Passive managers will come out on top in robo-advice battle

Research suggests the fledgling robo-advice market will be dominated by just three to five providers as active managers struggle to turn a profit.

The research consultancy Finalytiq predicts start-up robo-advice firms will "fall by the way side" due to the high cost of acquiring clients and the strength of established passive fund managers.

In its paper, titled 'Laughing all the way to the bank', the firm says index fund managers are set to emerge as winners because they will be able to add on between 20 to 40bps to their index funds charges with only a small increase in fixed costs.

It predicts Fidelity - which is planning to launch its proposition Fidelity Go later this year - is most likely to lead the pack, with Vanguard and BlackRock slightly behind because of their lack of direct-to-consumer distribution.

In addition it says despite its strong brand and deep pockets, Hargreaves Lansdown might struggle to break into the market.

The report says: "Costs would have to be lower than its current proposition. Its propensity to push high-margin active funds, rather than low-cost passive, is a big disincentive to entering the robo-advice race."

Active managers in general will struggle and will need a "significant cultural shift" to cash in, says Finalytiq.

It says: "We don't see typical asset managers being in a position to cash-in by launching a robo-advice proposition, due to the low-margins and high client acquisition cost typically associated with robo-advice.

"The increasing intermediation we have seen in the last few years means that most asset managers have had little or on direct relationship with retail investors for many years. They have outsourced client services to advisers, platforms and pension providers.

"Many of them don't even know who the end investors in their own funds are and haven't engaged with investors for many years."

The firm adds the trend of established asset managers buying up robo-advice start-ups will continue as the cost of acquisition begins to bite.

In the UK Aberdeen Asset Management acquired Parmenion - which runs robo-adviser WealthHorizon - in September 2015, while in the US BlackRock snapped up FutureAdvisor last year and Invesco bought Jemstep at the start of 2016.

FinalytiQ says start-ups have evolved into "outsourced research and development labs" for traditional wealth managers.

It says: "The cost of client acquisition is one main reason why investment advice is so expensive and while robo-advice start-ups have improved efficiency in the areas of portfolio management, client reporting and the on-boarding process, it's costing them way more than they have anticipated to acquire clients."

Finalytiq founding director Abraham Okusanya says: "When the proposals from the Financial Advice Market Review get ironed out, you are likely to see robo-advice propositions growing in the marketplace but not many will be start-ups using new technology, it will be white-labelled propositions taken on by advice firms. There will be a flurry of launches and many of them will fall by the wayside."

Adviser view

Paul Stocks, director, Dobson and Hodge

Robo-advice is fine for simple things. The minute you get into tax planning or long -term projections, it becomes subjective. It gets messy where things are not straightforward and you become the conscience on the client's shoulder.

As soon as something complicated comes along I'm not sure how these systems will cope. With all the changes in areas like pensions how will a robo-adviser keep up?

US recession replaces China as fund managers' biggest fear

Fund managers' biggest fear is a US recession, replacing worries about the fallout from China, as managers are negative on both global growth and profits.

The latest Bank of America Merrill Lynch fund manager survey shows that the biggest tail risk facing markets is a US recession, with 27 per cent of managers selecting it. It replaces the fallout from China which was the top concern in the previous survey.

This was closely followed by emerging market or energy debt defaults, at 23 per cent.

For the first time since July 2012, fund managers' global growth and profit expectations have both turned negative.

Fund manager wariness on markets has led to the highest cash holdings since November 2001, at an average of 5.6 per cent.

Looking to the most crowded trades, fund managers are pouring into the US Dollar, shorting oil and emerging markets, and buying into tech giants Facebook, Amazon, Netflix and Google at 12 per cent.

The shifts in portfolio reflect fund managers' need for capital preservation, with moves into cash, utilities, bonds and telcomms and out of banks and equity markets.

Stephanie Flanders: Do market ructions signal bad news for the real economy?

Do markets know something investors do not? That has been the question posed over the past few weeks as they gyrated wildly despite economic indicators in the UK and other developed economies suggesting the recovery was broadly on track.

When markets have risen so far for so long, it is no surprise to see them become more skittish and investors become more downbeat about the returns they are likely to earn from here. That should not be a big concern for consumers, households or governments. The question is whether the market moves are actually signalling bad news coming down the track for the real economy.

The oil price and trouble in China have attracted the most investor attention. We do not think either of these pose an existential threat to the global recovery. But there is plenty of room for them to cause trouble, when expectations for growth in the developed world are still so mediocre.

Oil is a good example of this. The oil price usually falls as economies head into recession, and that is certainly what we saw in 2009. But the collapse in the price of energy we have seen over the past 18 months has not been accompanied by any fall in global energy demand.

What has changed fundamentally in this period is the supply side of the equation. The world is awash with cheap sources of energy from the US and elsewhere, and the big producers in Opec have neither the will nor the capacity to prevent that cheap energy from flooding the market.

The big jump in the oil price recently in response to suggestions Russia and Saudi Arabia might meet to discuss their oil production plans provided more evidence that it is the supply side of the equation driving the market right now, not any worrying fall in global demand.

As long as that is the case, most economists would stand by the view a further fall in the oil price since November is good news for the global economy as it puts more money into consumers' pockets.

But there are short-term consequences from cheaper oil that are not so positive. One is it is going to be even harder for central banks to get inflation back up towards target. The Bank of Japan surprised everyone recently by taking the official policy rate negative to -0.1 per cent. The European Central Bank is likely to take its policy rate even further into negative territory in the next few months as inflation expectations slide back once again.

Cheaper oil also inflicts big losses for companies and investors who have bet large on energy. Unfortunately for all of us, the energy sector is disproportionately represented in the main stockmarket indices in the US and Europe, especially the FTSE. That means the bad news for investors is a lot more visible and immediate than the extra spending by consumers.

That extra spending is happening, however, at least in the UK. We had some reassurance on that front in the latest GDP data. A roughly 2 per cent rate of growth is nothing to write home about and the manufacturing side of the economy is struggling against a backdrop of little or no growth in world trade. But there is little in the numbers to suggest the economy is about to grind to a halt. It is a similar story in the US and across the Channel.

You might say it was poetic justice that investors are now nursing losses, even as households and the broader economy move ahead. After all, we had plenty of years after the financial crisis when the reverse was true; when stock and bond prices marched upwards even as household incomes were falling in real terms and the economy was flat.

It would not be the end of the world if markets now treaded water for a couple of years while the economy continued to grow. With a bit of luck, that is exactly what we are about to see. But it is difficult for us to be completely relaxed when policymakers' room to respond to trouble is so much smaller than it was in 2008.

Stephanie Flanders is chief market strategist for Europe at J.P. Morgan Asset Management

FCA chair set to rack up record expenses bill

FCA chairman John Griffith-Jones is on track to file the largest expenses bill in the history of the regulator, figures have revealed.

In figures published today, the FCA showed that Griffith-Jones has racked up a mammoth ?29,738.69 in expenses after just three quarters of the year.

Griffith-Jones' total for the nine months starting April 2015 is exceeded only by former chief executive Martin Wheatley's bill for all of 2014/15, which saw the ex-boss claim ?33,017.59 for a full twelve months.

This means that if Griffith-Jones files more than ?3,279 in expenses for the three months to March 2016, he will reach the largest annual expense bill recorded by the FCA since its launch in 2013.

In the eleven quarters since the regulator's launch, Griffith-Jones has claimed an average of ?7,040.44 for each three-month period.

The chairman's bill is led by costs for foreign travel, which totals ?25,000 for the year-to-date.

By contrast, acting chief executive Tracey McDermott, who took over following Wheatley's departure last Summer, has recorded just ?5,539 in expenses claims for the year-to-date.

McDermott's bill is exceeded by that of FCA strategy and competition director Chris Woolard, who joined the regulator's board in the aftermath of Wheatley's exit. Woolard has claimed ?7,712, almost exclusively in the final three months of 2015.

Wheatley also filed ?4,638.91 in expenses between April 2015, and his departure in mid-July.

Wheatley's exit was confirmed on 17 July, by which point the outgoing boss had already claimed ?252.36 in expenses for the quarter.

An FCA spokeswoman says: "The FCA seeks to minimise the necessity of domestic and overseas travel. The FCA could not however fulfil its role as a financial regulator without regular meetings with other overseas regulators and visits to group head offices of the firms which it is responsible for in the UK.

"Furthermore, much of the financial rules which govern the United Kingdom are determined in committees which meet outside the UK and the attendance of FCA personnel at such meetings is essential if the FCA is to discharge its role effectively."

Investment fraud victims to get ?2.9m back after FCA intervention

Victims of a ?5.5m unregulated investment scam are set to lose almost half of their money after a judge ordered funds retrieved from two ringleaders be returned to investors.

Southwark Crown Court today ordered almost ?2.65m to be returned to around 100 people who fell victim to the scheme, which was established and operated by Alex Hope.

In addition, Hope has been hit with a ?166,696 confiscation order which he must pay in full in three months. If he doesn't, Hope will face a further 20 months in prison on top of the seven year sentence he was handed in January last year.

Today's order follows a similar order placed on Raj Von Badlo, Hope's co-defendant, who was ordered to pay ?99,819 at a hearing in December. This sum must also be paid in full within three month or he will be hit with a 15 month prison sentence on top of the two-year sentence he was given in January last year.

The FCA says investors will receive "in excess of ?2.9m" back following the ruling - just 55 per cent of the sums invested.

FCA director of enforcement and market enforcement Mark Steward says: "This is the largest sum returned to victims of crime following an FSA/FCA prosecution and is the result of quick action in the first instance to restrain the proceeds of Mr Hope's offending. The FCA will continue to work hard to ensure wrongdoers are held to account not only for their wrongdoing but also for its consequences, especially to victims, to the fullest extent possible."

The scam centred on Hope's claim he would trade investor's money successfully on the foreign exchange markets. In reality, only 12 per cent of the total money investors gave Hope was ever traded and when he did trade, "he lost almost all of the money in his trading accounts", according to the FCA.

Hope exaggerated his trading abilities and the returns he was making, and used doctored copies of statements from his trading account to mislead investors.

Von Badlo promoted Hope's scheme to a large group of investors. Over 75 investors gave ?4.29m to Hope as a result of Von Badlo's actions, the FCA says.

Hope used over ?2m of investors' money to fund his lifestyle. He spent over ?1m in a casino, over ?200,000 on designer watches and shoes, ?60,000 on foreign travel, and over ?600,000 in bars and nightclubs in London, Miami and New York.

Experts back Tyrie over FCA 'regulatory overload' concerns

Senior financial services experts have backed warnings from Treasury committee chairman Andrew Tyrie of "regulatory overload".

Speaking in a Westminster debate on the Financial Services Bill last week, Tyrie warned the FCA and the Bank of England risk being overwhelmed by the Government's legislative agenda and said regulators could be powerless to prevent the next financial crisis.

Tyrie said the Government's reforms - including the pension freedoms and the introduction next month of the senior managers regime - are placing "huge demands" on both the Bank and the FCA.

He said: "We may be close to the point of regulatory and supervisory overload. By that I mean the Government and Parliament could be raising expectations of what they can achieve to a point where they will never be perceived to have succeeded.

"We need to ask just how much national regulation can achieve in an open financial world. The truth is: perhaps not that much, and certainly less than many people think."

EY senior adviser Malcolm Kerr says: "The warning lights are definitely on amber, and not green at this point.

"If you think about it, the market has been saying the same things for quite a long time, and saying they have been finding it difficult to react to everything taking place.

"If that's now the case at the FCA level, it could create even more demands on firms like providers and advisers if the regulator needs to find a way to ease the pressure.

"The motives are entirely appropriate but that doesn't mean the level of regulation has to be constantly increasing.

"Maybe there are more efficient ways of regulating the market, but it does appear at the moment more regulation doesn't necessarily equal better regulation."

Former FCA board member Mick McAteer says the increased size and complexity of the UK's financial services market makes it harder to regulate than ever before, while expectations of the regulator remain unadjusted.

He says: "There have been major successes in the post-crisis era. It's silly to argue that there hasn't been a big improvement, and the regulator has become more effective as well.

"But they will never meet expectations because people want it to be perfect and don't understand how complex the reality really is.

"You can maybe have perfect regulation if you throw 10 times the amount of resources at it, but I'm not necessarily sure that is what people want, and the FCA might well then be accused of overregulating."

Expert view

I have a lot of sympathy for the workload that the FCA has on, and the same applies to the amount of work required of regulated firms.

Regulators and the Government, and indeed the EU commission, need to stop and think about the amount of change being imposed and the compliance costs associated with that.

For example, Mifid II is sucking up a lot of time and resource from firms and regulators, despite being a matter that is largely out of their control, while there is also a lot of UK change for them to address.

I do not think that workload has ever been as intense as it is at the moment.

And it comes about because we are still dealing with regulations and measures brought about as a consequence of the financial crisis, while at the same time looking at new things linked to a more consumer-focused approach.

One alternative would be to explore a return to principles-based regulation, which is something the FSA looked at, but it fundamentally did not work properly. It was too generic and we need to keep things prescriptive, so all sides need to make sure the speed of change is thought through.

Tim Dolan is partner at KWM

Adviser view

Pete Matthew, managing director, Jacksons Wealth Management

The FCA faces such a varied workload and there is so many different elements to financial services, from massive multinational corporates dealing in multiple jurisdictions and currencies to little old me down in Penzance.

The only way of dealing with that is more people, and that is far from a solution that anyone in the industry would be happy with. So maybe we need to talk about regulating products instead, and self-regulatory aspects for some of the safer parts of the financial services community, because I do not see how any one body can deal with such a broad range of different topics.

German robo-adviser lands in the UK

German robo-advice firm Scalable Capital has been granted FCA approval to operate discretionary investment management services in the UK.

Using ETF-based investment portfolios meeting a range of risk profiles, Scalable Capital will reweight the underlying asset allocation based on forward-looking projections and an assessment of ongoing market developments.

Charges will be 0.75 per cent of the average invested capital, including account management and custody fees, as well as all trading costs for portfolio transactions.

Portfolios will be built from a universe of 1,500 ETFs. They are currently constructed using 14 products, which track indices across the four main asset classes - equities, bonds, property and commodities.

Investors can join the waiting list on the Scalable Capital website before the service launches later in 2016. The firm has been operating in Germany since 2015.

Leading the UK team are former Goldman Sachs trading division executive director Adam French and Dr Ella Rabener, the former founder and chief executive of Westwing Russia and associate partner at McKinsey & Company.

Adam French, co-founder and managing director of Scalable Capital says: "Our unique and dynamic risk management technology takes the digital investment industry to the next level. Our technology not only provides cost-efficient access to capital markets products, but also offers UK retail investors a more sophisticated investment methodology."