Expect the unexpected. As an opening statement, it is distinctly showbiz but it accurately reflects this year in the investment markets.
The role of the media in maximising the effect of the turbulence in investment markets cannot be understated. I am uncertain whether it is the media’s love of disaster that drives such over-coverage or a lack of news. If there was a disaster or accident with significant loss of life, I wonder if markets would make it back on to the front page. Let’s hope we do not have the chance to test my theory.
It is no surprise that clients focus too much on the markets when so many advisers make investment expertise their leading edge. We need to recognise that in focusing on value, we should not add the least safe area for emphasis, that is, the ability to second-guess the market. Given that most would accept market timing is not a common skill, I would like to move on to due diligence.
I have spoken before of my love of the 10-minute bin test. In short, if I cannot understand an investment option in less than 10 minutes, I throw it in the bin. Given the common complexity of many unregulated investment opportunities, I find it remarkable that the use of unregulated products is inversely proportionate to their most willing promoters’ tested level of competence.
I have lost count of the number of advisers who have told me that unregulated equates to no regulation – and that is scary. They seem to think they can compart-mentalise their offering when the reality is totally different. When you then look at how they determine an investor’s experience, it is clear they have not understood the process or the reason behind it.
The growth in this area is a sign that people, advisers and investors alike are searching for somewhere to go in their quest for investment stability and growth, without being competent enough to carry out due diligence.
This search is also driven by the seemingly uncoordinated actions of the world’s politicians, who seem to think they have an elastic timeframe, while those directly involved in the market become increasingly exasperated at their lack of action. Perhaps an immediate switch of all our MPs’ pensions to defined contribution would grab their attention and underline the impact of their actions or, more accurately, inaction.
Despite all of these issues, many still believe their advisory businesses continue to grow in value with perceived multiples going ever upwards. The average multiple in the US is currently around 2.4. Those in the UK promising six or above (I heard someone suggest nine times in Scotland – is this some veiled suggestion of a currency issue, I wonder?) are either pyramid-selling or making promises that are unlikely to be fulfilled.
This takes us to the need for robust processes, as due diligence will search for these in any purchase and it is the successful deployment of those processes that will have the major effect on multiples and not some perverse supply and demand scenario.
Despite the financially positive effect of processes, many still prefer the life of the artisan instead of accepting that processes reduce risk provided they are well thought out and monitored. Allowing a host of self-employed advisers to do their own thing is not smart and is certainly not the way to build a brand.
The recent employment tribunal that found an adviser with a self-employed contract was actually employed for legal purposes reopens a long-running concern that HM Revenue & Customs will deny schedule-D status to financial advisers where controls by the principal are such an intrinsic part of their employment.
I was once told by Aifa that 63 per cent of financial advisers are self-employed. The proportion of self-employed advisers has been brought about by the wish to contain the effect of increasing capital adequacy but it comes at a cost. Recent court cases on client ownership have high-lighted the lack of definition where the individual involved is not an employee.
As we await one of the most important cases in our sector to be defined, its determination, assuming there are no appeals, will impact on the use of self-employed contracts and also on the values of adviser firms. If it is determined that the clients are attached to advisers and not firms, this will send shockwaves through the consolidators or those with large numbers of self-employed advisers.
It is the trail income that drives this fight and, to make matters worse, I believe the need to reaffirm client connection (in Australia, the client has to confirm the relationship every two years) is not far away, irrespective of how the previously referred to court case turns out.
This reconfirmation would have an impact on prices but perhaps it would lead to businesses being run in a format that, by being truly client-centric, could prompt regulators to move to a less intrusive model than at present. This could be the regulatory dividend promised and it is time for the criteria to be made public.
As the unexpected becomes the norm, we need to realise that keeping the client at the centre of all that we do is the answer to more than the markets if we want a dividend any time soon.
Robert Reid is managing director of Syndaxi Chartered Financial Planners