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Graham Greene gets insured fund economics

The first blog from me for a very, very long time. Once you get out the habit of this stuff it’s hard to get back into it. Never mind, here we are now. I know how you’ve all missed it, so much so that you’ve barely felt able to articulate how keenly you feel its loss.

Stuff like that.

Anyway, felt moved to write after the Skandia volte-face on a bulk switch of its insured Invesco Perpetual High Income money over to the new Woodford fund. This would have involved something like £640m of OPM (Other People’s Money), so it wasn’t a small thing. Today, after howls of protest from advisers, Skandia has woken up and realised this is a bad idea. Not only on the grounds of the fact that there’s little obviously wrong with Barnett’s stewardship of the IP juggernaut he took over from The Neil, but also on the grounds that it was going to charge investors 1% for the privilege of implementation of a decision those investors had no hand in. Not cool.

Now, I think we should move past the fact that Skandia came late to the party, and celebrate that it got there at all. Much like Aegon’s recent Damascene conversion on ‘orphan’ business, it’s churlish to moan when the result is right. As it stands now, advisers and investors can choose whether to move to the Woodford fund, there will be no 1% charge, and the TERs have dropped a little too.

So fair play to Skandia. The rest of this isn’t about Skandia; it’s about insured funds generally.

Reaction to the concept of switching an insured mandate like this has been apoplectic in some quarters. Those who are observers of the inner workings of lifecos, conversely, have been barely surprised. As Graham Greene nearly said, “You cannot conceive, nor can I, of the appalling strangeness of the insured fund sector.”

Platforms and unbundled mutual funds have become so much our currency, that some folks seem to have forgotten that when you use an insured external fund link (EFL) in an insurance or pension contract, you are not investing directly in that fund. You are investing in a box, which may or may not invest in that fund at particular times. The insured fund ‘mirrors’ the EFL to a greater or lesser extent depending on the amount of finagling that’s going on. Some mirrors are ‘tight’ and reflect the underlying performance of the fund closely, others are what we would call ‘pish’.

We also should remember that the charge for the EFL has bugger all to do with the actual cost of the fund to the insurance company. You may be accessing the EFL at, say, 1%, but the lifeco may be getting it at an insto rate of, say, 0.15%. The difference between the two is available for distribution to deserving causes, such as long term incentive plans for directors.

I don’t know the economics behind the Skandia decision, and neither do you (although I suspect you do at the back there, you sly old devil). But there will be some; that’s the nature of this kind of business.

Recently I’ve been seeing a resurgence in both proposition teams and advisers thinking more closely about off-platform products and whether there is a way of bringing the insured world (which was so great and client-centric we had to remake the industry to get rid of it) closer to the post-RDR, PS13/1 compliant, shiny new world.

If this episode serves to remind us of one thing, it’s that if we are interested in transparency of client outcomes as a first step on the road to improving those outcomes – something that will take a while – then insured funds and products need to be brought under exactly the same regimen as their unbundled cousins. Anything else is ludicrous.

Just ask Greeney.

“Most things disappoint till you look deeper. Apart from insured funds. They're fine."

“Most things disappoint till you look deeper. Apart from insured funds. They’re fine.”

FCA Guidance Consultation (GC14/3)

In an effort to avoid offending fans of any other literary greats (and quite possibly the FCA), I’ll keep to the point this time. I’ll even resist the urge to draw one last parallel between Jane Austen’s Emma (which while often considered Austen’s most accomplished work, is distinguished by the fact that nothing of note actually happens) and Guidance Consultation 14/3 (GC 14/3).

OK, so I might have failed in the whole not-offending-the-FCA thing there but that’s the feeling which comes from reading GC14/3. It rounds up existing regulation in one place (which is very helpful but not news), offers some clarifications based on this and sets out the next steps. There is a lot of potential but this is just the start of the process and it could be this time next year before we see this come to fruition. Such is life and consultation papers.

So what did GC14/3 have to say for itself? Here are a few snippets we think are worth a mention.

The Duck Test – challenged

The FCA had previously intimated that whether or not advice has been given could be determined largely by the customer’s perception: ‘if it looks and feels like advice, it probably is advice’. GC14/3 qualifies that somewhat, stating that while the consumer’s perception is important, it will not always be correct and will not on its own determine whether advice has been given. Rather it’s more about external perception: would a ‘reasonable observer’ view the service as meeting the criteria of a personal recommendation? It’s still open to interpretation but might provide a little more comfort for providers.

Consumer perception – the human factor

As part of the GC14/3 work, the FCA commissioned consumer research. I already talked about this in a previous blog so won’t dwell but one point which is worth a mention is the importance of the medium by which information is communicated to consumers in the non-advised space. It seems most are pretty clear that non-advised services which are accessed online are just that. Non-advised. It’s when human interaction exists that scope for confusion appears to creep in alongside. While nearly all direct platforms offer telephone support to some extent, the majority guide you to FAQs or email. On reflection, that might not be a bad thing.

So where is the line between advice and not advice?

Clearly this deserves more than a few lines but since that’s all we have let’s see what we can do.

It’s not necessarily what is said that determines whether information crosses the line into investment advice as how it is presented. In essence, if there is an ‘opinion or judgement’ then it’s looking like advice. So, information in emails and mailings about fund launches, changes in manager and performance could be putting a toe over the line of advice if the information is presented in such a way as to ‘influence’ or ‘persuade’. A few terse meetings of comms teams could be underway by now.

Simplifying simplified advice

Some firms have apparently shelved plans for simplified advice services as, despite have the tech and enthusiasm, being unsure of or overestimating the requirements of FCA rules resulted in risk costs being factored in that rendered plans commercially non-viable. It was reported that, in some cases, direct investment services had been launched instead. Might we then see a surge of simplified advice offerings in this brave new world? There is certainly a market for it. There are good support tools on offer but for some, the option to get advice on an as-you-need-basis is the perfect compromise and, if it can be done cost effectively, is good for all concerned. The fact that advisory firms offering simplified advice cannot call themselves independent (as simplified is classed as restricted) could leave this field more open to platforms.

Providers need support from the FCA to avoid stepping over the advice line and anything which encourages consumers to engage with their investment is good news.  The tech is there and we could see some innovative stuff coming to the market if it can be carefully untangled from regulatory uncertainty, given a gentle pat on the rump and sent on its way.

Miss Woodhouse demands (more accessible and useful disclosure documents)

In Jane Austen’s Emma, during the rather bad-tempered picnic to Box Hill, mischief-making Frank Churchill addresses the assembled party. He asserts that Miss Emma Woodhouse wishes to be entertained and so demands from each of them ‘one thing very clever… or two things moderately clever; or three things very dull indeed.’

Mr Frank Churchill’s highly questionable motivations aside, this raises the question of who wouldn’t prefer to read one very well written, to the point and engaging item instead of two not so good or three truly impenetrable items? We all would, wouldn’t we? It’s common sense.

Sadly, the financial services industry as it currently stands is heavily weighted to the ‘three things very dull indeed’ end of the scale when it comes to disclosing information to customers. This is largely symptomatic of providers being unclear on what exactly is required of them by the regulator and throwing everything at it bar the kitchen sink to be on the safe side.

An unfortunate consequence is that consumers are deterred by this wall of words. Multiple, lengthy documents to cover even simple products with additional charging structures and key features are overwhelming. The end result is that these documents are either skimmed (at best) or quietly ignored, meaning investors are not making informed decisions and are at risk of detriment.

But, this could be about to change for the better.

One of the main issues addressed by Guidance Consultation 14/3 (GC 14/3) is the provision of information about financial services to customers. As part of this work the FCA commissioned research into how customers experience and engage with this information.

The outcome confirmed what we already know (but validation is always nice): customers want

  • the ‘must know’ facts in easily digestible nuggets of plain English
  • a clear and consistent format for ‘must know’ facts and for charging to help comparisons
  • telephone support, with easy to find details
  • clear information at purchase on recourse
  • reminders of the key points of purchase before the final decision is made

This resonates with much of what we’ve been saying for a while about how providers present information to customers and we know we’re by no means alone in this. We’ve been looking at the direct investment market rather a lot of late (but we’ll come back to that) and have seen a mixed bag indeed but no-one who really seems to quite hit the mark.

The FCA plans to work with providers to understand why they do not communicate with customers in a more accessible way, then establish the role that the Handbook plays in this. This is a big thing; a bold move and heartening to see.

While the FCA isn’t exactly putting its hand up to drowning accessible investor disclosure in a bucket of COBS rules, the good souls at Canary Wharf must know that they’re going to take what’s referred to in the field as ‘an absolute kicking’ from pretty much everyone they speak to. And that will have to be reflected in the eventual consultation paper.

The aim is to remove the ambiguity and give firms confidence to choose between belt and braces in terms of content. A consultation will follow later this year which could, potentially, see the end of certain (unspecified) disclosure rules which are not benefiting customers.

Emma is a matchmaker but I’m not convinced even she could plan a happy union between the FCA, advisers and providers. It could be a step in the right direction though and the first step on the inevitably lengthy journey from three things (T&Cs, KFDs and charging structures for example) very dull indeed to one thing very clever.

Which brings is neatly back to our having been busy in all things direct lately. No spoilers but we’ve been busy and we’re going to be making quite a lot of noise about it in the next few weeks. Eyes peeled and ears perked…

 

Tightening the ZIP – Zurich makes a move

It’s been, ooh, I dunno, weeks or something since a platform mucked around with its charging structure. So it’s with a sense of relief that we heard from our friends at Zurich last week that the Zurich Intermediary Platform – the only platform whose acronym is named after a clothes fastening – has stepped up and done the decent thing.

Now, when ZIP came out we gave it a bit of a monstering on the charges front (whilst observing that its non-standard front end was actually really nice). The structure as it stood could only have been designed by committee, with too many tier points and, unforgivably, charges to three decimal places. An example if ever there was of the numbers monkeys winning out over the needs of the customer.

Thankfully, with Zurich’s reprice, three decimal places are a thing of the past, and there are now fewer tiers as well. Some investors, especially at the lower end, will be quite a bit better off, and that’s a good thing.

This is all very timely, given TR 14/10 and GC 14/03 (the links go to the papers themselves; we’ll do a blog on these very shortly). Specifically, GC 14/03 recommends that information should be accessible to the most inexperienced self-investor. The research found that customers want small chunks of ‘must know’ basics, in plain English and in a clear and consistent format so they can find what they need to know and make informed comparisons. Not exactly ground-breaking but a robust and timely reinforcement which we hope will lead to real change for the better. We suspect that charges calculated to the nearest thousandth of a percent don’t measure up.

OK, on with the show. Here’s what Zurich has done:

Screenshot 2014-07-14 20.48.15

Prior to this we had 0.45% up to £50k and 0.325% (snark) between £50k and £100k.

It’s a basic tiered structure – no fixed elements, no caps, steps, or anything to mark it out from the norm. Family linking is available as long as the combined portfolios are over £200k. The SIPP (‘Retirement Account’) has a £75 annual charge, but that’s waived for new investors before 5 January 2015. We’re not a fan of ‘new investors only’ offers, but there we go. Cash is subject to a well-disclosed skim of 0.1% per annum. Trading is £10.50 a pop apart from big trades, if it moves Zurich will pretty much pre-fund it, and that’s about it.

So what do we think? First of all, once again we must just point out that this constant market adjustment shows that price does matter. It’s not the only thing, of course. We never claimed otherwise. But charging remains a key element of suitability – and we expect to see this brought into sharp focus in the due diligence thematic review later this year.

Let’s check the heatmaps (as ever in blogs, just a cut; subscribers get the full thing). ISA/GIA first:

zip1

and now SIPP:

zip2

ZIP’s pricing is sort of unexciting now, which is probably what the guys were going for – fair enough. It’s on the market, not leading the market, and is basically unremarkable in most ways. It’s certainly harder to make jokes about, which is a bummer for us. So amber-ish mid-table positions all round, except for the no-fee period on the Retirement Account.

We know distributing through large intermediaries is a key part of Zurich’s skillset, and those deals are always done at custom rates around the industry. Book price isn’t that important. So we note a couple of things – it may be that getting support from more regional firms is increasing in importance. And the trimming at the bottom end from the old shape is useful – with average platform holdings well under £200k across the market, this remains the key battleground and the one where ZIP has made the biggest change.

Not much more to say really; the market continues to close up, and those providers – ZIP included – who stress ‘value not price’ will really need to work out how they differentiate their propositions. Those who can will be able to resist commoditisation and resultant price pressure. Those who can’t – we all know how that goes.

 

image

Mark’s Big Self-Congratulatory Blog

Bollocks to self-effacing stuff today.

Every so often, bits of validation of what you’re doing happen, and this is one of those days.

Last summer, we were putting our annual Guide to Platform Pricing together. It was a bit of a landmark one for us, because for the first time it wasn’t just me, late at night with a bottle of Glenfarclas, a calculator, a laptop and a load of post-it notes. Steve and Sam had joined and were kicking my ass to make it better.

As part of the Guide we wanted to debunk the idea of there being one platform to rule them all in terms of pricing, so we created an awards section. We thought about doing an event thing off the back of it, but it filled us all with fear and loathing. There are quite enough events already. So instead, we wrote the section as if it were an awards ceremony, and had a giggle doing it.

It came time to promote the Guide and we turned to our old friends from MRM Digital for a hand. Given how much time we all waste on Twitter, it seemed obvious to do a Twitter ceremony, so the MRM guys went about setting this up for us. You can find out more about it here.  It was a laugh.

Anyway, at the 2014 Investment Marketing Innovation Awards, we picked up two plaudits:

  • Highly Commended for Most Innovative Event, jointly with MRM
  • Winner of Social Media, jointly with MRM

I’m incredibly proud of both of them, but something else happened that made me even happier than the Highly Commended or the win. I’ll explain.

We were also shortlisted in the Best Campaign category. Now, we didn’t win, but we got in there among some massive names with multimillion spends and that’s pretty incredible for a wee company with 6 folk in it out of Leith.

This award considered our relentless profiling of direct platform pricing using our now-infamous heatmaps in the national press. The guys here, particularly Steve Nelson and Mark Locke, have been tireless in doing and placing the analysis in an attempt to help investors understand what’s going on in this rapidly evolving space. It hasn’t been a campaign in the traditional sense; we have no budget and have spent literally nothing other than our time – lots and lots of time. To be shortlisted alongside Aberdeen, Investec (with a little agency called M&C Saatchi) and Henderson Global Investors is unbelievable. Nucleus won, by the way, which is also cool. The year of the little(ish) guys.

We’re taking this as validation of our approach – to make the complex simple, and to never stop poking the industry in which we work with a big, pointy stick.

And if we can do this for ourselves with no budget at all – imagine what we could do for your business if you chucked a bit of budget our way.

Self-congratulatory blog over. Now for a drink. Slainte.

There really are no words for these three.

There really are no words for these three.

Transferring from Stocks and Shares to Cash

The not-so-NISA sting in the tail

On the 1st of July, the whole world will tilt on its axis as swathes of Great British investors rush to top up their ISA allowance to a whopping £15,000. People are positively giddy with excitement at the freedom allowed them by Chancellor Osborne’s sweeping budget reforms. Not only can they invest more, tax efficiently, they can freely switch from a Cash ISA to an Investment ISA…AND BACK AGAIN, and no one will bat a regulatory eyelid. Good old Gideon.

But before we get too excited, there is a potential sting in the tail with this new freedom and flexibility.

You see, what we have in theory is a great structure within which my mum, for example, could bung a few thousand pounds into a Stocks & Shares ISA and then, a few months down the line – perhaps when interest rates begin their inexorable rise – send a wee online instruction to the platform provider of her choice, and hey presto – Cash ISA-a-go-go.

Except. Exit charges.

It’s hard to get to the bottom of what all providers have up their sleeves with regard to Cash ISA plans. However, from what I can tell, pretty much all of those that offer a Stocks and Shares ISA, don’t (and won’t) have an alternative Cash ISA available into which a seamless, hassle-free switch can be made. And the ones that do are unlikely to be able to compete on rates with the banks and building societies.

To be fair, there doesn’t seem to be much of an incentive to providers to develop a competitive Cash ISA alternative. To do so they would have to apply for a banker/deposit taker license and take on more risk. So I can’t see many rushing to develop an all-encompassing Super (N)ISA.

Yes – you will be able to switch between Cash and Stocks and Shares ISAs, however in practice, it’s going to be a pretty clunky, cumbersome experience – not to mention a potentially expensive one for those poor schmucks tied into their “We put the customer at the heart of everything we do” provider with exit fees. (Unreasonable post-sale barriers to exit or switch… anyone? ANYONE!?)

Things will be a whole lot cheaper for those customers of the ‘no exit fee’ brigade (hats off to you guys). But, still I’d hazard a guess that the actual switching process will be enough of a pain to put many people off taking advantage of the new flexibility.

So, we went on a bit of a mission earlier today and had a good look through the various charging sheets for investment platforms. Now, this is based on our interpretation of their marketing brochures – and some of those are not for the faint hearted – but it’s absolutely clear that the actual cost of switching to a Cash ISA from these guys will vary greatly.

Runners and riders

NISA table

What can we tell? Well, if you’re invested in funds then you’re probably ok in terms of back-door charges. Stocks and shares on the other hand are another matter. Transfer charges will range from zero for the handful who carry no charges (unless they’re not telling us!) to several hundred pounds if you’re invested in anything more than even a handful of lines of stock.

For direct investors, IT WILL PAY to do your homework.

So. Other than being able to invest more or your hard earned, there really isn’t much by way of flexibility or simplicity. Yet.

This is all a tad depressing, and I expect not what Mr Osborne had intended. It will be interesting to see how providers adapt their propositions to make the new ISA regime work for customers in the way it was intended.

If there are any providers out there scratching their heads, we have a few ideas!

Let the tweaking commence

See, they all bang on about ‘it’s not price, it’s value’ and all that kind of thing, and then the tweaking starts.

The latest tweak isn’t from a platform; it’s from a DFM. Brooks Mac, a highly respectable and well-supported DFM is cutting the charge for its model portfolios from an average of 60bps inc VAT down to 42bps inc VAT. There follows some justfication about platfom efficiencies and whatnot, but the truth is that the visibility of the pricing of these services is flattening out the market.

We did a bit of work on all this stuff for Skandia the other week, which made us unpopular with a lot of people – fine, can’t be friends with everyone. The main finding, though, was that the TCO of the portfolios themselves was relatively flat – a smidge more or less here or there. But the big cost, and the one that Skandia is clearly concentrating on, is the annual DFM charge, which ranges from zero for Skandia’s new kit through to 60bps or even more for some of the more rich-mahoganied guys with the impressive wristwatches.

We remain quizzical on why an ad valorem charge of even 30-40bps, with no capping or tiering, is the right model for renting the intellectual property and basic portfolio management of a centralised DFM model portfolio proposition, but that’s probably just us.

What really matters, though, is that advisers can start to see clearly what the costs of these services are; what they’re asking their clients to bear. And with that visibility and transparency in place, advisers and clients can start to attribute value or otherwise to what’s coming out of Brooks Mac and their competitors. And that makes the market healthier.

We expect to see further tweaking over the coming months; we’ll keep you updated…

Faster than you can say buncha munchy crunchy carrots, the tweaking begins

Faster than you can say buncha munchy crunchy carrots, the tweaking begins.

Cold towels and coffee

I spent most of this morning attempting to read and absorb the FCA’s PS14/9 Review of the client assets regime for investment business: Feedback to CP13/5 and final rules.

I say attempting because, at 410 pages long and packed with the kind of industry jargon that makes you want to run screaming from the room, this paper is not for the faint hearted. I counted one sentence with 58 words and no punctuation. And at 63 pages long in its own right, Chapter 7 (detailing the specific changes to the Client Money regime) actually made me want to cry.

For firms that handle client money and assets, I imagine that procrastination and desk tidying currently abound. There is far too much in the paper to summarise in any detail here. The FCA’s own press release doesn’t try to attempt it either so I don’t feel too bad about that. But let’s do a comically brief summary instead.

The new rules represent a tightening up of the whole CASS regime, including:

  • stricter segregation requirements for client money and assets overall, based around the underlying principle of ‘immediate segregation’
  • that includes the introduction of specific and relatively tight time limits for situations where firms are otherwise allowed to suspend segregation for operational reasons
  • stricter requirements for documenting agreements with custodian banks, including the introduction of FCA prescribed template agreements
  • stricter record keeping requirements overall and prescribed operational processes for checking that those record keeping requirements are being complied with
  • some enhanced disclosure requirements for clients, including around the payment of interest (or not) as the case may be, on client money
  • a ban on putting client money into ‘unbreakable term deposits’ (UTDs) with a term of anything longer than 30 days – to stop a practice that has developed amongst some firms of putting client money into longer term UTDs to maximise interest rates
  • clarification of permitted and expected processes in some areas, for example when dealing with apparently orphaned client money or assets or when transferring client money and assets from one business undertaking to another.

Recently, the FCA has been brilliant at producing things like summary videos and infographics to help people get to grips with key policy changes and the associated actions they will need to take. This paper feels like an EXCELLENT candidate for that sort of treatment.

If anyone from the FCA is reading, please. We beg you.

In the meantime, it’s going to be cold towels and coffee all round as various terms and conditions documents and operational process manuals are taken down from shelves for review.

Let us know if you might need a hand rewriting them. It’s one of our favourite kinds of challenge at the lang cat. We’re a bit strange that way.

PS – a follow-up consultation on some changes to the client money rules for NISAs was published today (11 June). This proposes that:

  • all cash held in Stocks & Shares ISAs should be held as client money (whether or not it is being held for the purpose of onward investment)
  • that Cash ISA providers who are not also deposit takers should be able to opt into the client money regime for the cash held in their ISAs
  • and last, but not least, that ISA cash should be carved out of the upcoming ban on client money being held in Unbreakable Term Deposits of longer than 30 days.

Only two weeks to respond to this consultation people, so get your skates on if you have strong views.

Time flies

The brain is a weird thing; it sometimes gets you to care about things you shouldn’t. We launch our new website today – hope you like it and all that – and it’s obviously all very exciting for us. Less so for you.

Three and a half years ago or so, when setting up the lang cat, I sat down with no knowledge of HTML, CSS or WordPress and boshed together a website – for no more than £37 of hosting fees – which I reckoned would do until I could do something proper.

It ended up ‘doing’ until today. This teaches – what? Something about procrastination, I suppose, but also that you can form attachments to the oddest things. The new site is 5,000 times better in every conceivable way than the old one. But I’ll miss the old one.

I wonder what other things I – and any business owner, maybe even you – are holding onto on the basis of sentiment, or laziness, or habit?