By the time you read this, we may well be in the new tax year and we may even have had a Brexit. I’m excited to see what happens, in much the same way as I was excited to see just how much my feet resembled hamburgers when I took my boots off after a 54-mile charity hike some years ago.
The real winners from Brexit will be the people who make their coin writing about financial markets, of course, and that’s as it should be. We don’t want them out on the streets. They’re still a bit delirious from the market wobbles at the end of 2018, and who knows what they’ll get up to if the Brexit high they’re craving for doesn’t happen.
I’ve been out on the road on various tours for the past four weeks or so, talking to advisers about centralised investment propositions, and in particular what Mifid II does to them. It’s been an interesting ride – about half of the firms I’ve spoken to run their own advisory models and virtually none have the required administration in place to be compliant with the regulation.
Most model portfolio admin is just a pain, but there’s one thing I’d like to pick up on here. A core tenet of advisory permissions in terms of running portfolios is that you have to get client permission for rebalances.
This is a pretty frustrating experience. Clients don’t always behave the way they’re told to, and so you end up with a few awkward sods who haven’t returned their permissions, or ticked the little boxes or whatever stuck in an old version of the model.
Or maybe you don’t, and you just shift them into the new version of the portfolio anyway – after all, it’s what’s best. The only thing is you’re then acting as a discretionary manager without actually being one, and there is a whole dedicated naughty step for that.
Technology is trying to come to the rescue here – think online portals, push notifications on mobile phones and so on – but that’s a partial solution at best. Dave Awkward is perfectly capable of being awkward via a mobile.
A potential solution
The answer might be to switch on automatic rebalancing, and that’s a subject worth dwelling on for a moment. The idea here is that you get permission from your client to rebalance their portfolio within given parameters and at specific intervals. You, as the adviser, have no discretion – you simply rebalance a portfolio back to its target allocation on a preset date.
If done right, this doesn’t need further client permission, and so the ‘ticky-boxy’ is all done. If you’re lucky, your investment platform of choice will also automate this for you. You will still have all the boring admin disclosure to do, but the permission is taken care of. Result!
Or is it…
Let’s have a think about when rebalances happen. Some 94 per cent of all rebalances (this is a made up stat, but I bet it’s right) happen early in a month, and the vast majority happen on the first working day of a new quarter. So your wording for a client agreement might read as follows: “We will rebalance your portfolio back to its original allocation on the first business day of each quarter; that is to say, January, April, July and October. By investing in Mark’s Awesome Portfolio (risk level four), you agree that you are totally fine with us doing this and won’t moan about it later.”
Or something like that. But here’s the thing: if you don’t have discretion and have switched on automatic rebalancing, then that’s what you’ve done. You can’t stop it without asking your clients. If you decide to miss out a rebalance and don’t get permission, you’re acting as a discretionary manager. See earlier naughty step point.
An extra complication
Now flick your eyes back up to the top of this column. I wasn’t bringing the Brexit chat for the joy of political discourse and badinage.
As I write this, I don’t know whether or not we’ll leave the EU on March 29. But I would bet a pound to a penny that there will be some fairly spectacular stock market trampolining around and immediately after that date.
And if you’re a quarterly rebalancer, your rebalance date for the second quarter of 2019 will be… April 1 2019, or to put it another way, ‘the first opportunity to test out just how choppy the waters are after March 29’.
Now you have the benefit of hindsight reading this, and it might all be fine, or we might be leaving later or not at all, or we might all just be living in a giant Jacob Rees-Mogg theme park (double-breasted jackets mandatory). But most companies I’ve talked to in the past few weeks have been extremely clear that to rebalance the first working day after a major market event would be a ‘crazy-go-nuts’ thing to do and that they want no part of it, thank you very much, and if there was an auto-rebalance scheduled they’d be hitting Ctrl-Alt-Del repeatedly until it went away. This kind of puts paid to the technology-making-it-easier part of the advisory model portfolio approach, and brings us back to that discretionary naughty step again.
There’s a huge amount of choice for firms in terms of how you run your client portfolios, and choice is good. There is no regulation that stops you running advisory models, if that’s your thing. But the administration load is getting heavier and heavier, and it doesn’t appear to be too much fun from where I’m sitting.
Fixed in their ways
Talking of choice, question time at the tours I’ve been doing have tended to slide back to the old questions – ‘does a tree falling in the forest make a sound if there’s no one there to hear it?’, ‘would you rather fight a horse-sized duck or a hundred duck-sized horses?’, ‘how many platforms do I have to use to be independent?’, and ‘how low will platform fees go?’.
The last of these has been on my mind recently as our good friends up in Dundee, Alliance Trust Savings, have released their 2018 figures as they prepare to become part of Interactive Investor.
First things first, in the direct investing market there are plenty of fixed-fee platforms. In adviser land there is only one, and that’s ATS. That fixed fee shape makes it very cheap for larger portfolios, though not so great for pots under £50,000, or maybe a bit more.
The thing with ATS is that it’s had a really tough couple of years. The integration of Stocktrade at the same time as doing a big replatforming away from its proprietary ActiveBank system on to GBST Composer was, in retrospect, a bit much to swallow and everything went a bit awry for a while.
The good news is that it’s returned to profitability – a swing of almost £20m from the previous year – and its complaint levels have dropped by 76 per cent, down to a level that most platforms would regard as normal, and which are non-reportable (if your complaints get too high you have to put your hand up to the regulator and bring your own naughty step to sit on).
This is good to hear, because the real answer to how low fees can go lies in some element of fixed-fee proposition, and we need someone to be showing us all how that works. Just to illustrate, ATS’s fixed fee for a £500,000 self-invested personal pension with a 20-fund model portfolio, rebalancing quarterly (ha!) comes out at 0.09 per cent a year, or about a quarter of Transact.
Now cheap isn’t good enough; it has to work. ATS has been hammering away on getting back to a state where that’s true. But the answer to the question on how low fees can go will depend on whether advisers will go for something like this, and perhaps accept that some of the more appealing stuff won’t be there. It’s worth saying that we don’t know what II’s plans for the advised part of ATS are yet.
These aren’t new arguments, of course, but at some point someone will do something that is both very low cost and works perfectly well. It might even be that Mifid II will drive companies to simpler investment solutions that require fewer bells and whistles, and can be housed without the need for more complex technology.
We don’t know if that will happen and, as with both Brexit and the state of my poor feet after that walk, we will have to wait for things to settle down before we can really draw any conclusions.
Mark Polson is principal at the Lang Cat
