Investment is often portrayed as a zero-sum game but Dynamic Planner chief executive Ben Goss does not see things that way – or at least not in the context of the key industry triangle of asset managers, intermediaries and end-investors. “That relationship is fundamental to the success of all participants in the market and it also cuts to the heart of our own business,” he begins, with characteristic enthusiasm.
“In the short term, it may not be uncommon for someone to come out ahead but, if value is added correctly, then ultimately everybody should win. That is why making sure there is a commonality of purpose and outcome is vital to a successfully functioning market. It is vital to the long-term success of the end-investor who gets to fund the things that are important to them at a level of risk they are willing and able to take.
“It is vital for the intermediary at a time when, a decade after the Retail Distribution Review (RDR), the persistency of clients and the retention of their assets in a portfolio is so critical to their business – and, of course, that holds true for the asset manager, too. They don’t want portfolio churning – they want to be adding value in the right way in the right proportion to the portfolio so those assets persist.”
A risk-based financial planning system that helps advice firms build suitable portfolios for clients, Dynamic Planner’s origins go back to 2003, when Goss co-founded parent company Distribution Technology. Originally a consultant at PricewaterhouseCoopers, he had qualified as a financial adviser before co-founding Sort, the UK’s first online investment adviser, in 1998 and selling it to the largest online adviser in the US two years later.
Goss sees alignment of interests as a crucial part of a picture that became a lot clearer 10 years ago. “Commission eroded the economic incentive to align but that changed when RDR banned it,” he explains.
“What is more, Consumer Duty should now only serve to heighten the focus on client outcomes, offering everyone in the value chain an opportunity to align and deliver value where there is, if you like, a clear lowest common denominator.”
Gaining clarity
How would Goss characterise the ideas of value and value for money, and how should professional investors be looking to deliver them? “Those are good questions and I think the industry is getting clearer on the answers,” he begins. “The FCA actually offered its own view five years ago in its platform review when it said value for money is the return the investor gets after fees and charges for the risk they take.
“So if you are not going to do anything else for a client, you should – after all is said and done – deliver a reasonable return for the risk they are willing to take, which seems like a sensible benchmark. Where this is evolving, though, is towards something more nuanced and more beneficial – that the end-investor may have different objectives and different preferences.”
On the day our interview took place, the Bank of England raised interest rates; the day before, Putin announced the partial mobilisation of Russian troops and once again brought up the prospect of nuclear retaliation; and the day after heralded the ‘fiscal event’. “There will be clients out there who want to know their active manager is actively listening to everything that is going on in the world and managing around all that,” Goss says.
“Now, their own manager’s response may well not turn out to be as effective for portfolio returns as the response of another manager but the value the client places on active management is a real thing. It is clear some people have a preference for an active manager, then, while other people have a preference for the lowest-cost, passively-run fund.
“In other words, different people place a different value on different things – that is true in every market – and the absolute highest return for a given level of risk is only one benchmark. After all, if you layer in sustainability – that is another preference, right? What is value for money and what is value in a world where the client is willing to make a trade-off for their strong preferences around sustainability?
Space for conversation
“One of the things Consumer Duty does is allow more space for that kind of conversation. And just so long as everyone in the ‘triangle’ is aligned around the client’s objective and purpose, which essentially means they are in a suitable portfolio, then it is possible to drive value for money within that target market in a way that was not the case 10 years ago.”
Some might feel the fact the financial services regulator believed it necessary to codify the concept of ‘Consumer Duty’ – and indeed ‘providing value for money’ before that – hardly casts the industry in the best of lights. After all, much like ‘It’s not nice to kick puppies’, there are some things people should just know instinctively rather than needing to have it set out for them explicitly.
Still, as of this July, explicit Consumer Duty now is – and Goss clearly has high hopes for the principle, which requires firms to act to deliver good outcomes for retail customers. “The new obligations are clearly a higher standard in terms of what is acceptable, placing the outcome of the client first and foremost in the mind of a manufacturer or an adviser” he says. “And so, without doubt, the bar has been raised.
“What is interesting, though, is that, where previously there was a huge focus on cost, we now see a new acceptance or acknowledgement that, actually, there can be different forms of value. You may recall the phrase ‘not a penny more’ around switching to products or portfolios that may have cost more but that sort of blanket statement has gone and been replaced with a more fine-grained assessment of where value is being delivered.
“As an example, layered charging gets called out for its potential to confuse and not deliver value – and that absolutely demands scrutiny. The paper does not say ‘don’t do it’ but it does say, if you are going to have a charge for stock selection, a charge for asset allocation, a charge for administration, then you have to ensure, at the end of the day, the consumer is achieving their outcome and their preferences are being reflected.”
Target markets
What has particularly caught Goss’s eye about Consumer Duty is the way – and it is fair to say this has not always proved the case with financial regulation – the paper not only defines an issue and places demands on businesses, but also offers a solution ensuring the client’s outcome “gains primacy, each time, every time”. “It comes down to ‘target markets’ and the ability to say, right, we serve clients who look like this,” he elaborates.
“You can have one target market or you can have 100 different target markets but, for each one, a business can set out the way it is going to deliver value to them. And to codify that, in terms of portfolio objectives and advice proposition, is, in an era driven by systems – portfolio management systems, financial planning systems – a scalable, economic way of ensuring good outcomes for clients all of the time.”
On the subject of systems, how does Goss believe professional investors can make the best use of technology? “The answer is to use technology to ensure an appropriate alignment between end-investor, adviser and asset manager,” he replies. “Let’s say you are a trustee of a corporate pension fund – your investment adviser will come in and talk things through with you.
“The adviser will talk about how managers are performing and they will set the risk mandate – perhaps even, broadly, the strategic allocation – and then the adviser goes back to the fund manager and says, this is where you are in terms of the risk mandate and this is how you are performing against client expectations or against the benchmark. That is the way that part of the industry has run quite successfully for decades.
“The problem with doing this in the retail market, however, is the physical distance between end-investor and investment manager – and technology is the way to ensure alignment on the risk the client has signed up for, their mandate, their objectives, their preferences.
“And, again, I do think Consumer Duty offers a blueprint for how to do this economically – to set up your target markets and be clear about product-labelling.”
‘Product sales’ – RIP
“In fact, I expect Consumer Duty will kill ‘product sales’ stone-dead. In a few years’ time, businesses are going to accept that approach to asset management is just no longer possible. You are going to have to understand your end-customers. You are going to have to understand that ‘target market’, as Consumer Duty – and indeed the ‘PROD’ product governance – calls them.
“Whether you are building whole solutions as a portfolio manager or contributing to those solution as a single-strategy manager, there has to be an alignment between the target market and the manufacturer – and technology is the way to ensure that alignment at a cost that means everybody can run a profitable business while the customer achieves the outcome they are looking for.”
Regardless of the size of a business, Goss argues, the key is “drawing the line between client and portfolio”. “For many years now, using technology to achieve that has been a requirement as opposed to a ‘nice to have’,” he says. “And the ability to use your technology to look through to the end-customer to understand them and their needs and wants is now the deciding factor on whether firms succeed or fail.
“So those firms that continue just to sell product because there is an area they are good at or they see a trend or a theme as something they can manufacture, without great reference to the end-client – build it and they will come; build it because we can sell it – that kind of behaviour will die. In contrast, the winners will be those closest to the customer.
“Even as a manufacturer, though, you can ensure proximity to your customer – if you make the effort and seek to understand who that customer is and what their needs are. That means you can do it as a very large business – scale asset management or passive, say – but it also means you could be a small boutique that really understands your clients and brings something new to add value to achieve the outcomes your investors are looking for.”
QUICKFIRE Q&A
What is the best piece of advice you have ever been given?
You will get there – though it may be via a path you didn’t quite expect.
What would be your ‘top tip’ to PA readers to help them run a better business?
Leverage the resources around you – and work out what is at the forefront of clients’ minds.
What single issue should most concern professional investors at present?
Listening to your clients’ needs and concerns. Is it inflation, is it income, is it preservation of capital? Clients are going through a really tough time so you have to understand what they want.
Does anything about your job keep you awake at night?
Nothing keeps me awake though, weirdly, ideas or solutions tend to come to me early in the morning.
What most excites you about your job?
Every day is different and there are always new opportunities to evolve. So that means working with my great team and our clients to make our existing trusts more relevant – and then potentially bringing something new to market that investors want but can’t find anywhere else.
If you were head of the FCA, what would be your priority?
To make sure children learn about money and investing from primary school onwards. There really should be a compulsory lesson each week so they build up a good understanding – and starting early would be such an advantage.
What advice would you give to someone starting out in investment today?
Never stop learning or being curious, work collaboratively – and don’t be afraid.
WHEN NO ONE IS WATCHING
“The best definition of corporate culture I have heard is ‘It’s what people do when no one’s watching’,” says Ben Goss. “You only have to look at the likes of Enron, Wirecard or Theranos to realise how good that assessment is. People are the most important aspect of a company – its most valuable resource, its essence – and the way they behave is fundamental to its long-term success.
“As an investor, then, you absolutely are concerned about culture – but there is a moral dimension to all of this, too. If a company is making money in a way you would not be comfortable to read about on the front page of the Financial Times, say, then should you be investing in it? Increasingly – and quite rightly so – this is becoming more of a concern for institutional and retail investors alike.
“More broadly, these are volatile times but the country needs great asset management. Savings rates are very high and the industry should be doing all it can to encourage more consumers to make long-term investments. Clearly, that is an opportunity for asset managers but, so long as all participants are aligned, it is also an opportunity for the customer to achieve a better outcome.
“And we need all of the investment we can get right now. This country has major infrastructure projects that need to be funded, there are major businesses that need to be supported. We need growth in the UK and the asset management industry has a fundamental role in enabling that. So these may be tough times but there remains a significant opportunity – for asset managers, end-investors and those who advise them.”
THE FOOTHILLS OF UNDERSTANDING
Much like what exactly constitutes sustainable investing, the concept of investment risk can mean very different things to different people. How then can asset managers, advisers and end-investors best set about ensuring a commonality of understanding around such a subjective idea?
“Well, you have to have an objective assessment and it has to be consistent,” begins Ben Goss, who has spent the past two decades exploring this very area.
“This assessment needs to be forward-looking and take into account the value of risk – and it must do that in a way that is meaningful to the investor, the adviser and the investment manager. Our view at Dynamic Planner is it has to be a model where the adviser can talk to the customer about the amount of their portfolio they can put at risk – how much they might lose in a given year – and the manager can operate with a future-looking lens.
“As of today, for example, we know interest rates are going to be 50 basis points higher going forward than they were before, so there is no point trying to drive the car while looking in the rear-view mirror. You have to look forward where you can and share your estimates and assumptions – and, at the end of the day, that is all they are – between the investor, the adviser and the investment manager so they are all on the same page.
“That is the way to ensure you have this consistency of risk assessment that is shared and, from that, it does become the denominator around which value can be added. Take value in terms of return – if, as a manager, you were not in US tech 12 months ago, then you were probably not doing brilliantly. Yet some – a few – were saying, look, this stuff is overvalued and, today, they are likely to be doing a lot better than their peers.
“Both groups would have been operating within a range of risk, of course, but you always have people taking different approaches to running money – that is the nature of asset management. There is no silver bullet here but what there can be is a single definition of the risk a portfolio is taking. And, so long as that is forward-looking, you have a reasoned and reasonable approach to ensuring consistency.”
Focusing in on ESG-oriented risks, Goss continues: “Almost all portfolios now integrate sustainability to a greater or lesser extent but there is still a huge way to go. We are in the foothills of disclosure; the foothills of understanding the relationships between sustainability-based risks and the risks that manifest themselves in portfolios; the foothills of really understanding the impact of sustainable investing on performance.
“There is a long road ahead but key points along the way will be clear disclosure from companies and from the platforms that monitor that disclosure – and then working out how do you factor it all into portfolio decision-making? Take carbon intensity, for example – even if you can model it and even if you have got the most recent data, how do you factor that into your assessment of the carbon intensity of a given company?
“The fact sustainability is being integrated in some way into all portfolios should ultimately lead to improved disclosure and there will be an increasing preference towards those investments that do less harm and more good. As such, the weight of money will continue to move towards those kinds of solutions but it is complicated – and the transition from where we are now to a zero-carbon economy particularly so.
“One of the biggest challenges – and this is something we are facing into as a business – is how you help the investor as well as the manager articulate how companies are transitioning? What is the price that is being paid today? What are the investments they are willing to make today? In the future, of course, we believe these companies will have made the transition – and in a way that is worth the price that has been paid today.
“Today, however, there is no clear system for doing that. As a business, then, we are thinking very hard about what part we can play to help advisers and asset managers articulate how they are approaching the transition. And we also want to make sure investors can exhibit their preferences – where they have them – so that, again, you have alignment between all these parties.”
Does Dynamic Planner’s area of expertise mean operating a revolving checklist of risk factors? Or are some – say, sustainability, liquidity, governance – always at the top of the list while others rise and fall according to investor tastes? “There are people in the business better-placed than I am to give you a methodological or technical answer to that,” Goss replies.
“Still, from a philosophical or a first-principles standpoint, yes – risk management is becoming more and more fine-grained. That is just society. So we are always teasing out, not just the risks themselves, but the risk factors, too – and you are right to suggest new risks and sub-categories of risk are surfacing all the time. Ratings agencies now have whole teams looking at one specific risk – for example, water stress on company performance.
“As the world evolves and concern about impact and governance grows, people are drawing lines between a company’s behaviour, its stock price and its long-term sustainability as a business. One should always look to understand the risk factors – while acknowledging this can only be done with models and a model has to simplify the challenges involved. So are you simplifying the right thing? And are you modelling it accurately?”
This article first appeared in the October edition of Portfolio Adviser Magazine
