Last year was an unforgettable one for a multitude of reasons. The most obvious being the global pandemic which shook the world in March, forcing many of us to adapt in a number of ways. The impact of Covid-19 has been extraordinary, but we are now seeing distant light at the end of the tunnel, with the vaccine roll-out taking place across the UK and around the globe.
From a UK perspective, Covid-19 headwinds were compounded with the uncertainty of getting a Brexit deal done before the deadline. But looking to 2021, there is a sense that sentiment is shifting for the better.
For the most part, we have all adapted well to coping with more virtual client relationships, changing investor demands and the need for fast adaptability in considering new investment strategies to suit a changing market backdrop. Thank goodness for broadband and Zoom.
Perhaps the biggest change brought about by the pandemic is an acceleration of trends that were already underway. This year we expect advisers and fund groups will need to further acknowledge and move with these changes. Here, I outline the top five areas to prepare for or consider in the new year.
Investing responsibly goes mainstream
2020 gave responsible investing the credibility it deserved years ago, with governments stepping in with complex initiatives to support a transition to a greener economy and in many cases, ESG strategies outperforming their non-sustainable benchmarks. Advisers are now faced with the task of educating themselves on responsible investing and learning about their client’s ESG values, while facing new additions to Mifid II regulation (or FCA equivalent rules), which will require ESG to form part of the client’s sustainability assessment. While not necessarily obvious, this presents a significant opportunity.
Advisers engaging in the subject of ESG can generate a richer dialogue with their clients around values. In doing so, they can also demonstrate that in many instances, taking an ESG approach can enhance investment returns. Such discussions further demonstrate the importance of the role of the adviser, in an area of growing importance to investors. But don’t just take my word for it.
A recent PwC report predicted that over 50% of European funds will be in ESG assets by 2025, demonstrating their belief that ESG investing will become the norm. Advisers will need to quickly upskill on ESG and responsible investing strategies and while this can be achieved through training, there is also an onus on asset managers to provide sustainable investment solutions that will suit end-investor needs. While some of us have been doing this for a while, it is good to see the broader asset management industry now responding. More choice of ESG solutions will aid wider adoption, which can only be good news.
No change to regulatory change
So, what are some of the areas of regulatory focus and change laying ahead?
The FCA has been reviewing the advice market and the impact of RDR and FAMR. In December, the regulator issued its evaluation report of this review, which recognises that irrespective of many initiatives, a significant advice gap remains. This is noted to be especially obvious around investment, with many consumers with smaller savings pots still not able to access affordable investment advice, thus missing out on the long-term growth prospects of investing. The FCA is likely to introduce relevant changes to advice regulations in the latter part of 2021.
Re-evaluating active vs passive strategies
If cost considerations weren’t already front of mind for retail investors, recent regulation enforcing the disclosure and greater transparency of fees and charges is having an impact. While many clients have accepted the cost/value trade off, this has created a challenge where the client is more cost conscience, or the area of financial planning has a cost cap.
This has inevitably led to advisers opting for passive products. While the beta markets of recent years have supported such products, many accept that we are unlikely to see similar market returns going forward and the environment we are facing is likely to suit a more active approach. Advisers may need to reconsider their use of passive in the years ahead.
We have seen innovation in the market across a range of sectors and products, and there are now – though very limited – active management solutions at passive prices. There are opportunities for active solutions to complete with passives on price, if run by the right managers with access to well-resourced in-house expertise.
Redefining value
Covid-19 has further encouraged investors to take stock of their finances. This is a natural opportunity to pause and consider where true value lies and what one wants to get from their investments. As an industry – managers and advisers – we need to better educate investors about the “value” they receive from their investments rather than simply focusing on the costs they are charged. As mentioned, it may pay for investors to be active in the current market cycle, and they shouldn’t be defaulted into passive options as constrained by their cost requirements – active solutions at passive prices do now exist.
Advisers are increasingly using outsourced investment solutions for at least some clients, including 60% using multi-asset funds, and we expect this to continue in 2021. With that in mind, it is even more important that advisers are well versed in the value of the investments they are recommending clients and how these fit in with longer-term goals rather than attributing value simply to cost. At the same time, asset managers must adapt their propositions to ensure advisers are still able to offer different types of solutions to suit client needs (including ESG preferences) and maximise value, at reasonable costs.
Evolution of fund groups support of advice markets
Fund groups serious about supporting the independent advice market will need to provide advisers with the tools and solutions to ensure their end client is receiving the conclusive suitability recommendations aligned to their values. To do so, groups will need to engage better with advice firms and look more closely at how to support their businesses. Successful groups will go beyond the creation of product manufacturing and will invest significantly to support those firms in areas such as practice management, technical areas of financial planning (and regulation) and of course, navigating the markets. Such support provision is likely to become a greater consideration of advice firms when considering which groups to use in their outsourced central investment proposition.
Rob Thorpe is head of distribution, intermediary, UK and Europe at BMO Global Asset Management
