Credit Suisse's multi-manager funds took in almost 20 times more money than Henderson's and close to four times Jupiter's in the fourth quarter of 2003. Although this is due to many reasons – not least its decision to scrap front-end loads – there does seem to be a gap developing between the main fund of fund players and the rest. Which do you see thriving in what is an increasingly competitive market?
Merricks: As ever, it will be those that market effectively to begin with, followed by those that perform well over time. I have always considered multi-manager funds a bit of a cop-out if you are supposed to be an investment IFA yourself but their growing popularity suggests that I am in the minority.
Credit Suisse will remain strong as long as Rob Burdett and Gary Potter are in charge but Isis will not rest until they have got a significant market share and their investors' protection feature offers that little extra which is used to distinguish one offering from another in a crowded market.
Talking of a little Xtra, Insight's parents are bringing their offspring up well and their financial clout bodes well while Artemis and New Star are certain to produce good returns due to their fundamental beliefs in the way in which they run money.
Patel: The Henderson brand is not what it used to be since its flourishing days in the 1980s. This may be why its multi-manager side has not attracted as much money as some of the bigger players. Furthermore, its performance has not been up to scratch compared with the likes of Credit Suisse and this has hindered inflows of money. This is a shame as John Husselbee is well respected in this field but performance needs improving.
Davidson: Currently, Jupiter, Credit Suisse, New Star Portfolio (ex-Edinburgh team) are winning on performance and, yes, if this continues I feel they may pull away from the pack but they will have to compete with big budget marketing teams, as all major groups have recently launched fund of funds. Competition is fierce.
Credit Suisse's constellation portfolio, Fidelity's new Fof and Skandia's manager of managers all look promising. In addition, both Jupiter and Credit Suisse are available within fund offerings on fund supermarkets which will help to leverage this product further.
Merrill Lynch Investment Managers has seen yet another major departure as Elizabeth Corley – head of several retail desks – leaves the group to pursue other interests. Coming so soon after the departure of head of UK retail Michael Jones, speculation has mounted that MLIM is not committed to the retail market. Do you agree?
Merricks: The problem with companies such as Merrill Lynch and others with big banking backgrounds is that they tend to be institutionalised. By that, I mean they are used to be run along megacompany lines and they will nearly always be the last to respond to the smaller retail investors' needs.
Merrill may think it is committed to the retail market. More to the point, is the retail market bothered about them?
Patel: I have always been in doubt about Merrill Lynch's commitment to the retail market, particularly in its mainstream funds. A spate of departures over several years and uninspiring performance certainly questions about their commitment. However, all is not lost for their retail arm as they have been successful in the more specialist areas such as gold and natural resources but I am not sure how long the specialist side of the business can hold the fort.
Davidson: It is unsettling and not good for investor relationships if there is a regular turnover of personnel at fund management houses. It raises a key question about their standing in a very crow-ded market.
Jupiter is polling IFAs about regulatory changes in a move which could see the company introduce performance-related fees. IFAs will be offered a range of options, the most popular of which will be implemented either with its existing funds or with new products designed specifically to meet advisers' needs. Do you think this is the way all groups should develop funds in the future? Can you see them following Jupiter's lead?
Merricks: It is hard to be critical of Jupiter's approach as it suggests that it is listening to what IFAs want from them. The problem is that I am not sure that IFAs know what they want or whether they will use it if they get it, particularly if multi-man-ager funds continue to dev-elop as they are.
Performance-related fees are a good thing in my opinion as long as they penalise underperformance as well as reward out-performance. If something is seen to work, others follow. Good luck to Jupiter in their initiative.
Patel: If this comes to fruition, performance-related fees should strengthen Jupiter's fund range and other groups should look to offer this as well. However, the success of performance-related fees will be dependent on the benchmark used and how the fees are worked out.
Provided that a suitable benchmark is used and the fees are reasonable, then I see no reason why investors would not be willing to pay for additional outperformance but by the same token, they should not pay more for underperformance.
Davidson: It will be very complex to devise a performancerelated fee structure. There are a number of issues that need to be addressed. How can you make it transparent and easily understandable? Do you benchmark against the average? You have to make money even in a falling market so surely it cannot be based on absolute performance and will there be different tiers? If these issues can be resolved, there may be something in it but it is not going to be easy. Ultimately, it appeals but I think the practicalities make it almost unworkable.
The FSA and Financial Ombudsman Service suspect they have discovered inappropriate collaboration between providers and distributors as part of their work into precipice bonds. According to an ABI note, this took the form of providers collaborating with IFAs and stockbrokers to sell products on the basis of volume rather than suitability. If this is proven, how much damage do you think this could do to the industry, especially given the attention heaped on the split-capital investment trust debacle?
Merricks: It is just further confirmation in the public's eyes that financial services are out to make money from them rather than for them. I think it is difficult for the public's perception to sink much lower but there will always be something to test this. As with splits, the good get tarred with the bad. I suppose we will have to wait for a “split-protected property fund” to go belly up before we can reclaim any of the ground that has been lost. Of course, IFAs and stockbrokers could refuse to sell them in the first place. Problem solved, then.
Patel: This is going to be the next major crisis for the financial services industry. A lot of these products promised some form of guarantee such as a high level of income and while this promise may have been met, it has been at the expense of capital. I do not believe the true risks of these products have been highlighted effectively on the marketing literature. This is going to lead to an awful lot of mistrust between investors and advisers as well as investors and product providers.
Davidson: The important focus is the investor. Commercial arrangements can benefit the investor where, for instance, discounts are offered because of the weight of the IFA or provider. It would be premature for us to comment on suspicion of the FSA and or the FOS until the full picture emerges.
Intelligent Money has launched its bid to claim back trail commission for investors. Early indications are that some providers will refuse to deal with IM but it is unclear at this stage which are prepared to accede to its requests. With investor confidence in the industry at such a low ebb, however, do you think there is a groundswell of public support for its campaign? How worried should brokers – especially discount brokers – be about the fact that IM has garnered so much publicity?
Merricks: I was called at 6.15pm on a Friday by a journalist who had been told to run the Intelligent Money story that Sunday because of Max Clifford's involvement so it is not surprising to see the publicity it has achieved. I genuinely believe that the clients that lean towards using them will be the Virgin-type client who is more concerned with cost than performance.
Discount brokers should be worried as someone will always come along with a cheaper alternative. I am interested that IM has already made a play for the advisory ground and I think it will find this a wholly different ball game. The same people that are worried about 0.5 per cent a year on their investments are going to balk at £100 an hour fee for telling them what to do. Unless, of course, the £100 an hour is paid for by reclaimed renewal commission. But that would be a bit smoke and mirrors, wouldn't it?
Patel: The public may well support this initially but when they have to get their chequebooks out every year to pay £35, I think they will question exactly what they are paying for. If IM's clients have any queries, who is going to service these clients? Are the product providers going to set up dedicated helpdesks? Unlikely. I do not think that discount brokers have a lot to worry about in the longer term as they at least provide a reasonable level of service to their clients.
Davidson: Anyone who has seen a commission statement and the number of small ent-ries will know that IM has its work cut out. Intelligent Money's legacy will be that they have put a spotlight on what an IFA does to merit the trail commission so IFAs will need to think about how they justify this fee. For ongoing relationship-based services, there should be no problem.
Andrew Merricks, partner, Simpsons Professional View
Meera Patel, senior analyst, Hargreaves Lansdown
Amanda Davidson, partner, Charcol Holden Meehan