Advisers’ juggling skills continued to be tested in 2017 as they faced an onslaught of regulatory and business challenges.
The FCA asset management market review, getting to grips with compliance for European regulations Mifid II and Priips, and increased oversight of defined benefit transfers have filled advisers’ agendas this year.
And 2018 will bring little respite as advisers and providers will continue to be impacted by work including the regulator’s platform market study, and market trends such as record flows into passive funds.
As well as this, uncertainty remains around the definition of advice and suitability, while Brexit negotiations loom large in the background.
Money Marketing analyses the key events that shaped 2017 for the adviser community.
Picking apart platforms
2017 saw the publication of several key FCA reports that will continue to shake up the investment and advice sectors in the coming years.
Among these is the asset management market study final report, which led to the platform market review.
The FCA outlined a series of remedies in an attempt to fix many of the long-standing issues in asset management, such as boosting transparency of charges and fund objectives, the need for independent boards, and the cost-effectiveness of advisers and third parties.
But the FCA has not limited its scope to product manufacturers. As the industry consolidates and the lines blur between fund management and distribution, the FCA quizzed providers on the role of platforms in the investment value chain.
These debates were unravelling while the industry prepared for Mifid II.
Seven Investment Management platform head Verona Smith says early planning has been crucial for advisers with Mifid II and the General Data Protection Regulation, which will be implemented in May next year.
She says: “2017 was the year when many of us realised that regulatory change is the new norm. With advisers busy running their businesses and servicing clients, regulation might look like a behind the scenes issue, but it is always ‘behind you’.
“Service quality will be absolutely critical at a time when advisers are facing more regulatory pressure than ever.”
Old Mutual Wealth platform proposition head Tom Hawkins says the regulator is right to look at the platform market this year, given its relative infancy and rapid growth.
He says: “The retail advised platform market grew at a tremendous rate in 2017 and we believe that is set to continue, driven by legislative developments and the increasing need for advice in the UK retirement market.”
Aegon pensions director Steven Cameron argues the platform market is already showing many features of a competitive market. However, on the vertical integration concerns raised by the regulator, he urges the FCA not to lose sight of the role asset managers play for clients.
Almost all the market’s worst economic and political fears failed to materialise in 2017, with the result that risk assets generally did well and some areas even began to look a bit bubbly, but there were enough lingering doubts to ensure that the long-awaited bond rout didn’t happen either.
Yes, the Brexit talks dragged on, but the French, Dutch and German elections offered little succour to anti-EU parties, while President Trump’s talk of tax reform was enough to keep investors interested, despite an absence of progress on infrastructure spend and more sabre-rattling on trade. Chinese growth held up, central banks largely remained accommodative, those who tightened policy did so at a global pace and global growth began to gather a little momentum, even as inflation remained subdued.
After spending much of this decade in the doldrums emerging market equities beat developed ones hands down, with Asia leading the way, helped by better growth, more helpful demographics and far lower debts relative to the West.
America warmed to the Trump trade but underperformed the MSCI World in total return sterling terms, even as the Dow, S&P 500 and Nasdaq set an array of new all-time highs, owing to a sub-par dividend yield, a slide in the dollar and ongoing concerns about valuations which look very lofty relative to almost any period in history bar 1929, 1999 and 2007 (none of which ended well). Other niggles also meant growth and momentum stocks outperformed the financials and value names which would have normally done best, had global growth truly clicked.
Nor did inflation expectations rise much, as wage growth remained subdued, to the frustration of bond bears. US 10-year treasury yields are ending the year a fraction below where they began it and UK gilt yields only a touch higher, to suggest not everyone is convinced by the reflation trade.
In theory a lack of volatility at the equity index level should have given active fund managers little chance to shine but the range of stock and sector performance was wide, allowing them to showcase their skills in the face of the growing onslaught from passive funds and relentless fee pressure, although it was another tough year for value-based strategies.
Russ Mould is investment director at AJ Bell
The FCA is concerned about whether vertically integrated platforms are starting to push their own products to the detriment of other investment firms.
Cameron says: “For the vast majority of investors, platforms offer improved value over older, legacy alternatives, and the FCA should be looking to remove barriers to bulk ‘upgrade’.”
Consolidation comes to town
Consolidation and replatforming were the key trends in the platform market in 2017, and commentators believe this trend is not about to stop.
Altus senior consultant Ben Hammond says platforms have been increasingly trying to differentiate themselves from their competition as profitability remains a key issue in the sector. He also notes more players have concentrated on operational costs this year to improve services.
He says: “All platforms need to differentiate themselves. For Aegon and Cofunds, Aegon is more about pensions, as opposed to Cofunds, but they are coming together. Then you have new players – dozens of these – trying to do something different or they will be bought.”
Novia Financial chief executive Bill Vasilieff is upbeat on the state of the market. He says platforms have had a successful year on the back of post-pension freedoms pension transfers and buoyant markets following Brexit.
In addition to Mifid II costs, however, Vasilieff notes the large sums being spent on replatforming projects, many of which have gone over budget and been delayed. Reports published this year show total replatforming costs could top £800m.
The fallout of BHS and Tata Steel has challenged many people’s perceptions of the security of defined benefit provision
Technology provider FNZ potentially has the heaviest replatforming workload, working on projects for Old Mutual Wealth and Aviva, among others.
Hawkins says: “Old Mutual Wealth has quite a bit of experience with this particular challenge. However, this year we made strides in putting our replatforming on track.”
The hot topic for pensions was DB transfers and predictions from experts around the risk of a future misselling scandal. In October, the FCA published data that showed only 47 per cent of DB transfer advice was suitable.
Hargreaves Lansdown policy head Tom McPhail says the DB transfer debate will run into 2018 as the attention of politicians and FCA scrutiny continues.
He says: “The fallout of BHS and Tata Steel has challenged many people’s perceptions of the security of DB provision. This is in spite of the relative stability which has returned to scheme valuations after the excesses of 2016. However, high transfer values and the lure of pension freedoms has driven DB transfer activity, to the joy of some and the alarm of others.
Despite this, McPhail welcomes the fact 2017 created a period of stability in terms of pension legislation and tax reform; mostly due to the Brexit “beast” politicians have attempted to control.
On a more pessimistic note, McPhail says there is a continued lack of clarity around the definition of advice and savers still do not have a clear vision of what a “good retirement journey” looks like two years after pension freedoms.
He says: “A lot of good work has been done and answers are emerging but the fact we have the FCA’s Retirement Outcomes Review and the DWP Committee’s pension freedom inquiry is indicative of policymakers’ concern investors may not be as well served as would be desirable.”
Asset management 2.0
2017 was not a restful one for the asset management industry. From the FCA market study to preparing for Mifid II and Priips, the industry is slowly waking up to its new defining phase. Mifid II has forced firms to decide whether or not they will absorb the costs of research, which must be separated from trading costs.
Large fund houses that have decided to absorb these costs say it will not impact their balance sheets but small players, as well as the quality of research, are set to take a bigger hit going forward.
Increasing regulation and pressure coming from the rise of passive funds is contributing to consolidation among firms, including this year’s mega-merger between Standard Life Investments and Aberdeen Asset Management.
Many traditional active managers are also venturing into launching passive strategies.
Copia Capital Management quantitative investment manager Hoshang Daroga says investment management firms are also investing heavily in technology to administer investments as well as manage them. He says: “Even though there have been net outflows from the active managers, active managers using quantitative models are seen to be preferred by investors over ones that make qualitative investment decisions.”