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Independence day for investors in the US

As the technology revolution changes UK financial services, the American experience may help IFAs in predicting the future. The US is at least five years ahead of the UK investment scene and history suggests we have more than a tendency to follow US trends.

The American public are more financially aware than ever and streets ahead of the UK. Bars and restaurants buzz with talk of the latest hot investments while bookstores&#39 bestseller lists are topped by titles such as How to Become Rich Through Online Trading and Girls Just Want to Have Funds.

But advisers say business is booming and the growing interest in the industry has been beneficial to them.

Los Angeles-based adviser Phil Cook says: “People are much more aware and more interested in investments than they were but they don&#39t actually know much more than they did before. Most people who have money still feel the need for advice.”

Instead, Cook cites changes in commission and fees as the biggest shift in the US intermediary industry in recent years. He says: “People are much more aware of the compensation advisers take and, as a result, we have seen a big switch from commission to fee-based brokers.”

In effect, consumers&#39 growing awareness of the industry is ensuring that standards remain high.

The established investment houses, such as Merrill Lynch, owner of Mercury Asset Management in the UK, used to dominate the US advice market but have been presented with competition from all sides.

Regional brokerages and independent financial planners have moved in to broadenconsumers&#39 options.

Cerulli Associates is a financial research and consultancy firm based in London and Boston. Consultant Dennis Gallant says: “To my mind, the major changes in the past decade have been in choice and objectivity. The advice market used to be entirely dominated by the large investment houses and these would have a big influence on what was bought and sold.

“People can now get a lot of information for free on the internet and brokerage firms have been forced to concentrate less on the products and more on the service they are providing.”

But Gallant believes advisers have made a definite shift towards higher-net-worth clients. Increasingly, lower-income investors are the ones who take advantage of the internet&#39s vast resources and cut-price deals.

In the UK, advice still spans a broad range of age and income brackets. Around 75 per cent of UK investors seek advice before buying unit trusts or Oeics but those seeking advice in the US represent just under 60 per cent. Much of that gap is accounted for by a younger generation of investors who still opt for some form of advice in the UK but do not in the US.

UK IFA Chase de Vere investment adviser Justin Modray believes British investors are split into two broad categories. He says: “First, there are those in their 50s and 60s who are retired or are about to retire and have lump sums which they wish to invest to supplement their pension. They tend to keep a range of investments which are usually fairly low risk.

“The flip side is usually late 20s and early 30s young professionals who are starting to look at saving on a regular basis. They tend to take a far more aggressive approach with higher risk because they have plenty of time to experiment with their investments.”

While this younger generation generally experiments with unit trusts and Oeics in the UK, their US counterparts are moving into dealing in individual stocks through discount brokers. Mutual funds have enjoyed fast growth in the US over the past decade but much of the media are now predicting their demise.

However, mutual funds seem to be finding renewed interest through other channels. The Investment Companies Institute, which is the equivalent of the UK&#39s Autif, remains confident that mutual funds have a strong future.

ICI spokesman Chris Wlos- zczyna says: “Mutual funds are still very popular, especially with the growth of self-directed retirement plans such as 401(k). Retirement assets account for about a third of all mutual fund assets in the US.

“Equally, the advice market is still a very strong distribution channel. A number of complicated factors come into play when managing investments and retirement plans, and people do not have the time or usually the expertise to handle these.”

Britain does at least lead the world in something. It seems that, for the third year running, London is the principal investment management centre of the world, at least so far as institutional equities are concerned. Something like £2,500bn is controlled in this fair city of ours, in an industry which employs in excess of 40,000 people – 50,000 if you include those looking after the portfolios of private investors. Both our pension industry and the insurance funds that we run in this country are topped only by the US and Japan in terms of size.

All very good news, you may think, but there is a sting in the tail. More and more of our investment managers are falling into foreign ownership. The money may be looked after here but the businesses are controlled from overseas.

The significance of this was brought to mind when I read the annual league table of global brands published each year by Interbrand in conjunction with Citibank. It lists all those world brands estimated to be worth $1bn or more. There are 75 of them. How does it arrive at its valuation? Well, it endeavours to work out how much money each of the productscarrying a particular brand name is likely to be making at present. Most of this information will be in the public domain but there is a degree of subjectivity involved in estimating future profits and attributing risk. Not every well-known brand is present. Lego, Levis and Mars are owned by private companies which do not disclose sufficient information to make a valuation possible. Nevertheless, you have to start somewhere and, rather like the ownership of many of our leading investment managers, most of the top brands are American.

Coca-Cola is top of the tree, as it has been for some years. But Microsoft is now hard on its heels. Indeed, four of the five top brands are in new economy industries, with IBM and Intel up there, along with Nokia – the first overseas brand placed at number five. Britain, sadly, does not feature too early. Reuters is the top-rated UK-owned brand at number 46 and it only arrived in this year&#39s table because media is included for the first time.

Media&#39s arrival demonstrates both the reasoning behind which brands to allow as eligible and how the world is changing in so many industries at present. Interbrand has taken the view this is a global brand table, so companies such as Wal-Mart are excluded, despite the undoubted value of its brand, because the bulk of its profits come from the domestic US market. Overseas, Wal-Mart operates under different names. As a result, it can hardly be described as global. Media has been allowed in because this industry is going global. Most of the major players are accessible all around the world. Indeed, it is sometimes difficult to know quite what constitutes media. Is Sony now a media brand? MTV is the highest-placed pure media operation at 37. It is, of course, American.

You only have to look down the list of major brands to see how US products now dominate world consumption. There should, perhaps, be no surprise that they are gaining something of a stranglehold on the investment management industry, too. This need not be a bad thing. The American approach of managing money has long been more progressive than that adopted in other financial centres.

Talking of financial services, it was disappointing that there was an absence of financial brands of any nationality. True, American Express was there at number 19 (unchanged) but that must rest on their card-issuing capabilities. Virgin was absent but whether this was because of lack of current profits or the inability of the researchers to gain the requisite information from Sir Richard Branson&#39s private companies is, sadly, not information I was able to unearth.


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