Best of British Winter Facing an inconvenient truth fileFacing an inconvenient truth We take a...

Winter 2010

Best of BritishWe put the spotlight on the UK economy in seven key graphs.

Facing an inconvenient truth We take a practical look at behavioural finance.

Insight. Ideas. Inspiration.

iView brings you news and training from the heart of the investment world. iView is fully accessible via iPhone and iPad and to celebrate the re-launch we are offering you the chance to win one of four iPads.

How to enter:Entry couldn’t be simpler. Just complete the enclosed feedback form and return it in the pre-paid envelope supplied where you will then be entered in to the prize competition, as well as earning valuable CPD points. For full terms and conditions, please refer to the back page of the feedback form.

Hello and welcome to your winter instalment of

The M&GAZINE. As ever we have a packed issue for you,

mixing opinion and analysis from M&G’s own investment

experts with insightful views from the broader financial

services community.

Contributions from the home team include Tom Dobell’s

stock picks, Fiona Rowley on the outlook for property,

Bond Vigilantes Jim Leaviss discussing the prospects for the

fixed income markets and Dave Fishwick offering a practical

look at behavioural finance.

We also have a special Retail Distribution Review (RDR)

focus that includes an examination of how RDR is

prompting a technology review and the experiences of

two different advice firms as they prepare for the brave

new world of 1 January 2013.

Back at my day job, Marketing-hub.co.uk has also been turning

its mind to the impact of RDR – as no doubt have you. We

recently ran a survey on adviser attitudes to the subject and

– accepting the tone may grow darker as more replies roll

in – initial responses suggest most IFAs are planning to stay

independent while about half want to retain control of their

investment decisions, with a further fifth or so still undecided.

Meanwhile, the majority of our respondents believe

developments such as better qualifications and transparency

of fees that enable financial advice to be seen as more

professional can only be a good thing. I trust your own

experiences so far are proving as reassuringly positive.

Either way and as ever, M&G (and Marketing-hub.co.uk)

would welcome your feedback on that or any other matter.

Julian Marr Editorial DirectorMarketing-hub.co.uk

Julian MarrEditorial Director at Marketing-hub.co.uk

Welcome to the latest edition of The M&GAZINE.

WelcomeGuest editor’s

For every edition of The M&GAZINE we will be inviting

intermediaries, industry experts and fund managers to

be a guest editor. If you would like to be an editor please

email us at [email protected]

News and OpinionSpotlight on the UK economy 06We analyse the current UK economy in 7 key graphs.

The future starts today 11Forecasts from leading M&G fund managers on commercial property and fixed interest.

Facing an inconvenient truth 12Dave Fishwick, Head of Retail Investment Management at M&G takes a practical look at behavioural finance.

Why did I buy? 14Tom Dobell, Fiona Rowley and Greg Aldridge highlight key stocks and explain their reasons for their presence within their portfolios.

Go where the dividends grow 16Stuart Rhodes, manager of the M&G Global Dividend Fund, profiles three countries which should be considered when looking for dividends.

Investment Insight

Training ZoneLegal Aid: Focus on RDR 18What effect will the Retail Distribution Review have on technology?

RDR – an advisers view 20Two leading advisers give their view on RDR and how they are preparing.

Insight. Ideas. Inspiration. 23We look at the essential portal for advisers wanting the latest market insights.

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Anthony Rayner – UK Economics Analyst

The BackgroundThe graph shows UK GDP over the past 50 years. This latest recession has involved the most severe contraction in GDP during the last 50 years, coming after an extended period of apparent stability.

The response to the recession by policy makers was unprecedented and, as the graph shows, the UK economy has responded quickly.

The causes of the recessionOne of the most important factors contributing to the severity of the recession was the build-up of credit, especially consumer credit, and particularly in the more liberalised economies. For example, in economies such as the UK and the US, household debt as a percentage of disposable income has grown markedly over the past few years (see graph overleaf). In contrast, countries such as Germany saw consumer credit remain broadly static on the same measure.

There were a number of reasons behind the build-up of credit, including low interest rates (facilitated by low inflation, in part driven by disinflationary pressures resulting from the boost in production of Chinese goods), the increased securitisation of debt (which imploded with the sub-prime debacle) and, more generally, an environment of light-touch financial regulation.

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7Winter 2010 • M&GAZINE

The picture in the UK can be seen clearly on the above chart, which measures the household savings ratio (or the amount of disposable income not spent, as a percentage of disposable income). This had come down sharply over the past two decades, in large part as consumers felt it less desirable to save, against the background of perennial

double-digit increases in house prices and rosy employment prospects. As these two factors reversed in more recent times, consumer behaviour changed dramatically and the savings ratio increased, thus contributing to the building momentum for recession.

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Policy response In terms of the UK, the policy response can be seen clearly from the graph overleaf, with interest rates being sharply reduced, in an attempt to stop the financial system freezing up and to support the economy. Likewise, the national debt, as a percentage of GDP, grew sharply, as the government

bailed out banks, and tax revenues from previously lucrative areas, such as housing and the finance sector, slowed sharply. Supportive responses such as these were seen in many economies across the world.

Source: Thomson Reuters Datastream as at 30.06.08


Household liabilities – Germany Household liabilities – UK Household liabilities – USA

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Stimulus from policy makers cannot go on indefinitely and does have consequences. The below graph shows what happens when the market starts to worry about a government’s ability to pay its debts. The orange line is the yield on Greek government debt compared to German debt (which is considered highly creditworthy). The perceived higher risk in holding Greek debt, driven by the deterioration in the government’s fiscal position, is reflected in the fact

that investors are only prepared to hold Greek debt if they are paid much more for doing so, via a higher yield. This is somewhat of an extreme case but Spain, Ireland and Portugal have also suffered, albeit to a lesser extent. This environment cannot be ignored in the UK and the government’s desire to retain its creditworthiness is one of the reasons behind the proposed fiscal tightening in the UK over the next few years.

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Another question vexing investors is whether we are faced with inflation or deflation. It’s a complex area, muddied by the severity of the recession, the subsequent sharp bounceback in the economy and by very loose monetary policy. In the UK, we have little to compare these events with in recent times, and this adds to the uncertainty.

The chart above shows that inflation is currently only marginally above the Bank of England’s Monetary Policy Committee’s (MPC) 1-3% ‘range’ and when the volatile energy component is stripped out,it’s actually below the 3% level.

The outlookWhen looking to the future it’s important to remember the type of recession we have had and the nature of the responses by governments and central banks. The scale and speed of the recession led policy makers to act quickly and, in many countries, with massive fiscal and monetary stimulus. As a consequence, many economies recovered rapidly but a key question is whether the recovery is sustainable, especially as policy makers start to unwind the stimulus.

For example, employment in the public sector accounts for one in five jobs in the UK and, in line with the planned cuts in government spending, we know that there are going to be material job cuts in this sector over the next few years. As such, a key area to watch is to the extent to which the private sector can take up the slack from the public sector, as this will help determine whether the recovery is sustainable.

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Average prices in 1982

Average salary £7,117

Average house price £23,644

Ford Sierra £6,524

Family food bill for the week £32.20

Gallon of petrol £1.64

Pint of beer* 58p

Pair of jeans* £20

First-class stamp 15.5p

Cinema ticket* £1.65

Can of Coca-Cola 20p

Pint of milk 20p

Mars bar 16p

Flight to Paris* £148

22-inch colour television* £297

*Source: thisismoney.co.uk. The beer was London Pride, jeans were Levi 501s, the cinema ticket was at Odeon, the flight to Paris was with Air France and the television was made by Sony.

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Hear more economic updates from Anthony Rayner at: www.iViewtv.co.uk

Against the background of tighter fiscal policy, a tighter monetary policy could push the economy back into recession and the MPC will be hoping that inflationary pressures will not force them into raising rates sooner than they would like. An important area when trying to assess inflationary pressures is wage inflation. Currently there is little sign of building wage pressure but if wage inflation starts to pick up, this could encourage the MPC to start tightening its policy. Two thirds of pay settlements are struck between January and April, so this will be a key period to watch. However, uncertainty as to the inflation outlook is such that the MPC is leaving open the door for more quantitative easing if warranted.

The UK economy is faced with significant headwinds on the domestic front, as the government and the consumer look to reduce their debt levels going forward. That said, the corporate sector in the UK looks more positive, with cashflow and profitability strong. Looking beyond the domestic environment, the UK is an open economy and therefore the state of the world economy can have an important influence.

As the graph below shows, the outlook for the manufacturing sector in the world’s largest two economies is mixed, with a level of below 50 suggesting a contraction in the manufacturing sector. With the outlook for global growth so uncertain, waiting for significant help from overseas seems somewhat optimistic. Rather, the most likely scenario is for anaemic economic growth in the UK, as fiscal and monetary policy move gradually back to more neutral levels.

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The UK economy is faced with significant headwinds on the domestic front, as the government and the consumer look to reduce their debt levels going forward{ {


To hear more from Fiona Rowley and Jim Leaviss, visit iView: www.iViewtv.co.uk

The future starts today

FIONA ROWLEY

JIM LEAVISS

The UK commercial property market has delivered a total return of 26.7% since the market’s nadir back in June 2009* although recently we have seen increasing signs of stabilisation across the market. Indeed, the strong rally experienced by the UK commercial property market now seems to be coming to an end at sustainable yield levels.

The occupier market remains challenging as rents continue to fall, although at a much slower rate than in 2009. In the current cycle, it is weak tenant demand that is depressing rental growth, rather than oversupply as in the early 1990s. As tenant demand is faster to react to changes in the business cycle than supply, there is a high correlation between GDP and rental-value growth. I therefore expect property fundamentals to remain weak until we begin to see clear signs of a sustained recovery within the economy. When the

economy picks up, I expect to see this reflected in higher tenant demand and hence rental growth.

In general, in today’s challenging market conditions, I still favour prime and good secondary properties, given their defensive qualities. I believe market rental levels are likely to continue to fall across most sectors during the remainder of 2010, albeit at a slower rate, and investment decisions will therefore be driven primarily by stock-specific factors. As we move through the bottom of the rental cycle, my strategic emphasis will begin to shift from securing rental income towards devising initiatives to enhance and grow the fund’s rental income through active asset management.

*Source: IPD Monthly Index as at end September 2010

Jim Leaviss, Head of Retail Fixed Interest, and Fiona Rowley, manager of the M&G Property Portfolio give their view of what’s to come for their asset class.

Tough government cuts may be good for bondsMy core view is that we’re still in a disinflationary world and we’re likely to have a ‘lower for longer’ interest rate scenario. In the UK I think the government’s austerity measures are very much deflationary and that the Bank of England is unlikely to risk the recovery by hiking rates any time soon.

The austerity measures mean we’ll lose hundreds of thousands of public sector jobs and it could be years before we get back to a normal employment environment. Ours is one of the worst austerity programmes in the world, and it is likely to limit people’s ability to spend. It’s possible the Bank of England may have to bring back quantitative easing to fight off disinflation. Although we have avoided losing our hallowed AAA credit rating, which has helped support the gilt market, there is a danger that the austerity measures kill growth and send us into a ‘double-dip’ economic recession.

While the government is now tackling the problem of excessive debt, many companies have already taken the pain and cut costs. This is good news for bondholders and is one of the reasons why we’ve been more positive on corporate bonds than government debt.

Corporate bonds have been rallying for some time now, and I think this rally has been about ‘carry’. What I mean by this is that the yield you are getting on corporate bonds, despite having fallen substantially over the past couple of years, still looks good compared to getting practically nothing from holding cash or little more than 0.5% on short-dated gilts. Given the outlook for interest rates, I see this carry trade persisting for some time to come.

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Facing aninconvenienttruthDave Fishwick – Head of Retail Investment Management

The initial premise may seem relatively intuitive: we can often point to examples of market behaviour which appear irrational with hindsight. However, it is not enough to accept that human emotion can have an influence; we need to understand how what the wider investment community feels at any specific time is influencing the pricing of assets. Behavioural ideas recognise the human and emotional dynamic of investment decision-making under conditions of euphoria or panic, and seeks to identify means of profiting from this behaviour.

This may sound compelling, but using behavioural finance in a successful investment strategy is not an approach that can be followed arbitrarily. To have the best chance of long-term success, such a strategy has to form part of a clear, repeatable and rigorously applied investment approach, to guard against the same emotional influences which are creating opportunities in the market.

The wisdom of crowds?Investors’ perceptions of the riskiness of assets can often become distorted by short-term corporate newsflow and forecasts. These factors can temporarily act as distractions from fundamentals, clouding objective assessment of an investment’s long-term value and creating opportunities to profit as these fundamentals become the more telling driver of price moves over the longer-term.

Even more importantly, perceptions of risk are more

frequently a direct function of recent trends in prices themselves. Monetary losses or gains provide an immediate and often disproportionately powerful influence on what are supposed to be long term investment decisions. As a result, recent price moves, while providing no insight as to what will happen in the future, can be the most significant source of shifts in perceptions of risk.

Windows of opportunityHuman behaviour can have an influence on the stock-market environment over both the short and the long-term. These episodes, created and fuelled by investor behaviour, can vary in length: the Dubai debt crisis of 2009 was short and sharp, while the European sovereign crisis has yet to conclude. Looking further back in time, the behavioural effects of the dot.com boom and bust can still be felt.

Behavioural finance recognises the human and emotional dynamic of investment decision-making{ {

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Investors are sometimes described as their own worst enemies – but this maxim is closer to the mark than we might realise. A sizeable proportion of market movements are based on human emotion rather than investment fundamentals. Behavioural finance recognises the inconvenient truth at the heart of investment, turning the spotlight on the factors driving investor behaviour and using them to make positive investment decisions.


Facing aninconvenienttruth

Investment markets move continuously, but most market

movements cannot be explained solely by changes to

underlying fundamentals. Indeed, the extent or even

direction of movements frequently bear no relation to

factual developments. Behavioural finance acknowledges

the influence of the human element behind market decision-

making and seeks to assess the extent to which it is this, rather

than objective assessments which is driving prices moves.

Separating fact from fictionThe principles behind behavioural finance may sound plausible

enough, but how can they be used to construct and manage

an investment portfolio?

Exploiting some of the opportunities suggested by behavioural

finance can involve making emotionally uncomfortable

decisions. Such opportunities only exist because of the very

difficulty of taking them on – otherwise everyone would

do it. Short-term noise and the stories which support

myopic market behaviour can often be highly convincing,

and distancing oneself from this involves a disciplined

and repeatable process to avoid falling victim to the same

behavioural biases as the market.

To do this requires considerable expertise, resources and

rigorous risk controls, and a process which is disciplined,

repeatable and strictly applied. The investor cannot contradict

the findings of such a process or choose what to use and

what to ignore – even though their peers might be moving in

the opposite direction.

The courage of your convictionsNot every investor is comfortable following a behavioural approach. It can be a challenging strategy that can involve taking decisions at the very point that they feel most difficult.

Nevertheless, the principles of behavioural finance can be harnessed by any investor willing to accept that market movements may often be driven by subjective as well as objective forces, and who is prepared to adopt the necessary discipline to dissociate themselves from the noise prevalent in markets. The principles of behavioural finance provide a valuable reality check, forcing investors to examine their decisions and honestly acknowledge what drives them.

Ultimately, behavioural finance in itself does not represent the “holy grail” of investment approaches; rather it represents a way of understanding the world and a framework from which to apply traditional methods of fundamental analysis. Understanding how the human factor can influence markets is the first step to ensuring the objectivity necessary for avoiding some of the most common investment mistakes.

For further reading on behavioural finance, try Behavioural Finance: Insights into Irrational Minds and Markets (The Wiley Finance Series) by James Montier.

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Why did I buy?

We ask three of our leading fund managers to explain why they bought some of the key holdings currently in their portfolios.

• Imagination specialise in technologies that ‘touch everyone’: multimedia and communications.

• Over 350 million people use Imagination technologies today.

• The group has a highly skilled workforce of over 600 people, of which over 80% are qualified R&D engineers

• The M&G Recovery Fund currently has 4.5% of the fund invested in the group.C

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TOM DOBELL

Why did I buy Imagination Technologies?Back in 2000 when I first purchased a stake in

Imagination Technologies, a leading Hertfordshire-

based microchip designer was struggling to convince

its investors of the strength of its technology.

At this time, investors were still reeling from the

bursting of the technology bubble and interest in

Imagination – despite its net cash, lack of debt

and investment in its products – was almost

non-existent.

Even 10 years ago, Imagination showed great promise

and its microchips were already sought-after by the

nascent digital radio market. The company was also

fast on the way to becoming the leader in mobile

phone graphics and car navigation. These qualities,

together with the focus of the management team on

creating value for shareholders, were too important

for me to ignore; and after several meetings with the

company, I decided to invest.

The first half of the decade was by no means an

easy time for Imagination and its shareholders, but

I remained convinced that the firm’s technological

excellence would eventually provide the cashflow that

investors wanted. I therefore took part in several fund

raisings, helping the company to get its products to

market and maintain a strong balance sheet. Success

stories do not happen overnight though, and patience

and plenty of cups of tea with management, were of

the essence throughout this time.

Our faith in Imagination seems to have paid off and

the company now supplies chips to Apple for its iPods

and iPads, and also to Intel and Texas Instruments.

What is more, both Apple and Intel have large stakes

in the firm. Seeing a home-grown business like

Imagination finally having its technology endorsed by

some of the world’s leading technology firms has been

particularly rewarding.


For more information from Fiona, Tom and Greg, visit iView: www.iViewtv.co.uk

Why did I buy 43 prime and good secondary small hotels?There has been a huge amount of interest in UK commercial

property as a whole since the market turned a corner in

July 2009.

During this time, I have benefited from the excellent

market access and extensive resources of M&G’s real estate

division as I put investors’ cash to work. We have been able

to identify a steady supply of quality properties that have

enhanced the fund’s already defensive income profile.

For example, in July 2010, we invested in a large portfolio of

43 prime and good secondary small hotels for approximately

£80 million. Located throughout the UK, these new

acquisitions came with a relatively high initial yield of 6.8%.

At purchase, my team successfully negotiated 25-year

leases with Travelodge for the entire portfolio of hotels,

with rent reviews every five years linked to the cost of living,

as measured by the Retail Price Index (RPI). Seven of the

hotels have pubs attached, let separately to Mitchells &

Butlers on 25-year leases with RPI-linked five-yearly rent

reviews. However, any rental uplift on the pubs is limited to a

maximum of 4.0% each year.

I expect rental growth to be low over the next 18 months,

and thanks to its long leases, good quality tenants and

protection against inflation, this portfolio should provide

a very reliable and increasing income stream for the fund.

Furthermore, the individual properties are relatively small,

ranging from less than £1 million to £4 million, which means

that they are an excellent source of ready capital if required.

FIONA ROWLEY

Why did I buy Sysmex?My investment strategy is focused primarily on selecting

quality companies with scarce assets that are difficult

to replicate. I tend to take a broader, even somewhat

unconventional, view of what can give a company a

significant edge over its competitors.

For example, this year I recently initiated a position in

Sysmex, a world leading supplier of diagnostic devices

and chemical catalysts (reagents) used in blood testing in

the healthcare industry. Ordinarily, investors would expect

Sysmex’s high returns to diminish over time as its rivals

release comparable products. I believe, however, that

Sysmex has some unique characteristics through which it

can maintain its strong market position, deliver attractive

growth rates and create substantial value for shareholders.

As well as technology and size, Sysmex’s other key

advantage over its peers is its successful after-market

business. In the same way that Canon has a lucrative

business supplying replacement ink cartridges for its

printers, over half of Sysmex’s revenue is generated from the

supply of replacement reagents for use in the instruments

it sells to customers. These long-term recurring sales helped

Sysmex to remain very profitable in the challenging market

conditions we experienced in 2008 and 2009 and should

protect the company’s future prosperity.

What is more, Sysmex has a strong focus on technology,

quality, manufacturing and customer service – intangible

qualities I look for in my investments. While such factors are

difficult to value, they are an undeniably important part of

the company’s success

Sysmex’s attraction also lies in its bright growth prospects.

The business already has a major presence in the emerging

markets, where rising spending on healthcare is creating

demand for testing equipment. Furthermore, there is room

for Sysmex to increase its share of the huge US market,

where it has traditionally been under-represented.

GREG ALDRIDGE

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It is possible to see why going global in the search for dividends is so compelling by highlighting three particular countries which have a strong dividend culture.

USHousehold NamesThe US boasts 92 ‘dividend achievers’, including household names such as Procter & Gamble, Coca-Cola and Johnson & Johnson. This contrasts with the UK where there are just five companies with a 25-year track record of consecutive dividend increases. Procter & Gamble tops this US elite group of companies with 56 years of uninterrupted dividend growth; Coca-Cola and Johnson & Johnson are not far behind with 48 years of consecutive dividend increases. But the list is by no means confined to companies with branded consumer goods. 3M (technology conglomerate), Emerson Electric (industrial automation) and Chubb (insurance) also feature high on the list, while household names such as Walmart, McDonald’s and Exxon Mobil are among the other worthy members of this dividend aristocracy.

No ‘lost decade’What is perhaps surprising is the share-price performance of these companies. During the last decade when the return from US equities was negative overall (the S&P

500 fell 29% in capital terms and the total return, including dividends, was -15%), the average return from the US dividend achievers was positive in terms of capital – not just positive, but has achieved a 90% return. On top of this substantial capital gain, investors also benefited from a rising dividend stream which, accumulated over 10 years, lifted the total return to more than 145%. In what was known as a lost decade for equities, US dividend achievers created huge amounts of wealth for shareholders. Discipline and patience can be very rewarding.

BrazilLegal requirementsIn Brazil, companies are required by law to pay at least 25% of net profit as dividends. This means that there is a natural discipline for companies to invest their capital sensibly and deliver profitable growth – a discipline which will in turn provide fuel for future dividend increases.

Quality managementBanco do Brasil, Brazil’s leading financial institution, is a good example of the generally very high quality of management throughout Brazil. It has transformed itself from a bureaucratic, loss-making government entity into an innovative and profitable bank that is accountable to shareholders. With a dividend yield in excess of 5% (as at 1 November 2010), the shares offer

Dividend investing works. History confirms that. An investment strategy focused on dividends has been a proven success in the stockmarket and holders of UK income funds have been handsomely rewarded over the long run with competitive returns ahead of inflation. But investors may be missing out on some excellent investment opportunities if they restrict themselves solely to the UK. The UK is not the only country where the dividend strategy works. Equity income is a proven strategy worldwide with several countries providing particularly favourable conditions.

Go where the dividends GROW


compelling value; the potential for profitable growth (and therefore dividend growth) in a rapidly developing economy seems to be underappreciated by the market. Banco do Brasil increased its dividend last year by 14%.

AustraliaFavourable taxesAustralian law allows companies to attach franking credits (credits for corporation tax already paid) to dividend payments, which means that the total income received from Australian shares comprises the cash dividend boosted by a tax credit.

Rewarding shareholdersWhen looking at companies in Australia on a fundamental basis, what is similar to the case of Brazil, is the very high quality of management teams. CSL, which specialises in plasma products and vaccines, is a global business with leading market positions and a long history of commercial success. The management team has an excellent track record of rewarding shareholders: the company has raised the dividend in all but one year since its stockmarket listing in 1994, increasing the payout by 40 times – equivalent to an average annual growth rate of more than 20%. Financial discipline is an integral part of the company’s culture and last year’s dividend was raised by 52%.

Source of company stats in US: Mergent’s Dividend Achievers as at 31.05.10, UK: Evolution Securities, company reports as at 30.06.10. Excludes Investment Trusts. Source of Brazilian law: Standard and Poor’s Country Governance Study. Australian Franking Credits: Dividend Imputation – published by the Australian Stock Exchange. Source of US equity returns: Bloomberg as at 30 June 2010.

To hear more from Stuart Rhodes, visit iView:

www.iViewtv.co.uk

“In Brazil, companies are required by law to pay at least 25% of net profit as dividends”{ {

How RDR is prompting a technology review

LEGAL AiDMany advisers are rightly focused on the most pressing aspects of RDR – the qualification requirements and shift to adviser charging. But a firm’s client communication strategy will be increasingly important in the post-RDR world.

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In the midst of some of the largest economic and regulatory upheavals in the history of financial advice, an adviser’s Twitter strategy may be the last thing on their mind. However, social media is just one example of how the next generation does things differently and how advisers may have to adapt. As advisers are re-engineering their businesses, there are a number of ways progressively to incorporate changing client communication needs.

The Inheritors Many advisers will say that they are fully focused on their retiring babyboomers, who still like the old-fashioned way of doing business – face-to-face, at an appointed time, with a trusted adviser. But the children who will inherit that wealth will also need advice. They are likely to gravitate naturally to the same advisers as their parents as long as they appear to be serving their needs. Not having the business processes in place to service that next generation – the ‘inheritors’ – risks missing out on potentially lucrative business.

In a very short time advisers will be faced with a potential client bank that at the very least uses internet banking and is possibly extremely technically literate. The annual portfolio updates issued by life companies are likely to look archaic at best. Newer clients will almost certainly want to look at portfolios with greater regularity, or at least be able to receive relatively instant valuations. This is only available through improved technology.

The introduction of wrap can be part of that strategy. Equally, however, many advisers are finding that their existing systems have this capability; they just need to put time and resources into ensuring they are used properly. Ultimately, any system should be able to help advisers understand the profitability of each client and help them service that client more effectively.

EngagingAdvisers also have to be aware of the other information being provided for to their clients. For their retiring clients, advisers may have been the only source of information. Younger clients increasingly have a wealth of information at their fingertips, but need a knowledgeable guide to negotiate it. This requires a slightly different skill, but having access to the most accurate information about their clients should give advisers a strong advantage.

Social media can provide an opportunity to engage with a wider potential client base, particularly for smaller advisers. Through Twitter, or LinkedIn or other networks, they can spread their message far wider than they might otherwise. This helps them to compete for clients with larger advisory firms. It also provides a cost-effective way to communicate with existing clients, or even generate referrals.

Social media strategies are relatively easy to implement. It helps if advisers are clear on their own business, the type of people to whom they want to appeal and the type of expertise they want to be seen to provide. There are a number of examples of advisers who have made a success of social media – Martin Bamford of Informed Choice, for example.

As well as appealing to clients, social media can provide a good forum for collaboration. A strong working example of this is Panacea IFA’s LinkedIn site. Smaller IFAs meet virtually to share ideas and best practice. Advisers are a natural community. IFAlife (www.ifalife.co.uk) also provides a forum for advisers.

Sharing Best Practise This collaboration is likely to become particularly important as business transition progresses. Many advisers have found that forging partnerships with their peer groups can help encourage best practice and share costs. For example, one adviser found that implementing a new computer system was costing valuable adviser time. He was able to share the costs of a paraplanner with another adviser.

Of course, social media can only ever supplement the way advisers communicate with investors, but it is a useful shop window for services. It can also liven up an otherwise flat, corporate website.

The next generation is used to having many things at their finger-tips and operating different, more flexible working practices. They are likely to apply this approach to financial advice. As part of an adviser’s business re-engineering it may be worth considering how to build at least some of these new practices into an advisory business, so that the business can accommodate changing patterns of behaviour when it needs to attract the next generation.

Social media can provide an opportunity to engage with a wider potential client base particularly for smaller advisers{ {

For more information on topics such as RDR:

www.fsa.gov.uk

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RDR an advisers viewThe RDR throws up challenges for every firm. Even those who are well on the way to achieving the necessary qualifications and already have the structure in place to charge fees are finding that they need to tweak their procedures to accommodate the new regulations.

Alan Steel from Alan Steel Asset Management

Tim Johnson from Pearson Jones plc


The majority of advisers are now supportive of the RDR and have accepted the need for improved qualifications and professionalism.

Long-term relationshipsA recent survey by SimplyBiz found that there has been a

significant decrease in the number of advisers planning to

remain in the industry as the path to RDR compliance has

become clearer. Originally, between 20% and 30% were

estimated to be leaving the industry. This has come down

to 10-15%. Equally, product and service providers, plus the

networks have stepped up to provide greater support.

Alan Steel, chairman of Alan Steel Asset Management,

has supported the principles of the RDR long before it ever

became known as such. He says: “As much as 20 years ago,

we realised that we were not selling things, but building

long-term relationships. We would not take high upfront

commissions. So we are happy about the changes and

certainly don’t believe we will lose anything through the RDR.”

Further research by MyTouchstone.co.uk of 2,500 IFAs shows

the current hourly rates being charged for advice throughout

the UK; the most common fee rate charged for advice across the

UK is £100-£150 per hour and the most common percentage

fee rate charged of assets under management is 0.5%

Additional TransparencyAlan Steel believes the changes should rid the industry of those

advisers who have served clients poorly: “There are still some

advisers who are still not interested in clients. They will go as

part of this exercise and not before time. It is difficult to see any

downside in this additional transparency.”

All advisers are at different points in the journey to business

transition. Some are still predominantly commission-based

and therefore have a difficult transition to make over the next

two and a half years. However, even those businesses that are

largely RDR-ready will have to formalise business processes to

ensure compliance.

RDR compliancePearson Jones is typical of the latter type of business. It is

already well down the road to RDR compliance. It has five branches with 120 staff and its advisers are, in the main, already CFP-qualified. It has been charging fees for some time, though has a remaining element of commission within its group pension practice.

Further research by MyTouchstone.co.uk, shows that in fact only 6% of the 2,500 are classified as ‘RDR ready’.

Adviser Charging GuideThe table below shows the percentage of IFAs charging hourly fees at the levels shown:

Fees Per Hour <£100 £100 – £150 £151 – £200 £201 – £250 £251 – £300 >£300 Total

UK 13.98% 41.39% 31.37% 9.85% 3.07% 0.34% 100%

The table below shows the percentage of IFAs charging annual management fees at the levels shown:

Fees as % of FUM 0.25% 0.50% 0.75% 1.00% 1.25% >1.50% Total

UK 3.73% 65.77% 10.80% 19.03% 0.22% 0.45% 100%

Source: www.MyTouchstone.co.uk

“There are still some advisers who are still not interested in clients.” Alan Steel, Alan Steel Asset Management{ {

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RDR Ready (UK Wide)2,500 IFA firms participated in the My Touchstone RDR survey. Of these 6% confirmed that their firm is already RDR Ready. To be classed as RDR Ready, each participating firm had to meet ALL of the following conditions:

• Over 75% of income generated by fees

• At least one adviser qualified to QCF Level 4

• Meet the FSA capital adequacy requirements

• 100% of advice provided on an independent/ unrestricted basis

But Pearson Jones has still had to make changes. Deciding on a full client service proposition has been the most important step for many advisers. The group developed this in 2008, but has had to bring in client agreements to formalise existing client practices. Tim Johnson, managing director, says: “This set out what we would do for clients, and how we would report to them. We also developed a new client agreement that stated how we would charge – either for a percentage of assets, or by the hour.” Johnson has implemented these new agreements across the business, aiming to get a consistent service level for clients.

The majority of advisers have also had to undertake a client segmentation exercise. Pearson Jones’s client bank had been built up over 30 years and inevitably held some legacy clients who would not fit the group’s new model. Johnson says: “We have had to be open and honest with these people and explain that we can no longer provide a service. We have realised that we usually cannot make money on investment portfolios of £100,000 or less and we have to move away from those clients”.

MyTouchstone.co.uk is the first truly collaborative marketing database ever constructed by the IFA sector. Powered by the collective sales data of 77 major product providers and inputs from thousands of IFAs.

IFAs can access personalised reports showing how they’ve performed compared to the other IFAs in their post area and across the UK; they can also view local hourly advise rates and much more.

Access is free and available at www.MyTouchstone.co.uk

0 25 50

A

B

C

D

% of firms

75 100

A – over 25% income via commission B – no advisers level 4 qualified C – capital adequacy issues D – not wholly independent

Source: MyTouchstone.co.uk

Alan Steel Asset Management, email [email protected] or call 01506 842 365.

Pearson Jones, email [email protected] or call 0800 458 0908.

The biggest obstacles for the firms who are not as yet RDR Ready are:


Insight. Ideas. Inspiration.M&G have announced a major step forward for the popular iView channel, which will see it become an online platform in its own right. The aim is to make iView into an essential portal for advisers who want the latest market insights, commentary and educational material.

The story so far iView was launched in May 2009 as the first interactive channel in the investment industry to offer bespoke fund information and educational content for advisers. At the time, it was compared to the BBC’s hugely successful iPlayer service, thanks to the functionality it offered.

Investment ideas worth sharingThe iView offer has now developed even further to provide TV-quality news programmes from specialists in many fields of investing, alongside thought-leading documentaries and fund-specific videos. Contributors will include M&G’s top performing fund managers, a wide range of external content providers, such as The Daily Telegraph, Citywire and industry leading experts such as Dr Philippa Malmgren. A range of educational content will also help advisers with their continuous professional development.

Anne-Marie McConnon, M&G’s Head of Intermediary Marketing in the UK, says, “Our success has been thanks to the content we offer. With these new developments, we hope to attract many more advisers to our service, while offering existing users more reasons to visit us regularly.

“At the heart of our service is the belief that investment videos don’t have to be boring and our aim is to entertain as well as inform. To make sure we are achieving these goals, we will be putting together an adviser panel. The panel will help ensure that adviser input underpins everything we do, and the results will drive and shape the content we deliver.”

Instant access, at any time All the information on iView will be available online and to download on MP3 24/7, so advisers can get the latest information and insights at a time that suits them. Following feedback from advisers, registration to the site has also now been removed – this will ensure that every adviser can use all the aspects of the service from the moment they first visit. In addition, iView will be available through mobile devices and integrated with popular social and business networking sites, so it is easy to share and stay informed.

Register now, for iView by visiting:

www.iViewtv.co.uk

What’s available on iView?• Four part paraplanning series

• Investment market commentary

• Expert views from Dr Philippa Malmgren

• Daily Telegraph news

• Thought Leadership Live

• Citywire Adviser Week round-up

• Leading M&G fund manager videos

For financial advisers only. Not for onward distribution. No other persons should rely on the information contained in this magazine. This Financial Promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Services Authority and provides investment products. *Calls may be recorded or monitored. **For your protection calls may be recorded or monitored. Before assisting you with your enquiry, we will ask you to: Confirm certain information relating to our mutual, customer, identify yourself, provide your firm’s FSA number. The registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776. OCT 10 / 29738

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LLW

EBSI

TE Financial Adviser Helpline 0800 328 3191**For further information on the M&G fund range, just speak to your usual M&G representative or call our Financial Adviser Helpline. Lines are open Monday to Friday, 8.00am to 6.00pm.

Investment Sales Team

0845 600 4125*This team will help if you wish to speak to a Sales Consultant who covers your area. Lines are open Monday to Friday, 9.00am to 5.00pm.

Financial Advisers online www.mandg.co.uk/ifaAccess in-depth information on M&G funds, daily prices and fund manager views.

www.iViewtv.co.ukThe interactive online channel for advisers. For investment ideas worth sharing.

www.bondvigilantes.co.ukJoin the debate; brought to you straight from the fund management floor.

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