After three years spent on this administrative side in each of the firm’s main departments – personal equity plans, unit trusts, and pensions – and in the midst of a ceaseless bull market, he was appointed investment manager across all three departments, and a year later managing director of the firm.
“At the time I became managing director, the FTSE 100 was still in unrelenting bull mode, but soon after, of course, we entered a prolonged and deep bear market, which threw up new challenges, and the need to adapt, of course.”
This need to alter with changing times, lay behind Chelsea Financial Services’ adoption of new platform technology, ahead of many other competitor firms, with Mr McDermott overseeing the migration of client assets to the new medium.
“This was a real sea-change for us, and we were one of the very first brokers to push the re-registration of client assets in this way.”
At the same time, he ensured that the firm pushed hard on upping its profile to the public in general, and to potential and existing clients in particular, by talking directly to the press, and by increasing the communications resources used by the firm.
Part of this broadening out of Chelsea Financial Services’ profile was the building up of the research side of its website, which now not just covers the key products that Chelsea Financial Services can offer at discounted rates, but also highlights any funds that the firm believes have been performing consistently poorly, and which clients may wish to switch or transfer (these are detailed in the website’s “relegation zone”).
This drive to subtly re-shape the firm on an ongoing basis and to diversify its operational scope lies behind Chelsea Financial Services’ plans to launch an independent fund ratings agency and research centre – FundCalibre – early in the new year, in a joint venture with Albemarle Street Partners.
He said: “We know from our own experience that investors need help to narrow down fund choices and are seeking guidance to help make their investment decisions.
“Increasingly, investors of all types are looking for reassurance that fund research is independent and not biased in any way, and FundCalibre will be an invaluable web-based tool for these people.”
Indeed, subject to approval by the FCA, the ratings website will launch at a time when other ratings agencies’ operations have come under considerable criticism.
Most notably, in this context, the big three agencies (Standard & Poor’s, Moody’s, and Fitch) that rate the risk associated with various securities, from national to company-specific, have come under negative scrutiny for their ‘issuer pays’ model, in which a security’s issuer pays the rating agencies for the initial rating and ongoing ratings of a security, thereby raising conflict of interest issues.
Conversely, said Mr McDermott, the FundCalibre model has been designed to ensure the utmost transparency and independence, and it is unique in bringing predictive analysis to fund ratings, as most screening tools assess funds using only past performance.
He said: “FundCalibre’s model is different,” adding, “as its quantitative system, AlphaQuest, strips out the impact of market movements on fund performance, to identify the returns attributable to the skill of the manager.”
Indeed, for every fund the process will be the same: AlphaQuest will measure past generation of alpha, correlated to the volatility of that alpha, over the past 10 years, and will then make predictions of the probability that the fund will produce alpha in the next 12 months.
Only those funds that show at least a 60 per cent probability of generating alpha over this period will be considered for an “elite” rating, Mr McDermott added, but for that to finally be granted, the firm has to undergo an additional qualitative screening by the teams at CFS and Albemarle.
“At that point only is the fund management community asked to licence the ratings that their funds have already earned.”
Another important distinction of the FundCalibre ratings system is that it will be extremely cut and dried in its parameters, rating funds either elite or not at all, unlike other ratings agencies that have a swathe of different ratings levels, which many even in finance find either confusing, meaningless, or both.
Looking further into next year, he concluded, CFS will be meeting the challenges raised when the firm officially starts being treated as a platform operation, as from 6 April.
“As the FCA maintains that we look like a platform, we will be treated as a platform from next year, so we are in the process of making our clients aware of the changes implied in this, which we have been doing for some time now, but will increasingly do so in more detail, partly through our new magazine that will be out in February.”
Simon Watkins is a freelance journalist
Mr McDermott’s career ladder
2000 – Present
Chelsea Financial Services
Managing director
1999 – 2000
Chelsea Financial Services
Investment manager
1996 – 1999
Chelsea Financial Services
Operations
1994
University of Birmingham
Graduated with BSc (Hons) in chemistry
