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Wrap up the wealth

AITC director general Daniel Godfrey believes that firms embroiled in the FSA&#39s splits&#39 investigation may be shooting themselves in the foot by shunning its collective compensation scheme over fears of litigation. He says if a fair compensation package could be thrashed out, not only would most potential claims fall away but those that did not would be looked upon unfavourably by the courts. Do you agree with him? Should firms try and draw a line under the problem?

Scott: Yes, I fully agree with him. Companies involved in splits knew exactly what they were offering. They lied to IFAs when marketing them and we believe they should do the honourable thing and settle the complaints.

Haynes: The splits&#39 crisis has proved very damaging to the investment trust industry and has shaken investors&#39 confidence in this area. I agree in principle that the sooner the firms can agree the collective compensation scheme, the sooner that the bad publicity which has tarnished the whole investment trust industry will disappear.

However, the companies involved are understandably going to be very cautious of admitting liability before they have full details of the evidence against them. Under the current proposals, the costs of compensating investors could spiral as admitting liability would, in all likelihood, lead to a flood of more complaints.

Schooling: It would be very good to draw a line under the whole issue but I doubt that it is as simple as that for the parties involved. The one thing that I do not think should happen is for companies to pay up just to make the problem go away if they do not think that they are liable. I do agree though that it would be preferable to try to sort it out away from the courts.

Threadneedle communications director Richard Eats believes that execution-only business is unlikely to show signs of life for at least another 12 months as groups struggle to devise ways to attract investors under prohibitive advertising regulation. He says that rules banning groups from basing ads on performance could continue the slump in direct business until next year. Do you think there is anything groups or execution-only brokers can do to boost business before then? Do you think the regulations are unfair?

Scott: No doubt, execution-only brokers play their part in the industry but, in my opinion, all clients should seek some form of advice before buying a product. The public should realise that all IFAs can do execution-only business but, in the best interests of the client, advice should be sought.

Haynes: I agree that exec-ution-only business will remain subdued for some time but I believe that stringent advertising regulations are not the key reason. Many investors have been badly burnt by falling markets between 2000-02, especially those who invested on the back of compelling past performance figures.

I think that fund management groups and execution-only brokers need to regain the trust of investors through providing objective, informative information to help clients make an informed decision. If the regulations stop the use of salacious past performance advertising, then they should be welcomed.

Schooling: Some execution-only firms are showing good signs of recovery already. We have noticed a reasonable increase this year compared with last and I feel this is primarily down to the market, not advertising.

I take Richard&#39s point that the new advertising regulations will affect the “direct market” both for the companies themselves and via execution-only brokers but I think that some of the changes were needed to protect the investor, especially when groups were advertising past performance on a fund where the fund manager had long since left.

The FSA is introducing new rules for UK authorised collective investment schemes in a move aimed at giving investors access to a wider range of investment opportunities. Among other benefits, the rules remove the existing category of non-Ucits authorised funds, give fund managers more flexibility to manage portfolios and permit the introduction of performance fees. What impact could these have on the industry? Will fund managers now design products better suited to the needs of investors?

Scott: At long last, rules are being introduced to protect the investor further. Managers will now have to pay more attention to the money they are running, especially as the performance will affect their own pockets.

We tend to invest client money with the best-of-breed fund managers where the fund managers&#39 own money is in the fund already. I do not really think that new products are needed but perhaps charges should be looked at in more detail. If the products could move more to institutional charging structures instead of retail, then products will become cheaper. Whether or not they can run on these margins is another question.

Haynes: I think these changes should be welcomed. They will enable the industry to provide investors with access to a wider range of funds, including enabling FSA-authorised funds to use techniques and strategies usually associated with hedge funds.

In addition, managers will be able to levy performance fees and cut down the bulk of information sent out to investors. I think that the new regulations will lead to companies becoming more innovative and provide them scope to tailor products to the needs of investors.

Schooling: The widening of the investment rules is a good thing generally. In recent times, when market conditions have been difficult, funds with the ability to make money while markets are going down would have been very useful. The one thing that the fund management industry needs to be is transparent.

However, I would prefer to see new funds launched that have the ability to invest in different vehicles rather than confuse investors, many of whom prefer the simplicity of long-only funds and would struggle to understand the potential complexities of these new investments.

We also welcome the ability to have performance fees. We feel that 1.5 per cent should be the standard fee for first/second-quartile performance and fees should be reduced for funds that are third or fourth quartile for two consecutive years.

JP Morgan Fleming&#39s European team raised more than $2bn in the first two months of the year. Chief investment officer Chris Complin attributes its success to the strong performance of many of its stylebased funds. Is style investing still popular with your clients? Do you think that JPMF will continue to pull in such huge inflows?

Scott: I think that stockpicking, pragmatic, contrarian fund managers are where you want to invest as opposed to what is in vogue at the moment. Investment cycles show that eventually the style approach will come and go, at which point, the inflows to the JPMF will dry up.

Haynes: Style investing is suited to the more sophisticated investor. The majority of private investors are seeking actively managed funds that do not show any discernible style bias and can demonstrate outperformance during different investment climates. Not many investors have the ability to time their investments to switch successfully between style funds at the right time. JPMF need to produce consistently strong performance if they are to continue to attract such large inflows of money.

Schooling: I think style investing has fallen out of favour. The previous swings that we saw from growth to value seem unlikely to return in the short term and, while the market always moves between the two, good stockpicking is now far more important than the style bias of a portfolio.

Whether or not JPMF are able to continue to pull in such inflows will be dependent on them maintaining performance.

American Express Financial Services Europe is forging strategic alliances with five high-end IFAs to roll out a wrap account platform designed to ease the administrative burden on wealth managers dramatically. Do you think that the platform, which is being aimed squarely at firms with high-net-worth clients, will prove to be a success? Is there a big market for such a comprehensive wrap, which integrates fully with IFAs&#39 businesses?

Scott: Excellent wrap accounts already exist, with Transact up and running. Without a doubt, these will be the future for clients as the structures are sound and portfolio admin is easier to maintain.

I do, however, believe they will take some time to become popular because of a lack of understanding and the old adage of having all your eggs in one basket. Charges on these wraps may also be an issue and clients should speak to IFAs before buying.

Haynes: Wrap accounts have already proved to be very popular in the US, and there will undoubtedly be high demand for such a facility that eases the administrative burden for advisers and clients. Such a platform is ideally suited for high-net-worth clients who operate on a fee-basis and, within this marketplace, I would expect the American Express proposition to be successful and be followed by many similar offerings from other providers.

Schooling: Our experience is that linking to a wrap/ supermarket does not cut down your administration immediately but will do so in the long term. I believe that the wrap/aggregation concept will mean different things to different clients and you need to be able to offer what the client needs.

As for American Express dealing with five high-net-worth firms, I am sure that this is a good place to start but they need to make sure that their offering is suitable for all IFAs, otherwise they will struggle to be profitable.

David Scott,consultant,Alan Steel Asset Management,


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