of risk

I recently spent a couple of days with one of our PR clients, Paul Resnik from FinaMetrica. For those who donâ??t know FinaMetrica, they specialise in helping financial advisers and their clients understand investment risk tolerance through tools and educational material.

One of the things we discussed was the language of risk and the fact there was a good deal of misunderstanding out there which was potentially having a detrimental effect on client outcomes.

First. Let’s get one thing out of the way. Paul hasn’t asked me to do this blog. I’m doing it because I genuinely find this stuff interesting and I enjoy reading all sorts of views on risk issues. I’m fully aware some of you reading this will think otherwise, but there it is.

Now, Iâ??m a bit of a simpleton. I hopped, skipped, jumped and clicked my heels out of school at 16 to seek gainful employment. So the thought of academic journals on the science of psychometrics applied to investment risk sends me running for the hills.

However, one thing that Paul has drummed into me over the years weâ??ve worked together is that risk tolerance is a personality trait that is relatively stable over time. I had at first thought risk tolerance was revealed by behaviour – but I’ve been convinced otherwise.

Iâ??ve just put this very question to twitter (yes, I appreciate the irony of testing the science of psychometrics via one of the most unscientific means imaginable). What I found didn’t surprise me really. The split of opinion was pretty much right down the middle. 48% of those who took the poll (thank you to the 69 people who took the trouble by the way) said risk tolerance is a personality trait. The other 52%, like me at first, think it’s revealed by behaviour. I’m a layman in all of this, so I’m not going to say 52% of people are wrong. But I will explain how I reached my conclusion.

riskpoll

If I donâ??t understand something â?? it happens a lot â?? I always try to break the problem down and simplify it in terms I get. This is what I did for the language of risk. The resulting story has nothing to do with investments directly, but everything to do with the psychology of risk.

Here goes.

My tolerance to public speaking (risk tolerance)
I have a very low tolerance to public speaking. In fact, I hate it. I get very nervous. I avoid it when I can. In my 25 years in financial services Iâ??ve had to give presentations to large audiences and sit on panel debates and at times Iâ??ve even been required to front up big news and manage crisis situations on TV and radio. Every time Iâ??ve hated the experience. This is probably why I have ended up in PR where itâ??s my job to put other people in the spotlight while I skulk in the shadows. This aversion to public speaking is hard-wired into my DNA. Itâ??s a personality trait. Yes, training and experience over the years has helped. But Iâ??ve accepted itâ??s not one of my natural strengths.

Attitude to public speaking (attitude to risk)
This is pretty much the same as my tolerance, and it’s evidenced by the fact that I have, when needed, spoken in public. But I’m separating it out here only to illustrate how my thinking has developed. My attitude to public speaking is pragmatic. I know that at times I will have to do it to achieve certain goals, even though itâ??s way outside my comfort zone.

Requirement to speak in public (risk required)
Letâ??s say, just for illustrative purposes you understand, Mark Polson decides to fire me for real one of these days.

I find myself on the job market. So I go to Nicki, a recruitment consultant. I talk to Nicki and tell her about myself. I tell her my target salary is £75k a year. I also tell her about my tolerance to public speaking, and my attitude to it.

Nicki does a grand job in finding me five potential roles. At one end of the scale, there’s a job that pays £50k a year and has no requirement to speak in public. At the other end of the scale, thereâ??s another job that pays £100k but requires me to be on my feet speaking publically the majority of the time. I now understand the public speaking requirement. I can make an informed decision.

Capacity for public speaking (risk capacity)
The job in the middle is the Goldilocks one. It pays £75k and it may be necessary for me to speak in public very occasionally. Ok, I can deal with that. If I had chosen the one at £50k I would have quickly realised it wasnâ??t for me when I struggled to pay the mortgage and put food on the table. Due to financial necessity I would have been back on the job market within months. If Iâ??d taken the job at £100k I would have bailed because Iâ??d be a nervous wreck within days.

To jog this along a bit, letâ??s now assume I aced the interview and landed the job that matched my requirements and capacity.

Public speaking behaviour (risk behaviour)
In my first week in the new job I find myself talking to a group of recruitment consultants. Itâ??s a big audience and I recognise no one other than Nicki; my very own recruitment consultant who helped me land this new gig. Only she and I know that Iâ??m hating every minute of this. To everyone else, my behaviour (the very fact Iâ??m on my feet speaking to them) indicates that Iâ??m comfortable doing what Iâ??m doing. They would all be wrong. They have incorrectly assumed my behaviour is an indication of my tolerance to public speaking. Itâ??s not. My behaviour is an indication of the compromises Iâ??ve made along the way, including my attitude to public speaking, my requirement to speak in public and my capacity to do it.

If any one of those recruitment consultants were to assume my tolerance (my personality trait) based on my behaviour in that one moment, theyâ??d probably end up matching me to the wrong job.

My discussion with Paul and the results of my twitter poll have convinced me there is some confusion out there on the language of risk. Perhaps creating some non-academic examples will help aid understanding.

Of course, Iâ??m happy to present my ideas to you and your teams any time you want. I love that kind of stuff.

Weekend reading

Lots of interesting stuff over the weekend, so for those of you with a life who didn’t spend the weekend reviewing the personal finance press, here’s a quick round up.

Friday evening started with a bang (#langcatlife) with the FT front cover on pension fund transparency. Much more to come on this, building on the excellent work coming from Andy Agathangelou & the Transparency Task Force. Henry Tapper’s views on this subject are also well worth reading.

Saturday morning saw the Telegraph getting stuck into pensions, off the back of Andy Haldane’s clickbait comments the previous week. The Guardian also wrote about the complexities of pensions, and challenged the previously held “rule of thumb” of 4% withdrawals.

The Mail on Sunday broke the news of M&G reducing their charges for direct investors. This has been widely reported elsewhere in the trades this morning, and is further evidence of the price pressure that most of the industry is facing. We expect this to be a big theme over coming months, and no one is immune. We know of one firm who are about to launch a proposition for under 50bps, for advice, custody, investments, the lot. Loads of coverage in the real world press on pensions, charges, and the need to take control of your financial future. The times are a changing….

Finally, and on a lighter note, the seven unmistakable signs of a shit brand consultant. Note to anyone involved in a “robo” proposition…check the millennial point….

Have a good week