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Inside Edge: Peter Dornan

The basic criteria used to select the most appropriate financial products for clients are hardly startling. A tailored product, consistent investment performance across a range of funds and good service support are key elements to consider. However, the financial health and outlook of the provider require a more significant evaluation and this has quickly installed itself as the number-one factor for advisers and clients.

Any successful company in any industry needs capital to support its existing position and to finance its future expansion and development. An indication of a company&#39s strength and ability to do this is its solvency – the difference between the liabilities and assets held – or free-asset ratio as it is also known.

Recent well-publicised returns to the FSA indicate that companies within the life and pension industry as a whole have reducing levels of free assets. Without doubt, relying on the free-asset ratio in isolation is a flawed method of assessing financial strength but the trends can be meaningful.

Turbulent worldwide equity markets can pose significant longer-term dangers and, along with falling bond yields, can impose quite a strain for weaker offices. Never has so much attention been paid to providers&#39 health and ability to weather equity market falls.

There is considerable work going on in terms of ensuring the correct balance of equities and bonds in the with-profits vehicles which have been the engine room of success for many companies during periods of unabated growth in the equity markets. The point here is that not only will this impact on bonuses but it may stifle planned expansion or force companies down a debt route to finance future initiatives.

But debt is not necessarily a nasty word. Analysis is also required of a company&#39s processes, its identification of future trends and the plans and strategy to implement change. Ability and consistency in the senior management team is worth looking at closely.

Within the organisation, is there a strong culture based on a clear strategy and common standards for capital and target returns? This will result in well-capitalised operations and a consistent pricing of new business to achieve standard returns on investment. This, combined with a key focus on reducing costs, will lead to a high-quality operating performance. In such a fluid and competitive marketplace, it is crucial that serious financial services players have the resources to meet key objectives such as attaining profitable growth while looking to create better futures for their stakeholders.

So it is not just about free assets. It is about clear and consistent strategy, having the faith and understanding that this will be carried through to implementation and, where required, the ability to address any capital requirements. This may pose different questions for proprietary and mutual companies, with the latter perhaps more restricted in their options in turbulent periods. At the same time, quoted companies must convince the markets to continue investing in the proposition. For companies with a strong parentage, the issues are different again.

In this context, the detailed information and analyses available from Standard & Poor&#39s and Moody&#39s, the transparency that backs the ABI&#39s Raising Standards initiative and the views of independent assessors who are not afraid to get off the fence – such as the excellent Ned Cazalet – should form a core part of the advice chain. And that should startle no one.

Peter Dornan is director of group businesses at Aegon UK.


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Man Investment Products – Man Glenwood Multi-Strategy GB

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