Financial Advisory

20 June 2017

Financial Advisory


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Expert: Jean Medecin, Carmignac

Facilitator: Dave Robson, Carmignac

Scribe: Sofia Aldatz, Owen James Group

This session was split into three parts:

  • Where have we got to with our investment strategies?
  • The “Here and Now” with regard to the markets. Which are the potential changes from where we have been with investment strategies?
  • Future changes and is there something out there we should be adopting?

After the controversial opening speaker, it was inevitable that the session would start with a short debate around “Passive vs. Active”. A show of hands showed that only a handful of people in the room would incorporate solely passive in their investment strategy.


  • The question that kicked it all off was whether delegates had changed their models from pre-RDR days. There was a general agreement that the main change was that the big focus is now the client. Firms have a better knowledge of their client base. What it hasn’t changed is behavioural traits, and advice is still based on those behavioural traits.
  • Aftermath of RDR is that pre-RDR the focus was on new business and new income and post- RDR it is more about ongoing services.
  • Another change is that pre-RDR the power brokers were the insurance companies. They were the ones with the money to take you out. Then Sunlife launched their Dream Scheme - a mono scheme that made people start to pay attention to fees. If you now go to Fidelity seminars it is 10% of what it was because advisers are aware of this cost driver. How are we going to get access? How are we going to pick our fund managers? We went from insurance company funds to picking the best funds off the page with cost always in the back of your head. If there was only one provider of passive - you wouldn’t want to put all your money with them.
  • What has the driver of cost controls been? Has it been the fact that active management wasn’t seen as adding value or is it seen as we need to put on cost controls as costs are high? Are we post –rationalizing about active as we never considered if active was working or not pre –RDR - no one seemed to be asking these questions before.
  • How can advisers offer something that is differentiated and adds value in a passive dominated world? The conversation shouldn’t be about segmenting the market into asset allocation as since Vanguard it’s not just a decision of Passive vs. Active. Listening to the opening session you would think all you needed to do is buy a tracker but that is not what advisers do, they can’t put their money in passive and not know where it’s gone. When looking at what other firms are doing e.g. Hargreaves Lansdown, in their top 10 funds there’s just one from Vanguard.
  • As an industry we focus on price and FCA keeps going on about price but in 10 years they can turn round if markets moved against passive investors and say “it’s not our fault”. The FCA is not supportive of advisers when it goes wrong towards the client regardless of the guidance that was given. Cost vs value?

The Here and Now

  • The debate should be more focused on what kind of allocation you practice? Where an active manager adds real value is that they know when to put money to work and when not to? The usual push is to make money work all the time but actually the job of the advisers is looking at risk and deciding if we should stay at home and avoid risk for the time being.
  • How do you manage and build your strategy? It’s not all black and white.
  • When talking Active-Passive, the area with biggest problem is fixed income - how do you ensure a stable return?
  • Keeping in mind that the world is sitting on a massive global debt, nominal rates are at a historical low, so inflation is probably the biggest issue for people investing in fixed income. How do you address that? Do you just buy passively or do you go for a more global approach? Do you go for a more active approach where you can be a bit more nimble and you can navigate through this? Do you go for a reactive approach where you try to address this inflation?
  • One of the reasons why this inflation risk is real is because over the last 20 years workers have not been in a position to negotiate significant pay rises. Globalisation has allowed companies to send work abroad. However, we are coming to a point where the opportunity to move to China is shrinking, because of cost and of the ageing population. We also had Brexit and Trump - suddenly this idea of bringing in foreign workers to keep pay checks under control has become extremely unpopular with voters.
  • We might be facing an acceleration of wage driven inflation, with very serious consequences for investors in fixed income.
  • We live in a world where we need to have much more than just a decision of Active-Passive; a world where you have to make big asset allocation decisions which are quite complex.
  • Advisers need to be more global and more active and address the risk management of the allocation. Risk income will have to stay a part of the process and active management will stay relevant.
  • The feeling was that rather than taking the stand on passive / active, outsourcing is more about asset allocation. The general opinion is that advisers are not good at choosing where to allocate their assets.
  • Their job is not about investment - what advisers are experts on is Client Relationships, understanding what client wants and making it happen. But then how do you charge?
  • The vast majority of the market charges % base fees, should they stop charging this way and start charging by the hour for the work that has been done? Or could the % base be based on hourly rate?
  • When charging a % base fee on the investment - what happens if market goes down? Also many are working with clients in the decumulation phase so the money is going down.
  • Everyone agrees that investment is not what advisers do!!
  • The holistic approach has some danger. We have been lucky so far in that no one has been criticised for their advice but from a risk management perspective, what do we need to do to protect ourselves? How do we make our business models less reliant on the investment piece? How do we make ourselves more resilient?
  • But the fundamental question is how should we manage money long term? There’s a difference in strategy between accumulation and decumulation. You can passively work on accumulation but delegates believe that you cannot work passively on decumulation. Maybe here is where active comes in to play as you need to be able to actively manage this phase.
  • To be successful long term you need to be successful short term. One of the biggest changes is that asset allocation has become a big part of this. It’s about being a practitioner, not so much about applying a formula to get the rate.
  • Going passive is risky - there’s no such thing as saying bonds are low, so in 10/15 years will be higher.
  • Maybe the solution is investment bucketing when looking at capacity for loss (eg. holiday, children uni, long term…)
  • Not all clients need to take risks to get the money needed. Fixed income is a conundrum. We need to provide real value to our clients.
  • Risk-volatility metric - when using a mathematical method it’s always a simplification so is it doing what it needs to? Imagine the life of a turkey in the US, their life all year is very calm (low volatility state) but we know that at thanksgiving he’ll have his head chopped. Models are great but humans are essential.
  • Financial repression is still reality. The UK is very lucky as it doesn’t have a low rate but in Europe it is a different story. Black swans do happen!!
  • You are a brave adviser if you can say you can allocate better than another adviser. Advisers are not stock brokers. These days it’s all about meeting clients’ expectations not about moving money as it’s too risky.
  • Clients are so used to the unexpected, an advisers’ job is to make sure they deliver the expectations and manage the unexpected. But when looking at an asset manager to make the decision for an adviser, where does the liability lie?

Unfortunately we ran out of time to discuss this last part as well as:

  • How do you use technology?
  • How you employ people with different skill sets to use technology out there instead of outsourcing.

Maybe points to discuss at a future Meeting.