UK consumers think retirement finances are less important than European peers

UK consumers think money is less important for a good quality of life in retirement than their European peers, according to Chase de Vere research.

According to the research, 31 per cent of the UK respondents said economic resources were important for quality of life in retirement compared with 54 per cent in Germany, 51 per cent in France, 45 per cent in Switzerland and 58 per cent in Austria.

For under 65s, just 30 per cent of the UK respondents thought economic resources were important compared with 58 per cent in the same age group across Europe.

The report argues this as a concern in relation to encouraging young people to save and invest for their future.

39 per cent of UK respondents under 65 wanted to retire from work when they are as young as possible which Chase de Vere highlighted as a “clear disconnect” with not thinking finance was important in retirement.

The research also looked into people living longer and found that, on balance, respondents thought that increasing longevity was a problem rather than a benefit for society.

The generational divide

Younger respondents were more concerned about higher pension costs, while older people highlighted the need for a change in attitudes towards the elderly.

The research showed that more people in the UK than Europe thought individual retirees were responsible for meeting the cost of retirement. In the UK this was 57 per cent of those aged below 65 and 67 per cent of those aged over 65 while in Europe the figures were 48 per cent and 57 per cent, respectively.

The report says: “It is positive that those in the UK seem to have a better understanding that people are responsible for their own financial futures, although this could be because they have little confidence in the state pension system, their employers haven't done enough to engage them regarding workplace pensions and they aren't engaged with any other pensions either.”

Overall, Chase de Vere says there is a “rather depressing picture” where living longer is viewed negatively by society, and where people want a longer retirement but are not prepared to take to steps needed to retire when they want to.

The report says: “The message is very clear. We are likely to live for longer and so if we want to enjoy the benefits of an extended life we need to plan ahead. While it is imperative to keep both physically and mentally active, we should also be planning financially to ensure that we are more able to retire on our own terms and to live the life we want as we get older.”

One thousand UK consumers aged 35 and over took part in the research. The online survey followed similar research conducted with 1,265 people in Germany, France, Switzerland and Austria.

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Two men plead guilty to insider dealing on IT takeover

Two men have pleaded guilty to three counts of insider dealing for leaking information about a company takeover.

Guilty pleas were entered by Manjeet Mohal and Reshim Birk yesterday during their trial at the Central Criminal Court, following a case brought by the FCA.

Mohal worked in the finance team at IT giant Logica, and in May 2012 came into possession of inside information during takeover negotiations with Canadian IT services firm CGI.

He told Birk, his neighbour, about the proposed takeover deal. Birk then used the information to buy shares and options in Logica two days before the CGI takeover was announced. He made over £100,000 as a result of the trade.

The pair will be sentenced on 13 January.

No evidence was offered against a third defendant, Surinder Sappal.

FCA executive director of enforcement and market oversight Mark Steward says: “We are determined to do whatever is required to curb insider dealing and other market abuse to protect both the investing public and market integrity and we will continue to prosecute cases and hold wrongdoers accountable where there is sufficient cause.”

As part of the same investigation, former Logica senior manager Ryan Wilmott was previously sentenced to 10 months in prison for insider dealing and Kenneth Carver was fined £35,212 for dealing in Logica shares on the basis of inside information.

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Malcolm McLean: Simplify pensions once and for all

For almost the entire 20 years I have worked in pensions people have said the same thing: “Pensions are too complicated. I don't understand them. They need to be simpler.”

This inevitably leads on to statements like: “I can't be bothered with paying into a pension. I don't trust either the pensions industry or the government; they're out to rip you off. I'll handle my own money.”

I would like to think that after so many years of us banging on about the problem things would be improving a bit. However, it is probably getting worse.

National Pensions Awareness day came and went back in September, with no apparent impact on people's understanding of the subject, while the success of auto-enrolment so far seems to depend more on workers' inertia than any degree of engagement with their pensions.

And it is not just the general pubic. Earlier this year, Bank of England chief economist Andy Haldane said that even he was unable to understand pensions because the system is so complicated. What is more, new pensions minister Richard Harrington pointed out at a recent conference that, prior to taking up his role, he was not sure what he had by way of pension provision and how the various bits all fitted together.

Harrington went on to say that one of his key aims was to make pensions simpler and more easily understandable to the ordinary man and woman in the street.

I wish him well with that but, at the risk of sounding cynical, we have heard it more than once before. And it has not happened. At least not to an extent that would make a material difference.

The problem is we have let the system grow like Topsy, over a long period of time and in a totally uncontrolled way. Take tax as an example. There are hundreds, if not thousands, of pages of tax legislation on pensions that continue to expand at an alarming rate.

And to what end? How many consumers actually fully understand what tax relief is, how it works and how it benefits them in their pension saving? Why is there this apparent obsession on the part of the Treasury with constantly adjusting the allowances with ever more complicated processes for capping and restricting reliefs?

I would like to think that after so many years of us banging on about the problem things would be improving a bit. However, it is probably getting worse.

Coming together

I accept that, to some extent, we are prisoners of our past and simplifying pensions as though we are starting from scratch is not always possible. Bringing in changes often means you have to recognise and give effect to accrued rights that already exist, producing complex transitional arrangements such as those in place for the new “simpler” flat-rate state pension.

But does that mean pensions have to be so convoluted and confusing in all respects? The basic concept of a pensions saving plan is about putting money away during your working life to give yourself an income (or extra income) in your retirement years. It is hardly rocket science. But when you add in the question of tax reliefs and allowances, contribution rates, target date funds, salary sacrifice, default options, lifestyling plans and so on, it probably starts to sound to the consumer a bit like it could be.

Why can't the industry and the Government work together to find ways of radically simplifying the whole pension system for the benefit of everybody involved? We need simpler legislation, simpler scheme rules and simpler insurance products. But above all we need a desire to think and act in the best interests of the consumer at all times.

Alternatively, this could be given as a discrete task to a new Pension Commission, which could objectively examine the case for more simplification and make practical recommendations as to how it might be achieved.

And while we are at it, let's have a once-and-for-all purge on the gobbledegook language used. Expressions like “trivial commutation” and “uncrystallised fund pension lump sums” have to be consigned to the dustbin if we are ever going retain any credibility going forward.

Malcolm McLean is senior consultant at Barnett Waddingham

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Clients are prepared to pay more for planning, advisers argue

Three top advisers have argued firms should charge more for planning as clients are becoming more willing to pay for these services.

At the Personal Finance Society's National Symposium in London last week, Thornton Chartered Financial Planners, Killik & Co and Informed Choice noted a trend that clients are accepting higher charges for advice, provided the value of the plan is made clear.

Thornton Chartered Financial Planners charges a minimum of £1,500 for plans but holds first meetings for free.

Managing director Sharon Sutton said: “Most clients thought we didn't charge them enough for the financial plan.

“It's very much driven by what the value of the financial plan is. The plan is what clients value in terms of advisers finding out more about them, their story and helping them understand better what they want to achieve.”

Killik & Co wealth planning partner Sarah Lord said her firm was continuing to transition away from its traditional investment management fees as a result of the value clients place on the financial plan.

She said: “We have grown financial planning within a historically stockbroking and investment management business. We are charging fixed fees for the plan based on hourly rates and complexity.

“When you try and pull those two together to demonstrate the value to the client it can be a challenging conversation, because what is the client actually placing the value on? Is it the investment management or the financial plan they are getting at the outset? What we are seeing is a gradual shift in client mindset that actually they want the plan to be more important.”

Informed Choice charges for advice based on an upfront fee that includes planning charges.

Executive director Nick Bamford said: “In terms of pricing, some situations are much more complex but we have wrapped in the implementation together with the advice and planning part of it.”

He added higher charges are justified in light of the value advisers add.

He said: “The industry is getting challenged on some of its pricing, but people don't understand what we have to do. The job we do is so valuable we need to be charging profitable levels.”

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How to cut mortgage fraud risk

Recent figures from Financial Fraud Action UK revealed a financial scam was committed, on average, every 15 seconds during the first six months of 2016, says Roy Armitage, head of credit at LendInvest.

That represents a 53 per cent rise year-on-year, with these scams coming in all shapes and sizes. Furthermore, a staggering 56 per cent of UK organisations have been affected by fraud in some way, and it is one of the biggest risk concerns facing board members.

The mortgage market is no stranger to financial frauds. Recent years have seen fraudsters raise their game in identifying weak spots within the transaction chain, so lenders are duty bound to do more in order to keep them at bay.

Lenders face a tricky balancing act between implementing effective anti-fraud measures, which address concerns about the risk of identity theft and online fraud, while still offering a frictionless customer experience.

But what can we do in practice to reduce the fraud risks that face us?

Awareness, data and having the right systems in place is a crucial tool in the fight against financial services fraud. At LendInvest we are members of CIFAS, a fraud prevention system.

It gives firms access to the fraud data collected by government agencies, the police and other industry firms.

That membership is a supplement to our existing use of SIRA (Synetics) and other data providers which give us enhanced insight to ID verification, including Sanctions, PEP and Adverse Media. Furthermore we train our underwriters on the risks fraud provides.

These data feeds, along with Equifax Insight credit data, are a powerful resource, supplying us with a range of data on mortgage applicants and how accurate the information they have supplied truly is.

It is crucial that lenders engage with these data feeds and add in their own information in a structured way. The richer those structured data feeds become, the more they benefit everyone across the industry.

However, the data can only do so much. There is no single algorithm that can look over that data and then decide if the application is credible and transparent. It's also vital therefore to employ quality and experienced underwriters who know how to cast a truly critical eye over all application data.

While LendInvest is a lender that sees the potential improvements technology can bring to the mortgage market, we have always been clear that technology must be there to support manual decision-making, rather than replace it. Technology for technology's sake must be avoided. Instead, a risk-based approach should be adopted.

In the short-term finance world, some of the attempted fraud focuses around buying the property at under value for reasons which aren't transparent or at arm's length. There can be good reasons for securing a property for less than it is worth, of course, but there are also cases where borrowers attempt to keep lenders in the dark about the true nature of the transaction.

LendInvest's core principles focus on transparency and disclosure. We perceive any form of non-disclosure as a form of fraud and do not tolerate it.

It comes down to each individual lender, and the checks they carry out. If you want to build a sustainable and scalable business, then you need to demonstrate in word and deed that you are lending responsibly.

Fail to take that responsibility seriously, and there will no shortage of fraudsters ready to take advantage.

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ECB warns UK equities most vulnerable to a crash

UK shares are expensive and more vulnerable to a crash than equities in most other major global markets, the European Central Bank has warned.

Figures in its Financial Stability Review report published this week showed that the UK was the most overvalued market in October, followed by the US, Europe, emerging markets and China.

It used the cyclically adjusted price to earnings ratio to point out “valuation measures… are in some regions hovering at levels which, in the past, have been harbingers of impending large corrections.”

It says the measure is “arguably the best indicator of valuation based on earnings”.

It said the prices in some equity, markets have begun to signal stretched valuations.

AJ Bell investment director Russ Mould says looking at market capitalisation to GDP as a metric the UK is “pretty expensive”.

He says: “It is about 120 per cent market cap to GDP which is basically as high as it is ever been.

“You can justify that because corporate profits at a percentage of GDP have never been higher so if you believe that corporate profits will stay where they are or even go up then you are not going to be too worried.”

As the ECB pointed out with its warning, if there's going to be a slowdown, down turn or recession in the UK that is “clearly potentially very problematic”, Mould says, because of the earning support for that high valuation.

However, Mould says UK shares are cheap on a dividend yield basis or relative to bonds.

He says: “If you look at dividend yield in the UK it's at around 4 per cent and even after the big rise in yields, the gilt yield is 1.4 per cent so that is a 250 bps premium, which is historically extremely high. So on a yield basis or relative to bonds, the UK is actually very cheap.”

The yield argument will remain “quite compelling”, says Mould unless bond yields zoom upwards or there are big dividend cuts.

He says: “We only had two big FTSE 100 companies cutting their dividend this year which is Sainsbury's and EasyJet against about 12 last year.

“So dividend yields will provide support even if cover is thin and unless the economy gets into recession UK equities will prove relatively resilient but whether they'll make massive amounts of progress or not, I am not too sure either, they'll need a big tailwind from exports and from oil, the dollar and miners to make substantial progress and ultimately the banks.”

Meanwhile, investors continue to shun UK equities with the region seeing outflows of £620m in September, compared to £162m in August, according to the latest figures from the Investment Association.

'US most expensive on all metrics'

The US followed the UK in terms of overvalued stocks, the ECB shows.

In its report, however, the ECB shows the US was the most expensive on all the three common price to earnings metrics it used, which are last year's reported earnings with a sample starting in 1985, forecast earnings for a year ahead starting from 1990 and the cyclically adjusted price per earnings ratio with a 10-year view starting in 1985.

Mould says: “The US is expensive on market cap to GDP, relatively expensive on forward earnings. The S&P 500 yield is now basically the same of the 10-year Treasury so that element of support is not as strong as it was either before the index offered a yield premium, which is historically extremely unusual.”

Conversely, emerging markets are cheap because they've outperformed this year but they've underperformed for four or five years previously, says Mould.

He adds: “If you look at price to book value, emerging markets are not at the bottom end of their range but still quite low, but they are still at the best valuations than Europe or the US.”

However, emerging market currencies continue to be under stress, he says.

“Asian governments learned their lessons in the 1990s. Asian corporations piled a lot of debt and that is a potential concern but if you look at valuations, EM is one place to go and the other place is Japan”, Mould says.

Japan is almost a “stock picking delight” for investors, Mould says, despite the macro data “doesn't look very good at all”.

He says: “In Japan in cheap in terms of earnings, and price to book value specifically as a lot of book value is in cash so you have tremendous downside underpinning that your problem with Japan is that the economy isn't great but that said, corporations are focusing more on improve governance and shareholders returns giving back 5 per cent a year back to the market in dividend yield and share buy backs.”

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Advisers' ETF due diligence called into question

Advisers need to better understand how exchange traded funds work and carry out the same due diligence on them as they do on mutual funds, the intermediary head of BlackRock's ETF provider iShares has argued.

Speaking at an event at the London Stock Exchange last week, Pollyanna Harper said some advisers might be “scared by the amount of due diligence to do on ETFs”

She said: “The reality is ETFs are absolutely no different to any other investment that you are doing due diligence on to build in to your portfolios and whether you are outsourcing.

“You just simply need to understand them, they are not complicated and are very similar to index trackers, they just trade slightly differently.”

Harper says around 90 per cent of advisers might not know “what's under the bonnet” of a product, citing funds like GARS, which are very complicated to analyse, especially around securities lending.

There are currently 6500 ETFs and $3.4trn assets within 289 providers in 54 countries on 65 exchanges, according to ETFGI. Overall, since 2005, passive funds have seen nearly fivefold growth and now make up around 23 per cent of the assets under management in the UK, according to the Investment Association.

ETFGI partner and co-founder Deborah Fuhr added: “Three years ago there used to be $15bn of net new assets in ETFs, we saw that growing up to $68bn. Now globally we've had 34 months of positive net new assets going into ETFs. No other new products have had that level of net new assets.”

There are 4147 institutions using ETFs globally, Fuhr adds.

She says: “It is hard to count how many retail people use, but ETFs are the only investment product I know where you find all this types of people and institution having access to the same toolbox at the same low cost with a very small minimum investment size.”

A recent survey by Platforum shows while 62 per cent financial advisers had recommended a tracker fund to clients, only 19 per cent had recommended an ETF. In particular, assets in ETFs on adviser platforms stands at 1.3 per cent of the total platform assets under administration, which is far lower than the percentage of assets in tracker funds.

Costs and smart beta

These comments come as later last week, the FCA has published its long-awaited interim report on the asset management industry finding active management fails to justify high fees for lacklustre returns.

In its report, the regulator found an investor in a typical low cost passive fund would earn £9,455 or almost 25 per cent more on a £20,000 investment than an investor in a typical active fund. The FCA argues this number could rise to £14,439 talking into account transaction costs.

Speaking on the Stock Exchange panel, Fuhr says: “ETFs tell you what they are doing and how from the beginning and often many investors didn't realise that mutual funds do the same thing that ETFs do. But in terms of security lending most mutual funds do it but they never talk about it. It's important to know what an ETF does, whether it is using derivatives or else and from a regulatory point of view, it is under the Ucits regulation like other funds.

“Outside the internal costs of a fund you have transaction costs so that is the measure of how often an active fund or an ETF is traded. In general ETFs don't trade a lot because they are tracking an index so you tend to have less trading.”

But Fuhr warns advisers need to look at transaction costs especially on new products such as smart beta, which aim to deliver a better risk and return trade-off than other passive funds by using alternative weighting based on measures such as volatility, asset weight or dividends.

More than 3 per cent of assets under management are now held in this type of strategy, according to the IA.

Fuhr says: “If you buy an active manager that is trading a lot they are going to have more transaction costs inside their actively managed fund and that is something you need to be careful when looking at smart beta, for example. There's a product that says this is an equal-weighted portfolio and rebalances every month so there's going to be more transaction costs.”

Morningstar research shows in 2015 FTSE All-Share smart beta ETFs charged an average total expense ratio, which includes trading fees, of 0.42 per cent compared to ETFs charging an average TER of 0.33 per cent.

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Unconventional cover that helps your advice stand out

These days, with comparison sites and price competition, it can be hard to see what sets some policies apart. By recommending cover that offers more than a financial payout, you could be giving your clients more than they expect.

We know it's important to do things differently. That's why all our protection plans available through intermediaries come with Helping Hand  – our comprehensive support service – at no extra cost. In times of ill health, it gives your clients access to advice and support from a personal nurse adviser – even if they never make a claim.

Helping Hand can help you to show the value of your advice and build long-term relationships with your clients, which can only be good for your business.

You can find out more at adviser.royallondon.com/unconventional

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Kim North: Providers are failing the unadvised

In the week I became eligible to access my defined contribution pension (sadly and unfairly, though, not my defined benefit pension), I spent a considerable amount of time helping others who have recently reached retirement age.

The pension freedoms brought in changes to tax rules, with drawdown becoming taxed at marginal income tax rates rather than the previous 55 per cent for full withdrawals. The 25 per cent tax-free lump sum continues to be available.

Forgetting about annual and lifetime allowances (as such limits apply to a small fraction of population) the main things those retiring are interested in are drawdown, the tax-free cash and tax due.

In my naivety, I assumed major pension companies would now be able to provide their customers with the full set of pension freedoms options. But this is not the case.

Two examples follow which occurred last week and annoyed me.

Scenario one: A senior NHS employee has been in the DB scheme for 30 years and is continuing to work as a higher rate taxpayer. She had five years working in a housing trust offering a DC scheme after university. That DC scheme is now worth £20,000, so has a £5,000 tax-free cash within it. She wants the tax-free cash now to replace her windows.

Her DC pension provider Friends Life does not offer tax-free cash only but it provided lots of information on irrelevant annual allowance and investment risk, then suggested a transfer to Aviva, which does offer tax-free cash only. Friends Life is now part of Aviva. She asked for my guidance.

Scenario two: An Essex man worked in the 1970s for a company no longer in existence. He was told Legal & General were the pension administrators, so he called them. They tell him there is no pension money left. He is disappointed and takes no further action.

When he tells me this story I check with the pension tracing team, which discovers there are two pension administrators: Legal & General and Zurich. Guess who has his pension? It is a shame Legal & General did not tell the man that Zurich had his pension all along, thereby saving him from the despair.

There have been onerous regulations put in place since the freedoms to ensure major brands treat customers fairly. Are either of these scenarios treating customers fairly? I think not.

Millions of people are going to have to find their pensions themselves. I am sure the new financial guidance service will be helpful but providers must do more to assist the unadvised public. They need to work on providing clear, understandable and – most importantly – relevant information.

What is more, the emphasis needs to be on the range of services offered. You can offer the cheapest and most transparent proposition but it may not meet all of a customer's needs.

Providers have a duty to provide full pension freedoms options and dedicate more resources to helping people find their pensions.

Kim North is managing director at Technology & Technical

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Tell clients to reign in debts, Lloyds chief economist tells planners

Advisers should tell clients to rein in their personal and corporate debts in anticipation of a potential interest rate rise and uplift in inflation, chief economist at Lloyds Bank Trevor Williams has said.

Speaking at a Personal Finance Society conference in London yesterday, Williams said that a cautious economic outlook meant that debt servicing should be a key priority for those involved in the advice profession.

Williams said: “Public sector debt, that's going to go up. Are households really prepared? At the moment that's sustainable, it's not excessively high. But we are at a turning point. We are now beginning to get more indebted. That's the point. Household balance sheets are now beginning to go back up again, become more stretched…Saving rates are going to remain low.”

“Defaults are beginning to edge up because borrowing is beginning to go up. They are very low but they are beginning to go up and we need to be wary.”

“Debt servicing is a weak area. If interest rates go up from 0.25 we have a problem given the high level of debt that there is. Personal insolvencies are beginning to turn up because we are borrowing more and therefore the riskyness is beginning to increase.”

Williams also said that planners should warn clients that their finances may become less stable over the coming years and make sure they are in a position to pay off debts.

Williams said: “Debt servicing pressure is what we have to keep focused on from a personal finance perspective. How much debt have you got in total, whats your ability to service this debt, in particular in the context of an increase in interest rates in the years ahead as inflation increases and erodes the real value of your income. That's the risk we face.”

“This is the time for you to be very cautious and to tell those people you talk to about their personal finance position that its likely to get more vulnerable over the next few years and ensuring they have the ability to pay any debts that they have. If you are advising lenders they too should be cautious about ensuring people don't over-borrow.”

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PFS calls for guidance to be regulated

Guidance services should only be offered by authorised firms that commit to professional standards and treating customers fairly frameworks, the Personal Finance Society has said.

While the PFS is backing the Treasury's plans to redefine advice to redefine regulated advice to just advice involving a personal recomendation, the professional body fears the increasing the scope of unregulated guidance could lead to consumer detriments without further safeguards.

Chief executive Keith Richards said: “Extending the scope of guidance to address entry-level or less complex savings and investment needs will help consumers make better informed decisions, and protect them from the increasing risks of 'mis-buying' and scams.”

“However, as the prevalence of scams continues to rise, consumers must be able to rely upon minimum standards from any firm or individual offering financial guidance, coupled with appropriate levels of protection.”

Guidance providers should have to abide by professional frameworks such as the Standards, Training, Accreditation and Revalidation programme, the PFS suggests.

Richards says: “The measures we have proposed should mitigate the risks of firms attempting to use guidance services to distribute products without being subject to regulation.”

When the new definition of advice and guidance is introduced, the PFS says it would also like to see those being the only two labels being used in the sector, removing terms like “basic,” “simplified,” “streamlined” “focused” or “gated” advice so consumers are clear on what each offers.

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FCA looks at merging FSCS and PI bills

The FCA is discussing combining Financial Services Compensation Scheme protection with professional indemnity insurance as part of the FSCS funding review.

Personal Finance Society chief executive Keith Richards says one of the ideas being talked about is a potential centralised fund that advisers would pay in to instead of paying FSCS bills and PI insurance separately.

The centralised fund could address new exclusions and high excess charges, and would be large enough to cover all payments when firms are likely to go out of business.

Speaking to Money Marketing Richards says: “Combining both PI and FSCS protection under one combined centralised mechanism is one of the potential options that should be considered.

“From a PFS point of view we are not suggesting that one is better than another, but would expect a sensible review to a least consider them only to discount them if they are not appropriate.

“PI is like any insurance, you pay a premium to protect your clients and your business from a risk of failure…The difference with PI is policies are reviewed on an annual basis to see if they are over-exposed to certain markets.”

He says because PI cover is able to exclude certain risks or withdraw cover, that can expose an advice firm to failure should a complaint occur in a specific area.

Richards adds: “What the FSCS has realised with PI is it doesn't work and could be exposing advice firms for future failure.

“One of the considerations about combining them into a centralised fund is that it builds up sufficient value to not only protect the advice firm but also the consumer…There would be no right of the central fund to review or change cover. It's just a consideration of whether there are solutions that service the public interest and the advice sector's.”

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Development focus: Is AF3 still the right path for me?

The CII's Advanced Diploma AF3 pension planning unit has always been a challenge for exam candidates and caused much upset with its decreasing pass rate. Back in 2012 51.93 per cent of candidates passed. By 2015 this had plummeted to 31.47 per cent. A 20 per cent decrease in such a small amount of time should be a major source of concern.

But just as I was about to write an article on what can be done to improve pass rates, there came an announcement from the CII: AF3 is being withdrawn after the April 2018 sitting and two new pensions exams – AF7 and AF8 – are being introduced from October 2017.

If you had planned to sit AF3 before the cut-off you may be wondering whether it is still the right path for you. If it is, that leaves just three sittings (April 2017, October 2017 and April 2018) to get this 30 credit exam under your belt. Or you may like to consider other options.

AF7 is the new Pension Transfers exam. It is a short-answer written exam with two case study-based questions. It also forms a part of the new Certificate in Pension Transfers qualification (the aim of which is to satisfy the FCA requirements for undertaking pension transfer activities, although approval is not expected until February).

But while AF7 is a Level 6 exam, the Certificate in Pension Transfers is only a Level 4 qualification. It is worth bearing in mind other examining bodies offer a Level 6 qualification for pension transfer activities.

The study text for AF7 will be available from July although the syllabus is already on the CII website. AF exams do not normally have study texts, so this is interesting. It suggests the material covered will look a lot different to that in AF3, with only a small number of overlaps.

Meanwhile, the new AF8 Retirement Income Planning exam will focus on those areas not covered by AF7. Full details will not be available until mid-2017 but we expect it to cover many of the topics examined in AF3.

So where do you go from here if you were planning to sit AF3?

It depends on your individual needs. AF3 provides 30 Level 6 credits as opposed to AF7's 20. It therefore follows AF7 should be “easier”, which should address the low pass rates we have been seeing for AF3. That said, if you are aiming for chartered, a 30 credit AF exam is a better option to get you up to the 120 Advanced Diploma level credits needed.

If your main aim is not to get to chartered but you wish to undertake pension transfer activities and have already passed R01, R02 and R04 (as many as part of the Diploma in Regulated Financial Planning have) then sitting AF7 next October may be a better answer.

The only question mark then is over the Certificate in Pension Transfers being a Level 4 qualification only. You may want to consider other options, such as the London Institute of Banking and Finance Award in Pension Transfers (AwPETR), which is Level 6.

All in all, it is encouraging to think the introduction of AF7 and AF8 should address the abysmal pass rate of AF3. However, from reading comments from candidates in the press and on social media, there are clearly concerns over the decision to provide a Level 4 rather than Level 6 qualification, and awarding it only 20 credits.

This does not make the AF7 option quite as clear-cut as it may have been if it offered 30 credits and formed part of a Level 6 pension transfers qualification.

The next couple of years could turn out to be very interesting as other examining bodies work hard to improve and promote their offerings.

Catriona Standingford is managing director at Brand Financial Training

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Govt to ban pension cold calling in Autumn Statement

Chancellor Philip Hammond will ban pensions cold calling in the Autumn Statement next week with scammers facing fines of up to £500,000.

Under the proposed regime, all calls where a business has no existing relationship with the consumer will be forbidden. This includes scammers targeting those who are opted-in to receiving third-party communications.

The announcement follows the pensions sector getting behind a petition to ban pension cold calling that was started by Red Circle Financial Planning director Darren Cooke in September.

The proposals also include wider measures to crack down on pension scams including giving firms more powers to block suspicious transfers.

Seems we'll get good news on banning pensions cold calling in Autumn Statement. About time too. Well done petition @RedCircleFP @philbray73

- Ros Altmann (@rosaltmann) November 18, 2016

The Treasury says scammers could be behind as many as one in 10 pension transfer requests.

The proposals will also suggest making it harder for scammers to open fraudulent pension schemes. It plans to do this by stopping small self-administered schemes from setting up by using a dormant company as the sponsoring employer.

A statement from the Treasury says there is one pension cold call made every eight seconds with almost 11 million pensioners targeted each year.

According to the Treasury, savers reported estimated losses of almost £19m to pensions scams between April 2015 and March 2016.

The Treasury statement says: “With signs that pension fraud is on the increase, the Chancellor believes that introducing hard-hitting changes – to stop scams before they occur – is more important than ever.”

The Government will consult on the proposals before the end of the year and the next steps will be announced in the Budget.

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Are providers facing the slow death of the annuity market?

Providers are continuing to back annuities despite a mass exodus from the market amid predictions that a “perfect storm” could lead to the sector becoming unviable.

LV= is the latest provider to rethink its enhanced annuity offering, having entered discussions with staff about plans to quit the market last week. This Wednesday, it decided on leaving. Standard Life also pulled out of the open annuity market earlier this month.

The FCA is also investigating several providers over historic non-advised annuity sales which is thought to have contributed to some firms feeling exposed.

Who is left?

According to Hargreaves Lansdown, six providers have withdrawn from offering the open market option since pension freedoms were announced. Reliance Mutual was the first to leave in July 2014, Friends Life exited after its merger with Aviva in April 2015 and Partnership also left the market after its merger with Just Retirement in April 2016. Prudential, Aegon and Standard Life all withdrew this year but still offer in-house annuities.

Aegon UK chief executive Adrian Grace says it is difficult for providers to be good at everything and understands why more firms might be considering pulling out of annuities.

Grace says: “We are very clearly moving out of traditional risk-based products that life and pensions business have historically made most of their strategic plays on. We are moving out of annuities, but we won't be the last to do that. Others will see that annuities don't have a bright future and look for alternative vehicles to make money.”

“The annuity market has shrunk because of pension freedoms,

it has probably reached the lowest level it will get”

Hargreaves says it still offers a “whole of market” annuity service through eight firms. Aviva, Canada Life, Legal & General and Retirement Advantage have a standard and enhanced offering, while Just Retirement, Scottish Widows and LV= are solely enhanced, and Hodge Lifetime is solely standard annuities.

Hargreaves Lansdown retirement policy head Tom McPhail says the environment post-pension freedoms is a “perfect storm” for annuity providers and warns of the future viability of the annuity market.

He says: “Pension freedoms have boosted demand for drawdown as an alternative to annuities, monetary policy has driven down interest rates to unprecedented levels, which has squeezed margins, and tough solvency requirements have imposed high operating costs on the insurers. It is hardly surprising so many companies are choosing to review their terms.

“The risk to investors is if this trend continues, one day soon the UK may not actually have a viable annuity market at all. That would be bad news for millions of pension investors who will want to buy a guaranteed income in years to come.”

The regulation factor

Regulatory changes have been cited as a key factor in providers reassessing their annuity offerings. The European capital regime Solvency II, which came into force in January, requires insurers that sell annuities to hold enough capital to pay customers if they live longer than expected, or if funds backing them perform worse than expected.

Aberdeen Asset Management retirement savings head Gregg McClymont explains the solvency requirements have had a particularly large impact on insurers that are unable to move towards higher risk assets to back their annuity products for regulatory reasons.

McClymont, a former Labour pensions spokesman, says: “You have to hold a lot of capital on your balance sheet to be an annuity provider. The requirements in a low rate world are tough. It's tough as a big insurer to get the returns you need to back your policies when yields are so low.

“No one's got a crystal ball, but there's no particular reason why 'lower for longer' is going to disappear suddenly. Because firms are providing guaranteed products it's a particular challenge; you can't just move up the yield curve, you have to be doing things that have very little risk attached that meet the requirements of regulators for assets to back their policies.”

LV= has cited changes in retirees' buying habits since pension freedoms as one of the factors behind its proposal to stop offering enhanced annuities.

Retirement Advantage pensions technical director Andrew Tully agrees the market has contracted since the reforms but says there is still a demand for guaranteed income products.

He says: “There are people who still want some certainty or level of guarantee whether that is for the whole pot or part of the pot. There is still a demand for annuities although that demand is lower than it was a few years ago. Pension freedom has seen the annuity market shrink, it has probably reached the lowest level it will get.

“There is still a competitive annuity market out there. In the last four or five weeks we have probably seen annuity rates go up 5 or 6 per cent. Part of that is down to gilt yields but part is also down to competition. Even at a time where we have seen some providers dropping out we have seen the market going up.”

“Others will see that annuities

do not have a bright future

and look for alternative vehicles to make money”

However, research by Moneyfacts suggests 2016 is “the worst year ever for annuity rates”.

The research suggest the annual standard annuity income fell by 6.4 per cent and the average annual enhanced annuity income dropped by 10 per cent between July and September.

Data from the Association of British Insurers suggests in the three months to April, the latest data available, the amount invested in annuities fell from £1.1bn to £950m.

A contracting market can signal concerns for consumers who have less choice in annuity products. Tully also says it is important for annuity buyers to shop around to sure they are getting the best deal.

He says: “One of the biggest issues is to get people shopping around for those competitive rates on the open market. About 60 per cent are still just buying from the holding provider. That is a bigger consumer detriment that people are just rolling over and buying an annuity from the company they are saving up with.”

Fairer Finance managing director James Daley has an optimistic outlook on providers leaving the market and considers there is still a demand for enhanced annuity products.

He says: “This has been triggered mostly by the pension freedoms and more people taking an active part in deciding what they are going to do in retirement. Hopefully that means that more people are getting a better deal overall.”

Expert view

Historically, annuities have always had a really important place in people's retirement planning but since George Osborne's freedom and choice speech people's buying behaviour is beginning to change. People are starting to look at shorter time horizons rather than the permanent decision of an annuity. We have seen a rise in fixed-term annuities and guaranteed drawdown and, at the same time, we have been in a low interest environment for a long time. We have got more stringent regulation coming through in Solvency II and it is a tough environment to deliver an annuity that gives a positive outcome for the consumer.

Solvency II puts constraints around the kinds of assets that can be used to back annuities, which means there is a smaller group of assets that can be used. To some extent, those assets are also the assets that are being purchased up by quantitative easing so it is quite challenging to find assets producing enough yield to create income for annuities.

That said, we still think annuities have a place and fixed-term annuities are becoming more and more popular and are a viable option. A fixed-term annuity can generate value to be returned to savers at a particular point in time. Importantly, people are looking at how their retirement might play out, how much income do I need right now in what might be an active phase of retirement versus what income will I need in the future. There are a variety of ways people use fixed income annuities alongside drawdown to plan their retirement in phases.

At the end of this consultation if we do stop offering enhanced annuities we will be plugging that gap by other products available in the market. Just because we do not manufacture them does not mean we do not think they are good so we will use other people's products.

Philip Brown is policy head at LV=

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Watch MM Wired: FAMR in action – but will it work? – LIVE NOW

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Schroders: 'We're not buying distribution with Best Practice stake'

Schroders says it is not adopting a strategy of buying up distribution following its investment in network Best Practice and its parent company Benchmark Capital.

Money Marketing revealed last week Schroders has taken a “significant” stake in Benchmark Capital for an undisclosed sum.

As well as network Best Practice, Benchmark Capital includes chartered IFA Aspect 8, network and chartered financial planning firm Evolution Wealth, its platform Fusion Wealth and technology firm Creative Technologies.

Under the terms of the deal, Schroders group chief executive Peter Harrison will join the board of Benchmark Capital as chairman. Schroders intermediary director Robin Stoakley and global head of wealth Andrew Ross will also join as non-executive directors.

Ian Cooke will remain a core owner of the business and will continue as chief executive of Best Practice and Benchmark Capital. He says Best Practice and Aspect 8 will continue to offer independent advice.

Asked whether the move signalled a move into the vertical integration models run by the likes of Old Mutual Wealth and Standard Life, Schroders UK intermediary co-head James Rainbow says: “If you think about the underlying motivation for what those firms is, there is a strong element which is about the depth of the relationship. This is not about us pursuing a vertical integration strategy. But it is important to broaden the range of opportunities and services we can provide to our core intermediary client base. It is not about imposing things, but offering more choice.”

He says the relationship between Schroders and Cazenove, the wealth manager Schroders acquired in 2013, demonstrates its commitment to independence.

Both Schroders and Benchmark Capital have ruled out launching a direct-to-consumer service as part of the deal.

Cooke says: “We enable firms to do D2C, we don't do D2C ourselves. Benchmark has grown to service the adviser and wealth management market. Our D2C platform is about helping advisers to digitise their businesses and build in efficiencies.”

Cooke says what excites him about the deal is the opportunities for international expansion.

He says: “We already power firms in Hong Kong and Singapore, but only with back-office systems. With Schroders we have the ability to power platform solutions as well.

“We looked at other routes to push our business forward, but there was a strong cultural alignment with Schroders. It also gives us international opportunities that we didn't have access to before.”

The deal is expected to complete early next year.

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Choosing an Adviser Platform, a new guide from Platforum

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UK Govt risks downgrade if it fails to understand EU single market, S&P warns

S&P Global Ratings says the British government has not yet grasped the principles ruling the European Union's single market and says the country is heading for a so-called “hard Brexit”.

The ratings agency says the UK would take the largest economic hit from leaving the bloc, The Guardian reports.

S&P also warns in its latest country report for the UK that the UK faces a further downgrade after it was cut from AAA to AA immediately after the Brexit result.

The report says the UK government does not grasp the “indivisibility” of the single market's four freedoms, which are the free movement of people, capital, goods, and services.

S&P chief sovereign credit officer Moritz Kraemer says: “Even if Westminster were to acknowledge the EU position, it is hard to fathom how a rather hard Brexit can be avoided unless both sides become much more flexible than they appear today.”

The report says the UK's economic power is diminishing, accounting for 5 per cent of global GDP compared to a projected 3 per cent in 2020, and is deeply divided following the Brexit vote.

Kraemer says: “Far from healing festering wounds, as was then Prime Minister David Cameron's intention, the referendum has deepened and laid bare the schisms in British society.

“Most of the economic impact will hit Britain itself. The second-round effect on the world economy is likely to be more limited, as the UK economy accounts for a small and shrinking share of global GDP.”

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Inflation statistics to include housing costs

The Office for National Statistics is to include housing costs in its headline measure of inflation from March next year.

Following a consultation, the ONS has decided to switch its preferred measure of inflation from the consumer price index (CPI) to the consumer price index including owner occupier's housing costs (CPIH) from March.

The measure calculates housing costs for owner-occupiers not in relation to house prices, but based on the rental value and council tax band of their properties.

In September the CPI was 1 per cent, while the CPIH was 1.2 per cent.

It is not yet clear whether this measure will be used for index-linked state benefits or for the Bank of England's inflation target.

ONS chief executive and national statistician John Pullinger says: “I have listened to views on CPIH and ONS has engaged with interested parties and released a number of publications to raise understanding and confidence.

“Various users have indicated that they are open to recognising CPIH as the main measure of consumer price inflation and are comfortable with the methodology behind it.

He adds: “I have therefore concluded that we will make CPIH our preferred measure of consumer price inflation as I indicated earlier this year.

“I believe that CPIH has a number of desirable properties, most notably the inclusion of an element of owner occupiers' housing costs.

“It also addresses several flaws and limitations present in alternative measures.

“We intend to make CPIH the preferred measure from March 2017, by which time all the planned improvements will have been implemented.”

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Stephanie Flanders: Trump needs to commit to Yellen

The most reassuring statement investors need from Donald Trump would be a commitment to see the Federal Reserve's chair finish her mandate, JP Morgan Asset Management's Stephanie Flanders says.

Following yesterday's US presidency victory by Trump, commentators have continued to raise concerns that a change in the Fed leadership has become more likely.

This follows Trump's recent criticisms of the US central bank with suggestions that Janet Yellen could leave her post as the Fed's chair in the event of a Trump victory.

Flanders, who is the chief market strategist for UK and Europe at the US asset manager, says: “From a market standpoint, the single most reassuring statement that Trump could make over the next few weeks would be one saying that he supports the independence of the US central bank and he would delighted to see Janet Yellen stay as chair when her current term ends in January 2018. On the campaign he said he would replace her. That's one promise he should break.

“Of course, whether chairwoman Yellen will want to stay is another matter.”

At the Fed's September meeting, Yellen hit back a Trump's claim that the bank's decision making was being driven by its willingness to help the Clinton campaign, rather than the US economy.

Speaking at the press conference following September's FOMC meeting Yellen said she “can say emphatically that partisan politics plays no role in our decisions” whether or not to raise interest rates. “We do not discuss politics at our meetings,” she said.

As reported yesterday, the likelihood of a US interest rate hike in December dropped from over 80 per cent to 50 per cent following Trump's election win, as well as rate expectations for 2017.

Meanwhile, Flanders and her team are not predicting “a radically different path” for the US economy or for US interest rates following the election results result.

She says: “The combination of looser fiscal policy and increased uncertainty over globalisation would be likely to mean a stronger dollar and potentially higher US inflation and higher interest rates.  That is not a hugely helpful combination for the rest of the global economy, especially emerging markets.   But that, too, is uncertain and could take time to materialise.”

In May, Flanders said the US economy is the most important short-term global influencer – rather than Brexit. She said the prospects for the US look reasonably positive as long as the central bank can keep to its plan to return interest rates to more “normal” levels.

At that time Flanders expected two further interest rate hikes by the Fed in the second half of this year.

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Mr Buffettology: US can guard against 'mad-cap' Trump policies

The man behind the Buffettology fund believes the US political system is well placed to block the more “mad-cap” policy ideas from president-elect Donald Trump.

Sanford DeLand Asset Management investment director Keith Ashworth-Lord manages the £64m CFP SDL UK Buffettology fund, which aims to mirror the investment principles of billionaire investor Warren Buffett.

Speaking at a Yellowtail Financial Planning client event in London yesterday, Ashworth-Lord said the fund's investment strategy will not be swayed by the likes of Brexit and the outcome of the US election, despite the uncertainty these developments bring.

He said: “I don't believe the rhetoric that was coming out of the campaign will translate into policy. I don't think Trump will be able to get away with some of his more mad-cap ideas.

“We have to remember a lot of senators were not backing Trump, and there will be a lot of checks and balances to guard against his wilder policies. That is what the US constitution was founded on.”

Ashworth-Lord admitted the more worrying prospect under Trump is the unwinding of free trade deals.

But he added: “His domestic policies, such as the focus on infrastructure, are reflationary. We should actually be doing more of that here in the UK. So I am not overly concerned.”

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In search of value? Banks and the sectors leading Europe's recovery

By Rob Burnett, head of European equities, Neptune 

After nine years of underperformance versus quality growth, Rob Burnett, manager of the Neptune European Opportunities Fund, believes that value strategies have reached an inflection point.

Watch Rob discuss why he believes value is well positioned to resume its historical trend of outperformance.

Click here to watch video

Important information

Investment risks

Neptune funds may have a high volatility rating and past performance is not a guide to future performance. These are Neptune's views and as such this document is deemed to be impartial research. Neptune does not undertake to advise you as to any change of Neptune's views. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations and your clients may not get back the original amount invested. References to specific securities are for illustration purposes only and should not be taken as a solicitation to buy or sell these securities. Neptune funds are not tied to replicating a benchmark and holdings can therefore vary from those in the index quoted. For this reason, the comparison index should be used for reference only. Neptune does not give investment advice and only provides information on Neptune products. Please refer to the prospectuses for further details.

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Outgoing MAS chief: I've turned us around

Outgoing Money Advice Service chief executive Caroline Rookes has credited her tenure with turning the embattled agency around, despite having to fend off constant criticism from Government and advisers.

Rookes announced yesterday she will retire from her post in April 2017. She had initially intended to retire in February this year, but wanted to stay to help steer the government's discussions over the future of the public guidance services.

Asked what her legacy at MAS will be, Rookes tells Money Marketing: “I think I have turned the Money Advice Service around. When I first started it was a pretty unhappy organisation that was being criticised by all sides.”

“Now we are an organisation that has a strong vision, I have a strong team in place and we are providing extensive services to help the public. As a result of all that, most of our detractors are now supporters, which we have seen with the Government announcement of the move to a single organisation.”

“We have lost the headlines that Money Advice Service is being scrapped and we have got much more positive support for ensuring that all of the good things in MAS are preserved and carried forward into the new organisation.”

Caroline Rookes did a fine job in the most difficult conditions https://t.co/DM4Zjq0Mu3

- Mick McAteer (@MickMcAteer) November 8, 2016

However, she says throughout her tenure MAS has been under constant scrutiny, including from the Treasury Select Committee and through an independent report.

She says: “The whole time the organisation has been suffering from uncertainty about its future; constant speculation about the future, constant uncertainty which makes life challenging in terms of running an organisation, ensuring that staff morale remains high and that we deliver what we say we are going to deliver.”

MAS has not yet started looking for Rookes' successor.

The Government said last month it plans to merge MAS, The Pension Advisory Service and Pension Wise into one organisation.

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LV= weighs up stopping enhanced annuity sales

LV= is consulting with staff on a proposal to stop selling enhanced annuities and increase its focus on secure drawdown.

The insurer says the proposed move follows a review of its annuity business and reflects changes in retirees' buying habits since pension freedoms, as well as the interest rate and regulatory environment.

LV= will offer standard and enhanced annuities from other providers and will consider offering annuity solutions from potential partners through other propositions, for example its Retirement Account.

LV= retirement solutions managing director John Perks says: “In an ongoing low interest rate environment and with Solvency II capital requirements further depressing annuity rates, we no longer feel our enhanced annuities provide good value for customers.”

He says: “We believe it makes sense, therefore, for LV= to focus on a mixture of safe drawdown products, fixed term annuities, guaranteed funds, investments and equity release.”

LV= will be contacting advisers to inform them of any changes.

The FCA announced last month it is investigating a number of annuity providers amid concerns they failed to inform customers they may be entitled to a higher rate of income through an enhanced annuity.

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London & Country lines up IPO

The UK's largest independent mortgage broker London & Country has set out plans for an initial public offering.

L&C has set a deadline of December 2018 to list, but has not said which exchange it is targeting.

It has also not said how much it hopes to raise through the IPO.

The decision follows three months of consultation on options for taking the business forward, which included a potential sale after “certain expressions of interest from third parties.”

L&C will offer a minority stake in the company in the run up to a float, and is targeting development in both its online infrastructure and brand awareness.

L&C managing director Phil Cartwright says: “We see an opportunity to create significant value in the next few years.  The business is at the forefront of investment in distribution technology and is extremely well positioned to take advantage of shifting trends in the way consumers buy financial products. In combination with our qualified mortgage adviser sales force, this will deliver an unparalleled service giving customers choice about how they access our award winning, fee free mortgage advice.”

L&C described the run-up to the EU referendum as “difficult” but the firm says it is still on track to increase profits in 2016.

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MPs call on Govt to scrap triple lock

The state pension triple lock should be dropped, the work and pensions select committee of MPs has argued.

Announcing the results of its inquiry into inter-generational fairness, the committee said that while the triple lock – which has uprated the state pension by the highest of inflation, earnings or 2.5 per cent every year since 2012 – had “made a valuable contribution in increasing the relative value of the state pension”, it would cost too much to maintain.

The report reads: “Its retention would…tend to lead to state pension expenditure accounting for an ever greater share of national income. At a time when public finances are still fragile, this is unsustainable.”

It adds: “The retention of the triple lock would not be intergenerationally fair. We urge political consensus before the next general election on a new earnings link for the state pension.”

After being re-elected last year the Conservative government pledged to retain the triple lock until 2020. The policy has ardent supporters including former pensions minister Steve Webb, but has been opposed by others including the immediate former pensions minister Ros Altmann.

State pension expenditure is currently around 5.5 per cent of GDP. Without increasing the state pension age any more than is already planned, the Office for Budget Responsibility predicts this will rise to 8 per cent by the mid-2060s.

The committee recommends replacing the triple lock with an earnings linked system.

The report says: “We recommend the Government benchmark the new state pension and basic state pension at the levels relative to average full-time earnings they reach in 2020. The triple lock should then be replaced by a smoothed earnings link.”

The committee adds that indexation should still protect pensioners from the impact of inflation however.

It adds: “In periods when earnings lag behind price inflation, an above-earnings increase should be applied to protect pensioners against a reduction in the purchasing power of their state pension. Price indexation should continue when real earnings growth resumes until the state pension reverts to its benchmark proportion of average earnings. Such a mechanism would enable pensioners to continue to share in the proceeds of economic growth, protect the state pension against inflation and ensure a firm foundation for private retirement saving”

Provider reaction

AJ Bell senior analyst Tom Selby says that the future of the triple lock looks “bleak” in light of the committee's findings.

He says: “Margaret Thatcher's decision to scrap the earnings link for the state pension in 1980 was seen by many as an attack on pensioners. The triple lock has at least partly restored some of the value that was lost during that 30-year period. However, it was never meant to be a permanent measure and costs the Exchequer billions. The Government will be wary about hitting pensioners ahead of the 2020 election – and breaking its manifesto promise in the process – but beyond that the triple-lock's future looks bleak.”

However, Hargreaves Lansdown head of retirement policy Tom McPhail  notes that politicians will be way of ditching the triple lock for fear of losing votes from retirees.

He says “Politicians are chronically compromised when making any policy decisions which might be detrimental to older citizens. You only have to look at the turnout in general elections to understand why: 78 per cent of the over 65s voted, compared to just 43 per cent of the eligible under 25s. The triple lock has served an important function in bringing pensioner incomes back into line with the rest of the population.”

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Robo-advisers hit back at claims they face battle for survival

Robo-advisers have challenged a report earlier this week which argued that current robo-advice firms will be overtaken by established finance or technology brands.

In its report, analysts at asset manager Bernstein said that the “Uberisation” of asset allocation could present a threat to new firms that have entered the automated advice market.

Bernstein believes that the assets run by robo-advisers will increase significantly – a bright future for the industry as a whole – but larger platforms may overtake the current robo-advisers, particularly given low barriers to entry in to the market.

The report reads: “The robo-advice approach looks to have a rosy future, though not necessarily the current robo-advisors themselves. Barriers to entry for the actual robo part are very low we think. So this may well be exploited by more established finance (or tech) brands with a broad distribution capability.”

In the report Bernstein also questioned how threatening robo-advice is for active managers, given that the current propositions are only allocated to passive managers.

Bernstein says there is no reason why active funds could not be included in the robo offering but they do not necessarily fit with the marketing message of “low fees and simple/transparent product”.

The report says: “The robo-advisers have an incentive to make sure that overall fees are kept low by minimising the fee paid for managing the underlying assets. The inclusion of active funds could well make sense though if, for example, they were offering idiosyncratic returns not accessible by the other passive offers.”

It adds: “The most immediate issue caused by the robo advisors is that in their current form they accelerate the already relentless shift to passive investments and thus put additional pressure on active fund fees. In addition, if active funds were to be included in the robo allocations in future, presumably there would be pressure for those active funds to have substantially lower fees to make them competitive.”

Start-up fightback

Incumbent robo-advice brands have hit back at the report however.

Scalable Capital managing director Adam French says: “Bernstein's statement on the future of robo advice lacks a full understanding of how the industry has developed. While they're absolutely right that standardised products based on buy-and-hold passive investment strategies will find it difficult to compete, they have not taken into account the innovation that is taking place with regards to the investment methodology itself – replacing a simple buy-and-hold strategy with advanced, technology-enabled strategies that were previously only available to institutional investors.”

eVestor chief executive Anthony Morrow calls the report “too general” and said that history did not support the idea that incumbents are automatic winners in new markets.

General executive manager for wealth at financial services technology Iress Mark Loosmore, however, notes that the “true power of robo is when working alongside other distribution or communication channels backed by either big brand names or existing strong relationships.”

 

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