When bad can also be good

By Gerald Ambrose, CEO, Aberdeen Islamic Asset Management

Things look bad in Malaysia. In fact, things haven’t looked this bad for quite a while. Cheap oil has slashed revenues from crucial oil and gas exports while awkward questions over the inner workings of a government investment fund have further damaged investor confidence. The stock market is down, as is the ringgit, and capital has flowed out of the country.

Some pundits blame today’s woes on Malaysia’s failure to fix its problems after the Asian financial crisis, when the country introduced capital controls to keep money within its borders. They say complacency has led to a loss of competitiveness and a tendency to close ranks when challenged.

Click here to read full article

MAS attacked over ‘waste of time and money’ report

The author of an independent review into the Money Advice Service has slammed the organisation for “wasting time and money” by carrying out a review into whether it replicates the work of other bodies.

In March, former Consumer Focus chair Christine Farnish published a Treasury-commissioned report calling for the MAS to be overhauled and to slash its money advice budget.

The report also warned the MAS was not delivering good value as it was duplicating services offered by other organisations.

Earlier today, Money Marketing reported that MAS was continuing to investigate Farnish’s conclusions, and was carrying out its own work into whether it was replicating other bodies’ work.The MAS plans to publish its findings in a report in November.

MAS chief executive Caroline Rookes described Farnish’s work on duplication as “light touch”.

She said: “It was a short study with a very small team and in the time available and with the resource available it just wasn’t possible other than to do a fairly light-touch look at what appeared to be out there.

“Those services may be very good, but we don’t know if they’re only reaching the customers of one organisation or people only living in one area, and there’s also the quality of the product they provide and the key question of how impartial they are.”

But Farnish says: “This strikes me as a complete waste of time and money.

“Anyone who has got a laptop or a mobile phone can search for advice and find a whole range of different providers coming up, many of whom are excellent.

“Caroline would say they are the only one set up by government to be impartial, but there are plenty of other providers out there who give good, honest advice.”

Farnish also points to the findings of the Treasury select committee, which said in 2013 that the MAS was replicating work already being done in the private and charitable sectors.

She adds: “But the MAS seem to be ploughing the same old field again.”

Rookes says: “The Farnish review provided a number of recommendations to streamline and improve the work of the MAS and we are actively working to implement these. The changes we have already undoubtedly contributed to the excellent set of results we issued this week: we continue to expanded our list of partners, we have reduced our marketing spend by a third, and our debt advice projects helped more than 91,300 people in the quarter, more than ever before.

“Our focus remains on continuing to support the 5.5 million people that come to us for support each quarter, continuing to implement the changes the Farnish review recommended, and launching a financial capability strategy for the UK later this year.”

Is global market turmoil just a volatility event?

The current market turmoil is “just a volatility event” and investors should not ignore the positive fundamentals still coming from developed markets, experts argue.

On Monday, global equity markets slumped as the rout in domestic Chinese equities continued, mounting fears that the world’s second-largest economy could slow down much more quickly than had previously been thought, potentially dragging down other economies with it.

JP Morgan Asset Management European Equity Group managing director and portfolio manager Stephen Macklow is not discouraged by the fall in the markets led by China, claiming it is “just a volatility event” and that global economic fundamentals “haven’t really changed”.

He says: “It is very clear emerging markets are under pressure. One of the things that we do know is although you get short term volatility and the market starts to trend very sharply in one direction, we don’t think fundamentals have changed.

“You’ve got the eurozone, which continues on its recovery. In the US, the Fed made it clear that recovery is on track and expects inflation to get back on target. In the UK unemployment figures also look good as well as the manufacturing figures for Germany, which exceeded expectations.”

About 4 per cent of eurozone exports go to China but around 7 per cent go to the US, explains Macklow, so although there is pressure from Asia Pacific “there is a counter balancing improvement elsewhere”.

F&C’s multi-manager team, co-headed by Gary Potter and Rob Burdett, also says the slowdown in emerging markets will have an impact on exporters and commodities stocks, but those low commodity prices will continue to be a tailwind for Japan and Europe.

The firm says: “The deflationary forces of lower commodity prices will also allow developed markets’ central banks to keep interest rates lower for longer and this volatility has greatly reduced the chances of the US Federal Reserve raising interest rates next month.

“Global growth will obviously be impacted by a slowing China and emerging markets, but unless growth collapses, some markets may well have over-sold in the short term, with the caveat that they may fall further yet.”

Aviva Investors head of multi-asset Peter Fitzgerald also doesn’t think the recent events are a warning of a significant global downturn or recession.

He says: “We have added to equity positions in continental Europe, Japan and the US in recent days, and view any further bouts of extreme volatility as an opportunity to add exposure to these regions. We continue to prefer prospects for developed markets over emerging markets and have no commodity exposure.”

On the other hand, Macklow hasn’t made any changes to his portfolio, trusting in companies’ valuations which he believes remain attractive.

He says: “We looked at valuations and improvements in earnings. The valuations got more attractive and nothing really changed in improvements in earnings.

“In our portfolio we are more focused on domestic earnings and these are still holding really well and that is consistent with the picture we are getting from credit, money supply and PMI.”

He concludes: “The one thing that surprises me is the fall in the US dollar, which is very contrary to expectations. This happened maybe because the dollar has been too strong causing US companies to hold their earnings back earlier this year.

“However, the Fed has been very clear about the fact that the monetary policy tightening process will be gradual and will probably finish at a lower interest rate that they finished in the past, but nevertheless if you get increasing interest rates in the US that should be a support to the dollar.”

Pensions minister rules out means-tested state pension

Pensions minister Baroness Ros Altmann has ruled out the Government returning an element of means-testing to the state pension, warning it would “undermine” saving.

A recent survey of 208 advisers conducted by Aegon found only 4 per cent think the state pension will be in its current form in 30 years’ time.

In addition, two in five (39 per cent) think the Government will revert to means-testing and 41 per cent expect the triple lock will be scrapped.

But Altmann says: “Such speculation is irresponsible and unfounded. The new state pension will hugely reduce the reliance on means-testing ‎for future pensioners.

“Means-testing would undermine the important incentives to both save more or work longer for those who want a better later life income. We will keep our promise to protect the triple lock.”

From April 2016 new retirees will receive the single tier state pension of roughly £150 a week.

However, two thirds of people retiring next year are due to miss out on the full amount, mainly because they were contracted out of the state second pension.

The Government has also committed to the triple lock on the state pension for the life of this parliament. This means payments will rise by the highest of earnings, CPI inflation or 2.5 per cent.

Aegon managing director of retail Duncan Jarrett says: “It’s concerning to see such a resounding number of advisers foresee more uncertainty on the horizon.”

He adds: “We need to get better as an industry at highlighting to individuals how much they are due to receive, so they can then work out how much private pension they need to make up the gap between this and their aspirational income in retirement.

“If someone were to buy a state pension at retirement it would cost at least £273,000 as a one off payment to secure a weekly income of £151.25.”

Ian McKenna: Resisting the sales push on adviser software

In my last column, I considered how recent developments in the world of industry software have changed adviser priorities when selecting systems. This week, I want to examine a factor that has been a constant challenge: defining the right requirements for any new system.

In my experience, when software projects fail to deliver what the adviser wants, it usually boils down to one of three things. Two of these – the importance of training and having suitable change management processes in place – I will address in a future column. This week, I want to focus on how to make sure you get the system you need rather than the system someone wants to sell you.

Software suppliers understand exactly what the strongest elements of their systems are and, given the opportunity, will build any demos around them. For this reason, it is crucial to take firm control of any presentations that take place and ensure each potential supplier goes through exactly how they address the functions most important to you.

All too often, the first thing an adviser firm will do when considering new software requirements is ask a number of suppliers to present their solutions to them. However, this should be one of the last things on the list. Rather than looking at what suppliers have to offer, firms should conduct their own internal processes in order to identify what their priorities are across the business.

One technique I have seen used well is for each part of the business to identify a list of 10 things that are really important to them, 10 that would be nice to have and 10 that would be a real bonus. Small firms with just a couple of staff can still use this approach but might want to look at it separately for each of the core areas of activity. Having created these lists, compare them to identify which features come up most frequently.

From here, build a final list of requirements and priorities and then write to potential suppliers asking them to document how they can be met. Once responses are received, create a shortlist based on those who have recognised what you have asked for. If they gloss over or ignore any area the chances are they cannot support your needs.

Only at this stage would I suggest inviting suppliers in for demos but, again, make sure each vendor focuses on your priorities not theirs. It is a good idea to tell the providers in writing in advance of any demo exactly what you want them to show you. Make it clear selection will be based on ability to address those areas you have identified. Do not allow them to deviate.

Before taking a decision to proceed with any software system be sure to talk to some of its existing users. Try and engage in discussions around the specific features you have identified as important to you. Online forums can be a great way to connect with others for this purpose.

The technology that firms select as their core operating systems will be used day in day out and will have a massive impact on the profitability of the business. With this in mind, the decision is not one to be taken lightly. Making the wrong decision is something that will be regretted every day for many years. It is almost impossible to do too much homework before reaching a conclusion but, hopefully, the above guidelines should help firms make the right selection.

Ian McKenna is director of Finance & Technology Research Centre

Facebook Ads Tutorial 2015 How To Get More Sales

Video update: Winners and losers in a rising US rate cycle

US rate rise: A new era to buy and hold quality

By Felix Wintle, Head of US Equities

Watch Felix Wintle discuss the US’s first rate rising cycle in a decade and why he believes a focus on quality stocks will be key for outperformance in this environment.

Click here to watch video

In the video Felix discusses:

• The impact that he expects rate rises to have on US equities
• Why he has adopted a low turnover, quality bias in the Neptune US Opportunities Fund
• Healthcare and tech stocks identified by Neptune’s enhanced global sector process that he believes are best placed to outperform in this environment

Brokers’ market share hits record high

Brokers’ market share is now at its highest ever level, with adviser-introduced loans accounting for 69 per cent of new mortgages in the second quarter.

Figures from the Council of Mortgage Lenders show brokers’ share of the market has increased by over 8 percentage points over the past year from 61.9 per cent in Q2 2014.

The figures are significantly up on Q3 2009 when brokers had a market share of 46.7 per cent. This was brokers’ lowest-ever market share.

The previous high was in Q4 2007, when brokers had a 68.5 per cent share of the market.

Intermediaries say the length of time it takes to see a bank adviser and the fact it is now more difficult to get a mortgage are the key factors in brokers’ recent market dominance.

Perception Finance managing director David Sheppard says: “It is so much tougher to get a mortgage these days, so anyone trying to do it on their own will generally come up against too many barriers. The other thing is, over the last few years, all we have heard about is bank misselling, so I don’t think people will trust that they are going to get the right advice.”

In February, Money Marketing sister-title Mortgage Strategy revealed that lenders were beefing up their digital mortgage sales platforms to drive more business through their direct channel.

However, Middleton Finance managing director Daniel Bailey believes brokers’ share of the market will continue to grow.

He says: “The processing time is quicker through brokers and I think advice is so crucial at the moment. Getting a mortgage is much more difficult than it was pre-MMR. And brokers offer support. It is not just advice and a recommendation; it is guiding buyers through the process and explaining it all to customers.

“I would say [brokers’ market share] will keep on growing.”

Iress: Tech is the only way to change the advice market

Adviser software firm Iress says technology is the only way to improve the availability of advice to the mass market.

Speaking to Money Marketing, Iress UK managing director Simon Badley says: “Globally, there is strong demand for technology to support advice to the mass affluent and mass market and to do it in away that suits the behaviours of the consumer. This will support different advice flavours and different approaches.

“It is helpful that the [FCA] is starting to look like they want to support that change, and in real terms the only way you can do that is through technology.”

He says the firm is optimistic about opportunities developing from the Government desire to make sure that advice is more accessible at a mass market level.

The FCA and the Treasury launched a probe into the affordability of advice services earlier this month.

“Some people call it direct-to-consumer, and some people call it robo-advice. But we have existing distributor partners who are looking at customers in that mass market and mass affluent space and asking how they an offer a service to those customers using technology, and we are working with them on that.

“But we also know that providers and banks are looking at that space, and again we are working with them.”

The Australian technology supplier today reported UK revenues of £28.9m, roughly a third of group revenues of £86.6m, compared to 2104 figures of UK revenues of £28.3m, and group figures of £79.9m.

UK operations contributed £6.5m in profits, down 1.7 per cent from £6.6m last year.

Badley says the firm will grow its profits in the second half of the year and into 2016, in part thanks to an agreement to support Intrinsic.

He says: “The demand for Xplan has been really strong and the pipeline that we have and the way we’re executing that is looking really good.

“But unfortunately revenue has not been triggered in H1. It will follow in H2 and more importantly into 2016.”

Quizzed on the performance of the firm’s Xplan service since it was extended to mortgage customers earlier this year, Badley admits the firm failed in its messaging by leaving customers unsure if existing offline tools would remain.

But he says feedback from firms who have taken part in pilots for its online broker system have been positive.

Badley adds: “The first launch of Xplan Mortgage was around putting [the previous system] Trigold online to enable existing users of that sourcing capability to use it as an online capability. And to be clear, we are retaining the offline option as well.”

The firm is currently piloting new tools to help advisers from an initial fact find to a suitability letter.

Badley says: “We have had some people who have been troubled by it, but on the reverse, we’ve been piloting this and testing it, and in the pilot group the feedback has been very positive.”

Brokers expect lenders to slash rates in race to meet targets

Lenders will look to slash mortgage rates again in the fourth quarter as they struggle to hit their year-end lending targets, brokers say.

Over the past month, a number of lenders have increased mortgage rates but, equally, a number have cut their rates.

It has been suggested the lenders that have increased rates have done so to stem the flow of business during the summer months when it is more likely staff will be on holiday.

However, brokers feel this trend will reverse come September as lenders look to hit their lending targets.

With the exception of Nationwide, the major high street lenders have lent significantly less in the first six months of this year than during the same period of 2014. Half-year results show Royal Bank of Scotland’s lending was down 7.1 per cent, Santander’s was down 7 per cent and Lloyds’ was down 19.1 per cent.

Further, as swap rates are still relatively low and have not moved significantly over the past two months, it will allow lenders to price their fixed rate products more keenly.

John Charcol senior technical manager Ray Boulger says: “I have seen a lot of comment that mortgage rates are going up because the cost of funds is going up. Actually, if you look at Gilt yields and swap rates over the past two months, they haven’t actually changed that much. They have moved within a 20 basis point range but over the past two months, they haven’t moved that much.

“I think a lot of the increase [to rates] is down to the fact that lenders are keen not to have too much business coming in in August when their staffing levels are lower.

“Come September, when most people will be back from holidays, lenders’ minds will be focused on meeting their lending targets, as a lot of them are behind. I suspect come September we will see a bit more competitiveness in the market.”

Capital Fortune managing director Rob Killeen says: “I think we’ve probably seen the lowest rates. However, later in the year lenders who have not hit their targets could come in quite aggressively. Lenders are missing targets by some distance and they are clambering for business.”

He adds: “We do not think risk will give; it will be margin – they will just chase it down [to attract business].”

Andrew Tyrie: Govt reforms do not protect OTS independence

Treasury select committee chairman Andrew Tyrie has hit out at planned reforms to the Office of Tax Simplification, which he says do not go far enough in protecting its independence.

Tyrie wrote to Chancellor George Osborne in late June to call for a stronger OTS, with the Treasury then publishing a framework for reform in mid-July.

Under these plans, which will be enacted as part of the Finance Bill 2016, the Government will be formally required to respond to OTS recommendations, while the office will also be able to respond to Treasury and HMRC consultations on its recommendations.

However, in a letter published today, Tyrie says these moves still fall short of giving the OTS full independence by failing to guarantee a clear line of reporting to Parliament, rather than just the Government, and a “double lock” on the appointment and dismissal of Office for Budget Responsibility committee members.

A double lock would effectively give the TSC the power to veto the appointment or dismissal of any committee members as proposed by the Chancellor, a power it can only currently exercise over the chairman of the Office for Budget Responsibility.

Tyrie says: “This also establishes a clear line of accountability to Parliament.

“Your suggestion that the Treasury committee may wish to hold post-appointment hearings with the [OTS] chair and tax director is not sufficient to establish this clear line of accountability.”

Gross lending forecast to grow 39% to £287bn by 2019

Gross lending is forecast to reach almost £287bn by the end of 2019 due to an improving economy and growing wages.

Timetric, a firm that provides business information services to financial services companies, predicts average growth of around 7 per cent each year until the end of 2019.

It forecasts gross lending to reach £218.6bn this year, from around £205bn last year, and then £241.6bn of lending in 2016. By the end of 2019 it says lending will have reached £286.8bn.

Timetric analyst Ben Carey-Evans says: “Rising interest rates, combined with reduced growth in the UK housing market, is set to stunt increases somewhat from the 15 and 22 per cent rates seen in 2014 and 2013 respectively.

“Improving economic conditions, however, particularly the continuation of improving real wages – due to extremely low inflation – should see gross lending rising at a steady rate up to 2019.”

Boris Johnson appoints Ed Truell as pensions adviser

Mayor of London Boris Johnson has recruited Edmund Truell as an adviser on pensions and investments.

Truell, who founded the Pension Insurance Contribution, will work to drive collaboration between public sector pensions funds, and increase infrastructure investments.

He will resign his current position as chair of the London Pension Fund Authority to take on the unpaid role, and will also be responsible for the creation of an advisory board for the Lancashire and London Pensions Partnership, the tie-up between the LPFA and the Lancashire County Pension Fund.

Johnson says: “If we now use this new partnership as a blueprint for further pooling of pension funds, we could have a war chest worth hundreds of billions of pounds and access to the kind of investment opportunities which have until now been the preserve of foreign sovereign wealth funds.

“I am therefore delighted that Edi has offered to maintain his links with City Hall and support the cause of further collaboration across public sector pension schemes.”

BAML recognises unstoppable globalisation of credit market in landmark decision

Hermes Credit has welcomed the decision from Bank of America Merrill Lynch to retain emerging market issuers in BAML’s benchmark Global High Yield Index. Fraser Lundie and Mitch Reznick, co-heads of Hermes Credit, believe emerging markets play a fundamental role in global high yield investing and keeping this area of the asset class in the benchmark is beneficial for both investors and the corporate issuers.

Click here to read more

Neptune’s Burnett looks beyond Greece

Watch Rob Burnett, manager of the Neptune European Opportunities Fund, discuss the Greek bailout deal and its potential implications for European equities.

In the video Rob discusses:

• Why, with the Greek crisis receding, markets can now focus on Europe’s strong fundamentals
• The resilience of European markets and why the recovery is on a solid footing
• Investment implications for Italian banks and domestic-facing companies

Click here to watch the video

Important information: investment risks

The value of an investment and any income from it can fall as well as rise and you may not get back the amount originally invested. Please remember that forecasts are not a reliable indicator of future performance. The content of this article is formed from Neptune’s views and we do not undertake to advise you as to any change of our views. Neptune does not give investment advice and only provides information on Neptune products. This is not a solicitation or an offer to buy or sell our funds.

John Lawson: Why pensions as Isas won’t work in practice

Proposing the idea to treat pensions like Isas and actually doing it are two very different things. Defined benefit pensions are one of the key stumbling blocks that will prevent this idea becoming reality.

There is no denying tax relief given to pension savers is a large number: £34bn at the latest count, excluding the cost of national insurance relief on employer contributions. It is, therefore, no surprise that the Treasury is looking at this (again) as a potential revenue saver.

Equally revealing is how this number breaks down between DB and defined contribution schemes. An enormous £25bn, or 72 per cent, of the whole amount spent on tax relief goes to DB schemes. DC pensions, meanwhile, account for just £9.5bn of the total, of which £7.3bn is up-front tax relief and £2.2bn is the cost of gross roll-up in DC savings.

With this in mind, even if you completely “Isa-ised” DC pensions the saving would only be £7.3bn. Meanwhile, DC savers will need some encouragement to lock their savings away until age 55, so at least some of that amount would have to be spent on another form of incentive.

That incentive will not be generous. Post-auto-enrolment, there will be 15 million DC savers. The £7.3bn figure shared out among this group would only amount to £486 a year per head. This amount of tax relief would imply a total pension contribution of about £2,400 for a basic rate taxpayer, or about 9 per cent of pay for the average earner.

Therefore, even under the current rules, DC tax incentives can hardly be described as bloated.

On the other hand, the average tax relief per active member of DB schemes today is £3,500. A large part of this may relate to deficit recovery contributions. However, given the generosity of DB schemes where funding rates are now around 30 per cent for most schemes (versus around 9 to 10 per cent for DC), the tax relief cost of new accruals is also substantial.

It has been suggested by some that two different regimes are created: one for DC, in which no up-front tax relief is available, and one for DB, where the existing rules continue. Such an outcome is likely to fail for two reasons.

Firstly, it creates a “them and us” situation, where the lucky minority in DB schemes continue to enjoy tax incentives funded by the majority who do not themselves have access to DB schemes. This is compounded by the fact most of the members of DB schemes are public sector workers where the employer contribution of between 15 per cent and 20 per cent of pay is also funded by all taxpayers.

The taxpayer would be funding pension costs and tax relief for an average earning public sector worker of £7,500 a year, while the vast majority of (non-public sector) taxpayers receive next to nothing themselves.

Secondly, if the cost of tax relief is to be made “sustainable”, DB has to be a key target, since it already accounts for nearly three-quarters of the total tax relief spend.

It would, of course, be possible to Isa-ise DB pensions by simply removing tax relief.

This might rightly cause employers some angst, particularly in the private sector where most of these contributions relate to deficit recovery rather than new accrual. Those deficits were run up during a time when tax relief was available, so having the goalposts moved retrospectively would feel unfair.

Removing employer relief will, therefore, be met with stiff employer resistance.

Another alternative would be to tax only new accruals, with the tax bill for both employer and employee contributions falling on the employee. Under this scenario, employers would continue to receive both corporation tax and national insurance relief on their contributions.

However, with total funding costs of DB accruals around 30 per cent, the tax bill for a basic rate taxpayer would be 6 per cent of pay and for a higher rate taxpayer 12 per cent. Against a backdrop of public sector wage rises pegged at 1 per cent for the next four years, effectively cutting pay by between 6 per cent and 12 per cent would cause uproar among public sector workers and their unions.

For these reasons, the solution that emerges from this consultation is likely to be less radical than the initial sound bites.

But that does not mean the consultation cannot be productive. It can still allow us to address the imbalances in the allocation of tax relief between the better off and the average worker and, as highlighted here, the imbalance between DB and DC.

Tax relief also needs to act as a clear incentive to save, so it must be easily understood and valued. This is why we believe a simple matched contribution “you pay £2, we give you £1” is the best and fairest way to tackle these imbalances.

John Lawson is head of pensions policy at Aviva

Tony Mudd: All change again for dividend taxation

In 1973, the UK had an imputation system for dividend taxation. This was a method of giving credit to the recipient for the tax paid by a company making the distribution. It always felt appropriate and in line with many other tax systems around the globe.

However, that has not stopped numerous chancellors from mucking about with it. Whether this has been on the promise of creating a fairer tax system or for the benefit of the exchequer is open for debate.

What cannot be disputed is that from the first step taken by Norman Lamont in 1993 through to Gordon Brown severing the link between tax credit and corporation tax paid, the imputation system has been eroded.

Finally, we have a chancellor in Mr Osborne who has, arguably, taken the logical decision to scrap tax credits completely. This ends the imputation system. While he could have left matters there, he also announced:

• A £5,000 dividend allowance from 2016/17
• New rates of tax above this allowance of 7.5 per cent, 32.5 per cent and 38.1 per cent for basic rate, higher rate and additional rate taxpayers respectively.

According to the Treasury, 85 per cent of individuals in receipt of dividends will either be better off or no worse off at all. If we assume that the average dividend yield on a portfolio of equities is 3 per cent, this leads us to the conclusion 85 per cent of investors have portfolios of no more than £166,000. For those with portfolios in excess of this level, the position from 2016/17 is very different to where we are now.

The question is, who are the taxpayers that will benefit from this? The answer is arguably perverse:

• For investors paying tax at the higher rate, the £5,000 allowance is worth £1,250 (£5,000 x 25 per cent)
• For investors who pay tax at the additional rate, the allowance is worth £1,527 (£5,000 x 30.55 per cent)
• For investors falling within the basic rate, the allowance provides no benefit whatsoever

The bad news for basic rate taxpayers does not end there. While they currently would not pay any tax until their income fell into the higher rate threshold from 2016/17, they will now pay 7.5 per cent tax over the allowance.

These changes could also have knock-on effects to some of the standard tax advice around normal portfolio construction. The end to grossing up dividend income will have a material effect on those investors selecting tax wrappers based on ensuring income does not take them into the next threshold for income tax. Furthermore, for many clients, the value of stocks and shares Isas will now only be in terms of capital gains tax, which few investors are liable for in any case.

We also have the issue of investment bonds. On the face of it, over and above the dividend allowance tax rates of 7.5 per cent, 32.5 per cent and 38.1 per cent does not compare well with onshore bond gains taxed at 0 per cent, 20 per cent and 25 per cent. Unfortunately, we do not yet know whether, or to what extent, these changes will affect the rate of tax levied on dividends within life company funds, although it is something all of us will be looking carefully at.

A further interesting twist, with corporation tax itself reducing to 18 per cent by 2020, is whether this will result in higher net dividend yields and further changes to the effective rate of tax on dividend distributions. Changes that, frankly, the majority of investors do not understand. But perhaps that is the point.

Tony Mudd is divisional director, tax and technical support, at St. James’s Place

Profile: Bravura’s Tony Klim on technology in the new pensions era

Bravura Solutions group chief executive Tony Klim was lucky enough to work through the “golden age” of UK software in the 1980s and 1990s, when banking was becoming hi-tech with the introduction of credit card systems, online payments and secure networks. Now he is anticipating another exciting era in financial services technology, as pension freedoms create a need for product innovation.

“While the pension reforms have caused much strife across the industry, they will also result in product innovation, which is something we have not seen for some time. People do not need to buy an annuity so companies are looking at how to hold on to assets through flexible and guaranteed models.

“We are already working on some interesting new models around guaranteed products and flexible drawdown. It is great for us because technology is needed to support the new products.”

Klim admits keeping up with the pace of change in the rules and regulations is no easy feat. But the move towards greater individual responsibility for retirement planning came as no surprise to him.

Back in 1999, in his early days at Marlborough Stirling, Klim predicted this shift would create huge growth opportunities and demand for software solutions. “One of the main problems is the rate of change and our clients need to react reasonably quickly,” he says.

Bravura, an anglo-Australian firm providing software services to wealth managers, fund managers and insurance companies, believes the platform industry is the logical place to deliver the product innovation needed for the new pensions environment.

Klim says Bravura and its clients are particularly happy with the scale of opportunity that lies ahead, although the need to offer attractive and innovative new products is also challenging, not least for platform providers.

“Platforms will encompass traditional life and pensions, and possibly even banking, across multiple delivery channels. Far too many people focus on platforms as a business model. In reality, we are just talking about the infrastructure for the next generation financial services business,” he says.

Bravura has spent a huge amount of money on developing its Sonata technology as the “next generation” platform across investments and life and pensions globally.

Sonata is Bravura’s life and wealth management administration system that enables the firm’s clients to be more efficient and reduce running costs by connecting and engaging with their clients through a range of devices including a desktop or laptop computer, tablet or smartphone.

“As with all major step functions in technology, it has taken longer and cost far more than we initially envisaged but we are now getting significant traction on both sides of the world.”

“Unlike some of the other players in the market, our focus is solely on software and software as a service rather than administration. This means we are able to service both administrators and product providers alike. It is a business model that we have successfully deployed across the fund management industry for many years.”

Klim started his career with his feet planted firmly in the technology side of financial services. He got into software development once he realised his teenage ambition of becoming a rock guitarist was not to be. “I know it sounds corny but I so wanted to be a rock star,” he says. “My air guitar skills didn’t make the grade but I did graduate to a real guitar. I became a blues and jazz guitarist. I got to the point where I was practising three hours a night and ended up in an amateur rock band but I still didn’t make the grade,” he says.

At school, Klim shone at mathematics and, after graduating from university with a physics degree, became an analyst/programmer at Software Sciences, now IBN Data Sciences, working on defence systems. He then joined Systems Designers, now EDS, working in secure communications networks. “In the early 1980s, these skills became very much in demand in banking with the emergence of card technology and online payments,” he says.

In 1985 Klim joined The Software Partnership and moved into the business side, encompassing distribution. “The Software Partnership was an amazing business that was set up by a group of like-minded entrepreneurial individuals. It went on to be a pioneer and market leader in online banking technology before eventually being acquired by a very large US corporation.

“I learnt a huge amount about high growth companies and international business at that time through working with partners across the US and in Asia. We got a number of major banks using our system in the pre-internet banking era.”

Klim joined Marlborough Stirling in 1999 and led the integration of the Exchange portal, which Marlborough Stirling acquired in 2001. He left the group in 2004 due to an internal restructure and spent the four years prior to joining Bravura Solutions as an independent consultant.

“I worked as an independent consultant with a variety of financial services businesses and private equity companies. A key theme was the changing UK value chain in financial services distribution and the emergence of platforms. This was an area of interest that I had started to develop when working with the Exchange IFA portal at Marlborough Stirling. Platforms were almost a logical extension of the portal.”

For Klim, the future of the platform industry lies in its supporting technology. “Technology is very much on the agenda again as modern platforms need to cover multiple channels: advised, discretionary, execution only and potentially online advice.

“Scaleability and admin efficiency will become even more important with the continuing squeeze on the overall value chain. Shaving a few basis points off the admin cost model through use of modern technology can make a significant difference to the profitability of a platform. Multi-channel servicing and admin efficiency is the key to how platforms will make money.”

Five questions

What is the best bit of advice you’ve received in your career?

Don’t sell technology; sell the business benefits of technology.

What keeps you awake at night?

The fact we have over $2trn of assets managed on our technology platforms. More seriously, my two daughters finding their way in life.

What has had the most significant impact on financial advice in the last year?

It has to be the changes to the pensions/annuity rules in the 2013 Budget.

If I was in charge of the FCA for a day I would…

Openly encourage more innovation in online advice.

Any advice for new advisers?

Embrace technology to make your job easier.

CV

2008-present: Group chief executive and previously chief executive for Europe, Middle East and Africa, Bravura Solutions

2004 -2008: Independent consultant working with various financial services businesses and private equity companies

1998-2004: Managing director of UK Operations, chairman of Marlborough Stirling subsidiary Exchange FS and director, group strategy, Marlborough Stirling

1994-1998: Director of International Marketing and Product Management, Deluxe Data Corp.

1985-1994: Director of international business development, managing Director, Open Systems Division and director, Consultancy Services, The Software Partnership

1981-1985: Technical Consultant/Senior Systems Engineer. Systems Designers, now EDS

1979-1981: Analyst/programmer, Software Sciences, now IBM Data Sciences

Strong sterling cools BoE inflation forecast

The strength of sterling has played “a significant role” in the Bank of England’s thinking over inflation projections, says Axa’s David Page.

The Bank said today the stronger pound trajectory over the past months could cause a delay in the rise of inflation in the UK.

In its latest inflation report, released today, the Bank stressed the fact sterling has appreciated by 3.5 per cent since May, as well as rising in the past couple of years, will likely push inflation down in the near term.

The MPC minutes say: “In light of the reduction in oil prices and appreciation of sterling over the past three months, it appeared that the increase in inflation over the following year would be more gradual than had previously been supposed.”

Axa Investment Managers senior economist Page says sterling has played “a significant role” in the Bank’s thinking over inflation projections.

He says: “Sterling is clearly having a significant role in the bank’s thinking about the development of inflation. They’ve suggested they’ve downgraded to some extent the path of inflation over the near term…they think that is a more accurate way of treating the situation and we will see how that goes through.”

The MPC report also says: “To the extent that the appreciation of sterling could be expected to weigh on inflation for a persistent period, the corresponding pickup in domestic costs necessary to return inflation to the target within three years would be greater.”

“The movements in sterling over the course of 2015 had been correlated with changes in the interest rate differentials paid on sterling and foreign currency assets, although the scale of the change in the exchange rate had been much larger than implied by the change in interest differentials alone,” the MPC minutes state.

“The recent appreciation of sterling was therefore likely to represent an additional tightening in financial conditions over and above the steepening of the sterling yield curve over the past few months.”

JP Morgan Asset Management chief market strategist for Europe Stephanie Flanders says, unlike many major economies, “the UK is not trying to recover on the back of a weak currency, but the Bank does not want investors to think sterling is a one-way bet”.

BoE governor Mark Carney pointed out in his press conference on the UK outlook today that sterling has risen 20 per cent on a trade-weighted basis since March 2013.

Flanders says: “With monetary policy still extraordinarily loose in the major developed economies, the upward move in sterling in the past two months shows how even a modest move in rate expectations can have a dramatic impact on the currency.”

The inflation report had had an immediate impact on sterling with the British currency falling 1 per cent against the dollar and the euro today.

Flanders says: “However, we do not believe this is the start of a sustained move down in sterling given the broadly upbeat tone of today’s statements about the economy.”

Dennis Hall: When a provider relationship turns sour

I recently advised one of our clients to use the new pension freedoms to close her pension with AJ Bell and withdraw the entire sum as a lump sum. It formed part of a much larger portfolio of investments but the pension pot was relatively small.

For our involvement we agreed to charge the client about £500, paid from the pension fund before it was finally paid out. We submitted all the paperwork to AJ Bell making this very clear. You already know what’s coming.

At this point AJ Bell paid the client without deducting our fee. Several days later we received the paperwork and noticed the fee had not been deducted, so we asked AJ Bell what they would do about it.

After some to- and fro-ing they said they would write to the client asking for the money back and thanking us for highlighting a training issue. When will product providers stop spouting platitudes and instead pay for their mistakes (financial pain being the only pain they feel)?

I do not want AJ Bell to go back to my client asking them to return the money – it is not as though the sum was significant enough for them to notice. As far as they are concerned they received a net payment. Anything I have read about behavioural economics or the psychology of loss tells me the pain of losing money is twice as painful as gaining it.

My clients would feel a sense of loss far greater than the £500 they had agreed, which would impact on our relationship, and so for the sake of £500 I am left wondering whether I bear the loss or make the clients feel as though it cost them £1,000. AJ Bell on the other hand has not have suffered any loss, and although it has discovered a weakness in their processes it has suffered no pain.

By last week I believed we had reached an impasse. This is not the AJ Bell I started out dealing with more than 10 years ago – back then when something went wrong they held up their hands and fixed it. It was so refreshing, and it shaped my own attitude to handling clients complaints – we even have a ‘no quibble’ guarantee on our website.

So when I tweeted on Friday that my long running association with AJ Bell had sadly come to an end it triggered a response that I was not expecting.

One of the senior management team picked up the tweet whilst on holiday in Florida, and immediately called me. It is hard not to take anyone seriously when they interrupt their downtime to try and save a relationship. That is the AJ Bell I had experienced in the past.

With senior management involvement there was a thawing of the ice. We still did not reach the ideal solution from my perspective, but we got halfway there. And for that I am satisfied.

They still don’t quite ‘get’ where I am coming from – but then I am not a multi-million pound provider. I can care that little bit more, and I treat my clients in exactly the same way I would wish to be treated – and I live in a fantasy world where I believe providers should do the same.

Dennis Hall is managing director at Yellowtail Financial Planning

AJ Bell declined to comment

Brooks Macdonald appoints deputy CEO

Brooks Macdonald has promoted Andrew Shepherd to be deputy chief executive, a newly-created role “to broaden the senior management team”.

Shepherd, who joined the wealth manager in 2002, was an executive director of the group and joint managing director of Brooks Macdonald Asset Management with Nick Holmes.

After Shepherd’s appointment, effective from today, Holmes will be the sole managing director of the asset management division.

Brooks Macdonald chief executive Chris Macdonald says Shepherd’s appointment will give him more time to focus on “delivering the group’s growth ambitions”.

He adds: “I am looking forward to working alongside Andrew in his new role as deputy chief executive. He has been a core part of the group’s management team for the last seven years.”

Asset allocation: Property is bright spot for Canada Life’s David Marchant

Property is the golden child currently for David Marchant, chief investment officer at Canada Life, delivering solid yields and growth for his range of risk-targeted model portfolios.

The risk-rated 3 version of the fund, which has £16.1m in assets, has an 8 per cent allocation to property, which Marchant says has done “fantastically well”. In June it was the only positive contributor to returns for the fund “as sustained investor demand in the sector translated into a continued rise in capital values”.

“The commercial property market came off 50 per cent in the financial crisis and has had a good recovery since then, in particular in London and the South-east but now spreading out to the regions,” he says.

“The overall yield on the property portfolio is in the region of 5 per cent or so, which is excellent, rent is growing, capital values have some room for further upside.”

The Canada Life Portfolio range consists of five funds, with CanLife Portfolio 3 being the lowest risk version of the range and Portfolio 7 being the highest. All the funds are risk-targeted to the Distribution Technology risk rating tool and the asset allocation is determined by DT’s target asset allocation.

Marchant chooses not to put his own tilt or tactical allocation overlay onto the DT asset allocation, believing that doing so inevitably means that clients will be taking more or less risk than they intend.

“We don’t have a deviation against the risk allocation, no tactical tilts. If DT make a recommendation we will stick to it, so there are no surprises for advisers,” says Marchant.

“If you’re an investor and risk profile 3 reflects your attitude to risk you don’t want to find it’s gone to [risk profile] 4 or 5 three years down the road.”

However, he says the asset allocation team at Canada Life sense check the DT allocations and question whether they make sense, sometimes going back to DT to query anything they don’t agree with.

The team will also take their time making any changes to allocations prescribed by DT, waiting until the pricing is right and they are ready to move out of other areas.

Performance of the Portfolio 3 fund has been patchy, ranking third quartile over the short term – one and three months – but first quartile over a year. The fund was only launched at the end of 2013, so longer term performance is not available.

The most recent change on the fund was the introduction of high-yield bonds, which now make up 6 per cent of the Portfolio 3 fund, having previously been no allocation. The money for the new allocation was taken “across the board, from small tinkering” with other allocations, says Marchant.

“The benefit of high yield is it adds an extra element of diversification, which these funds are suppose to achieve,” he says.

However, Marchant was careful with the timing of the move into the asset class. “High-yield has already had a relatively good run, we did finesse the implementation and didn’t go into it until mid-December, which was pretty close to the lows in prices,” he says.

For the high-yield allocation Marchant invested in the Putnam World Global High Yield Bond Fund. The range of model portfolios has a skew to internal funds, always using a Canada Life fund if it is available.

If Canada Life doesn’t have a suitable fund, as with the high-yield allocation, Marchant will look among the group’s partners for a suitable option.

“We have not got high-yield expertise in house, Putnam is part of our group of companies and has experience and a long record of managing high-yield bonds, so we use their portfolio to provide asset allocation,” he says.

Only if this search among Canada Life’s partners turns up blank will Marchant look to other fund managers. The only instance of this occurring is in the allocation to the BlackRock ICS Sterling Liquidity fund, which has 9.8 per cent of the fund.

The benefits of using internal funds are multiple, says Marchant. “We benefit from being close to the fund manager, we know exactly what they are implementing with no surprises and it also is cost effective using our own internal managers.”

This selection process limits the choice of funds available, often driving it to just one option for each asset bucket. Marchant admits the size of Canada Life’s fund range means he has “not got a vast array of funds to choose from”.

The only area where this isn’t the case is in its UK equity allocation. Here the fund has the allocation split between two funds: the CF Canlife UK Equity Fund at 12.4 per cent and the CF Canlife UK Equity Income Fund at 3.2 per cent.

“I like the idea of income funds and recognise the importance of income, “ he says, leading him to put 20 per cent of the UK equity allocation in the income fund and 80 per cent in the core UK equity fund, although he says “that can change over time if required”.

Marchant is very positive for the prospects of the UK equity sector generally, predicting a boost in consumer spending will help to drive the economy up.

“There is rising employment, real wages are going up, consumer sentiment is at relative highs and oil prices are low and weakening more recently, so the outlook for the UK consumer is pretty good,” he says.

Portfolio Research and Consulting Group: Helping to manage risk and build more durable portfolios