The wealth management sector and the pension rule change payday

Square Mile Magazine, 2014. Original article (p84-85).

SM92 wm pensionsThe wealth management sector and the pension rule change payday
Who will look after the baby boomers’ pensions? Now that the Chancellor has rewritten the book on retirement funding, wealth managers are eyeing a rare opportunity to take a sizable chunk of this market.

£12 billion was spent on annuities last year, as regulation meant the guaranteed income scheme was mandatory for many pensioners. As this will no longer be the case, insurers are licking their wounds as the annuity market is expected to fall by two-thirds over the next 18 months, according to Barclays Equity Research, or possibly even become extinct altogether.

“This is a huge change, and the effects on the wealth management industry will be very positive,” says Tom Hawkins, Head of UK Proposition Marketing at Old Mutual Wealth. “Now that the barriers have been removed, there will be a significant rise in the demand for individual advice.”

The effect won’t be immediate for the wealth management sector, as the pension changes won’t come into effect until next April. But reports from leading providers have suggested annuity sales have halved since the news, as people are delaying purchases to review their options in light of the new situation. Bank of America Merrill Lynch estimates the opportunity could be worth £6 billion for the wealth management industry, and this is at the conservative end of the spectrum.

As wealth managers are exploring how to best respond to this opportunity, Hawkins believes we can expect to see innovation in both products and packaging, as providers will be looking at their offerings with fresh eyes. “People may take an added interest in their pensions now that there’s this added motivation [of more choice]. There’s an opportunity to make pensions simple and engaging,” says Hawkins, stressing there will be a strong need to provide proper guidance.

Because the freedom to build our own pensions also comes with hefty dose of risk. “We will see more awareness around how to structure income in retirement,” says Ian Price, Divisional Director of Pensions at St. James’s Place Wealth Management. “But annuities will still remain relevant for many people, because the one thing no one knows is how long they are going to live.” While critics point to annuities becoming increasingly more expensive, they do shift the risk of longevity and investment value fluctuations onto the provider – a feature which will undeniably remain attractive for many pensioners.

Describing the new pension rules as a big surprise to the industry, Price is also optimistic that the new rules will lead to more awareness around retirement funding: “This could increase people’s faith in pensions, and encourage them to think more about their options.” The fact that people are less likely to go straight from full-time work to retirement anymore is also changing the financial needs of pensioners:

“I think building portfolios of assets to live off will become more common,” says Price, adding that this doesn’t have to be just shares and funds, but also ISAs and elements like buy-to-let properties. “People will have more than one income stream to live off in retirement.”

This has already started to happen: only 27% of professionals plan to rely on just on a pension for retirement income, according to a survey by Wesleyan Assurance Society released in May. While two-thirds of respondents admitted to be in the dark about how much their current pension arrangements are worth, over half said they plan to use property to generate additional funds.

Asked whether the new retirement flexibilities will be primarily of benefit to wealthy pensioners, Hawkins said the changes could be positive for anyone preparing to retire because it will encourage more people to seek financial advice. “The more affluent investors will often have financial advisers already, so they will have been aware of their options regardless. The opportunity is now for those with the average pension pot, which is £40,000, to become more aware of the available choices.”

While welcoming the relaxation of rules guarding the extraction of funds from pensions, David Stoll, Board Partner at Partners Wealth Management, is skeptical of the prospect that this represents a major change for industry: “In practice there will probably be little change in behaviour at the upper end of the market, where larger pension portfolios are already managed pre and post retirement without having the requirement to purchase an annuity, as has been the case for a number of years.”

Stoll also points to other factors, particularly in regards to tax, which will effectively restrict choice: “The new regime will not necessarily provide as much flexibility for all as heralded, and individual bespoke advice will remain as important as ever”.

Making sure people properly understand the risks, especially if they choose to take their money as a cash lump sum, will remain a key task for the wealth management industry. Concludes Hawkins: “The wealth management firms who will be successful under the new rules will be those who provide quality advice and flexible options.”

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The technology opportunity

Square Mile Magazine, 2014. Original article (p86).

Screen Shot 2014-07-13 at 14.13.38The technology opportunity for wealth managers
We like a good app: it’s such a quick and easy way to access information at any hour. These are features not too often associated with traditional wealth management, but this is changing rapidly as the industry is embracing technology.

Keen to woo the next generation of customers, wealth management companies are taking to apps, Twitter, Facebook and LinkedIn with gusto – some and even use photo sharing site Flickr. As people are getting accustomed to quick and intuitive technology in other areas of life, they see no reason why their wealth manager should require a phone call when an app could do the job, or even an office visit if a video link would do the trick.

“We’re moving away from a time when investment firms would act as gatekeepers to information. Instead we are sharing the information with our customers, making it easier for them to make their own investment decisions,” says Danny Cox, Head of Financial Planning at Hargreaves Lansdown. The company’s apps for smartphones and tablets let users manage their investments at any time of the day or night, and keep up with live prices and new research. On Twitter, @HLInvest handles customer queries in addition to delivering news.

“What clients want is exceptional service. They want technology that enables this great service,” says Cox when asked what features customers are looking for. The key to making technology work for wealth management groups, and not just be “nice to have”, is to make it an intuitive and interactive tool for communication. Today, over half of Hargreaves Lansdown’s new business comes through digital channels, with around a quarter of website visits coming from smartphones.

Wealth managers who meet the demand for easy access may find themselves not just more attractive to tech-savvy new clients, but also receiving more business from existing clients. If wealth managers of the past used to sit down with clients once or twice a year, granting better access today means more informed clients reaching out for more frequent consultations and trades.

“All wealth managers have seen increasing demand from clients for greater visibility on their investments, which is correct. But technology has created an interesting situation, as relatively small retail investors now have access to state-of-the-art investment reporting systems, creating pressure further up the wealth scale for wealth managers,” says Paul Fletcher, Head of Marketing at London & Capital. And this may not always be ideal: “Greater visibility could lead to more indiscriminate wealth manager selection by clients, which is at odds to most of the ‘buy and hold’ investment strategies larger clients tend to adopt.“

Still, 24-hour access and the accompanying transparency is rapidly becoming the norm, and the winners will be the wealth managers who embrace the new tools, says Amit Pau, Director at technology-focused investment and advisory group Ariadne Capital:

“[Wealth management] is an industry steeped in tradition, and the future winners will be those that embrace digital to address the rapid needs of evolving customer needs. Digital, as an integral part of the wealth management, will be a strategic differentiator by driving innovation, improving efficiency, enhancing communication, and prioritised customer convenience.”

This conclusion is supported by research from asset managers SEI, NPG, and Scorpio Partnership. Released this spring, the study found that 92% of wealthy investors are making extensive use of digital tools ahead of transactions. But when large sums are at stake, most clients still view the manager as the lynchpin:

“The research emphasises the importance of a personal delivery in the wealth management transaction,” said Marc Stevens, CEO of NPG Wealth Management. “But it also highlights that for customers to be truly satisfied, their human contact at a firm must be supported by digital capabilities.” Almost 70% of wealth management clients under 40 look at their accounts at least once a month, the research found, while nearly 45% of those over 60 do the same.

Transparency is the guiding principle at Nutmeg, the UK’s first online-only investment company. Granting customers complete access to their accounts is only one feature of this, another being the fact that the company publishes its net performance figures. Nutmeg’s technology-driven business model makes it a different animal than its sales-driven competitors, a fact which CEO and co-founder Nick Hungerford attributes as an enabler of the company’s competitive pricing.

Nutmeg’s do-it-yourself approach, and arguably radical openness, means the company is frequently hailed as an innovator. But Hungerford resists the notion that dedication to communication and convenience should be considered ground-breaking: “All companies in the wealth management sector should be operating in this way. If they were, it would drive healthy competition, transparency of service and, most importantly, better customer experience.”

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Back to school: Broadening financial understanding

Published in the London Stock Exchange Group Yearbook 2012.

Back to school: Broadening financial understanding

At the moment, around 4% of the trading volume on cash instruments are made by retail investors, but the London Stock Exchange Group (LSEG) is determined to boost this number. To this end, education is a vital component in attracting more private investors to the market. Before people can become participants they need a basic understanding of the financial products available, as well as a grasp on the ins and out of the practicalities of trading them.

But before we look into the LSEG’s efforts to aid in people’s financial understanding, there is one question that begs an answer: Why? If the private investor base is so small, you might ask, why not focus on catering to the institutional customer base? The answer to this question has to do with diversification of the order book, explains Gabriele Villa, head of private investors at LSEG. Especially for the smallcap stocks, it can also be important to aid with liquidity,

“Having a large base of private investors is very positive for the industry, and for the exchange. We believe a key element for the exchange is to have a liquid and transparent book for all assets. One way to do this is to have different types of investors trading at all times,” says Villa, explaining how having different types of traders means there will be a range of different strategies at play at any time. For example, a fund manager will approach a trade with different priorities than someone eager to strike it rich by picking the next ten-bagger. Furthermore, someone looking to boost his or her pension income, a group of investors which keeps growing now that this is increasingly the responsibility of the individual, will have a very different approach to risk than a parent investing on behalf of a child.

The LSEG considers it a priority to help educate potential investors, and the exchange will at all times have a range of resources available to this end. This includes hosting roadshows, making available dedicated web tools including educational webinars, as well as arranging investor expos. “Some of the elements of attracting private investors to the markets are out of our control, such as government taxes. But knowledge about the products is something we can help, as well as issues such as brokers’ connection to the exchange. We have a project in place for the latter,” says Villa.

The LSEG is shortly launching a newsletter for private investors, inspired by the success of a similar product in Italy. LSEG-owned Borsa Italiana has been running a derivatives-focused newsletter since 2003, and by 2010 the exchange had launched letters to cover all aspects of the markets. “The newsletters are a significant marketing channel for Borsa Italiana. External parties such as bond- and ETF issuers are invited to write for the newsletters, ensuring it becomes an interesting read,” says Villa. The LSEG first attempted a newsletter launch last year, but the project has now been overhauled to solve problems with user-friendliness; “We hope it will provide investors with a sort of official guideline.”

Borsa Italiana’s impressive retail investor base has become a source of inspiration for the LSEG. “Certainly direct participation with the market is at a higher level in Italy than in the UK, and we have in London sought stimulus from our Milanese colleagues in terms of growing UK private investor participation,” says Mauro Romano, business development manager at LSEG Equities & Derivatives. He points to Borsa Italiana’s highly successful Online Trading Expo event: “[This has] inspired us to further improve the level of the education we want to offer for engaging with private investors in an interactive and constructive manner, and to build the foundations of a larger and more active UK private investor community.”

Romano is heading up LSEG’s London Investor Show, which will take place for the second time at London’ Olympia on 26th October. The event brings together trading experts, analysts, brokers and commentators to provide attendees with a thorough range of views. The show will feature five professional investment workshops, themed on investment fundamentals, technical analysis, fixed income, trading psychology, and how to spot and take advantage of market trends. The speakers will also congregate in a panel to discuss recent market movements and how retail investors can best respond. “The London Investor Show is the UK’s premier show for private investors and active traders. This exciting annual event offers a unique opportunity to learn about investing and the financial markets,” asserted Xavier Rolet, chief executive officer of the LSEG. “Giving private investors access to a wide range of investment products and services across equity, bond and gilt markets is a key focus of the LSEG.”

The steady stream of new products available for investors to choose from is a key source for questions from private investors, says Romano. While the launch of new products makes the financial landscape more diverse and interesting for traders, it also makes it more complex and challenging to manoeuvre.

“A key concern for [private investors] is product and market information. Do they have the right information about the products they are investing in? Do they have the right tools for analysing potential investments? Do they have a feel for the market’s dynamic and how to best manage their exposure to risk? The LSEG takes these questions seriously and we have worked hard to […] understand [private investors’] needs, and to improve their access to the highest quality of tools and educational materials.”

The management of risk is a key factor in the LSEG’s education efforts, as people who trade without fully understanding the products are more likely to have a negative experience. “If people lose too much money we stand the risk of losing their custom forever. This is why we want to provide them with as much information as possible,” says Villa. Having an attractive and informative web portal is vital in order to make it easy for investors to make good choices, and the LSEG has been steadily improving the content on its site over the past two year,, by making sure it has real-time prices and up-to-date news content.

“The UK is one of the most important financial centres in the world,” says Villa. “The level of service provided by online brokers is very good, but it focuses more on unlisted products, such as forex and contracts-for-difference, which is unfortunate for us.” While it would be easy enough for the LSEG to increase the number of trades made by retail investors by adding ever-simpler products to its offerings, Villa says the exchange prefers to take a longer-term approach. In essence, the LSEG wants to be considered the first port of call for retail investors when they want to make a trade. In order to get to this point, making sure investors see the LSEG as an impartial and helpful source of information is half the job.

Yellow fever

Published in The Market, 2012.

Yellow fever
Gold is the ultimate rock in the storm for investors in times of crisis. Recent highs in the gold price has led to intensified speculation that we may be in a bubble, but at the same time, the case for gold remains as solid as ever. We take look at what drives the demand for the yellow stuff.

In times of economic turbulence there is usually one thing we can rely on: gold. When inflation takes a swing at the buying power of our hard-earned cash, and threatens the value of property and other investments, gold has proven highly resilient. And it is not a new phenomenon: during the reign of Babylonian king Nebuchadnezzar 2500 years ago, it is believed an ounce of gold would buy 350 loaves of bread – just as it does today.

The gold price has enjoyed an incredible bull run over the past decade, having seen a value increase of around 600%. Over the course of this year alone, the price has risen by 30%, and the slump experienced earlier this autumn has since been recovered, courtesy of the troubles in the eurozone. Recent economic events are a prime example of the kind of circumstance that fuels the gold price: uncertainty punishes stocks and currencies, so nervous investors run towards a safe haven. But now the big question is: can this price level be sustained?

The currency push
“A key driver for the rise in the gold price is the desire for people invested in currencies to diversify,” says Charlie Long, analyst at Singer Capital Markets. Currencies like the US dollar are traditionally seen as a safe pair of hands, but this is no longer such a clear-cut case as Western economies having a hard time. Consequently their currencies come under pressure, and investors start to look for alternatives. “In hedging your exposure to western paper currencies, gold is seen as a good bet. Bear in mind, gold has been the major currency throughout history, whilst an unbacked US dollar has only been around since 1971,” says Long.

The ongoing surge in the gold price has led to speculation that we could be in the middle of a price bubble, especially in light of the wobbles experienced in recent months. Still, there is no way to tell for sure where the price is headed; alongside talk of over-inflation we also see speculation of new record highs up ahead for gold. Consequently, each investor needs to consider both sides of the argument and use their best judgment.

“There are good arguments that gold will stay strong, or at least that it will not collapse,” says Long. “It seems to me the fundamental reasons for people buying gold will continue for at least the next couple of years.’

Gold under the mattress
The downside to investing in gold is that the asset class has no income, nor does it yield dividends. Another point to note is that while there are industrial uses for gold, demand is primarily driven by the financial markets. This is why gold is different from the other main metals, these being silver, platinum and palladium, where demand mainly comes from the industrial sector. Consequently, these metals have not enjoyed the same uptick as gold, as their price drivers are different.

As a gold investor, one option is to buy bars and stuff them under your mattress, but a better alternative for those keen to own the physical metal will probably be to buy a certificate for gold stored in a vault. Those wanting assurance they can get their hands on their gold in case of an economic meltdown should make sure to get an allocated account, as this would mean owning a specific pot of gold rather than an anonymous share of a general inventory.

A less radical approach is to buy a gold tracker, such as an exchange-traded fund (ETF). This will be designed to mimic the overall performance of gold for its investors. There are a number of gold ETFs to choose from, depending on whether an investor wants to track the commodity price, the futures price, or if you are bearish on gold, go short. A more risky approach is gold spreadbetting or contracts for difference (CDFs), or investors could buy into an investment trust specialising in the metal. Trusts and funds usually own shares in gold miners, which is another key approach to tapping in on the fortunes of the yellow stuff, but first a fair warning: gold mining is risky business.

Up from the ground
“One point most gold miners have been aware of for some time, but has somewhat been ignored by the commodity markets, is that the cost of mining an ounce of gold has been increasing at a similar rate to the growth of the gold price,” said Duncan Hughes, mining analyst at Ambrian Capital, in a report on the sector.

While the price of gold itself is largely driven by demand from the financial market, the value of shares in gold miners will be affected by a whole host of more down to earth concerns. This includes the cost of digging through less pure deposits, competition for workers, rising prices of associated costs such as fuel, plus the overhanging risk that mines come up short of their initial promises. All this means the value of gold shares have not enjoyed the same good fortune as the pure metal, but, says Hughes, if the gold commodity prices keep rising, the mining stocks should start to catch up.

As the fate of gold miners is tied to the performance of the overall market, there are however no guarantees: “If the global economy suffers a more prolonged recession, or if countries start defaulting on their debts, then gold equities will go down alongside other equities,” says Singer’s Long. “But if the gold price stays high, then gold producers will continue to generate huge amounts of cash. This will force analysts to upgrade forecasts and gold shares should rise. How many other sectors are seeing upgrades to forecasts?”