Weathering the storm while trading in turbulent times

A decade ago, a group of investment advisers joined forces with Quilter to set up an Irish operation. What lessons have been learned in that time?

Tue, Apr 30, 2013, 06:00

Back in 2003, it appeared to be an inauspicious move to set up a new wealth management boutique, given the troubling direction markets had settled into.

“There were questions about the wisdom of the timing because markets had undergone a period of decline, which was then well into its second consecutive year,” recalls Brian Weber, head of Quilter’s Dublin office.

“Gloom pervaded in the aftermath of the dotcom bubble. Like all things in the investment market, we took a view that the short-term timing issue was irrelevant for a long-term business.”

For Weber and his team, there was another motivating factor in the decision to move on from Davy Stockbrokers.

“We wanted to concentrate on investment management only, because there was a proliferation of other products in the market place which had more of a sales emphasis. We wanted to stick to what we’d been trained to do and that’s what we’ve done since.”

Indeed, the early days of the business coincided with a time when contracts for difference (CFDs) and leveraged property deals seemed to be the only deals in town. Quilter however, took a contrary view, identifying such products as being too “speculative” for most investors.

“I didn’t think they [CFDs] were appropriate for the private client market at all,” Weber says, adding that he considered them to be short-term products which pitched the average investor up against market professionals who were either running hedge funds or were engaged in high frequency trading.

“And these guys were checking prices on Teletext – what chance did they have?”

Nonetheless, at the time, client demand for leverage was very strong.

“Some product providers leveraged everything – we saw leveraged property transactions, leveraged equity indices, individual shares were leveraged with CFDs; there were funds specialising in leveraging bank shares and we even saw leveraged private equity funds being leveraged. In short, there was leverage upon leverage as clients borrowed to speculate,” he says.

“When you start leveraging products you’ve moved outside savings and investments and you’ve moved into the realms of speculating,” Weber says, adding that it wasn’t an approach that Quilter wanted its clients to pursue.

Deciding not to sell such products had a cost for the nascent adviser, however.

“We did lose clients. And we did pitches and the clients went elsewhere – but we ended up with a more resilient client base who have weathered the storm,” Weber recalls. “This was not a rational period of investment where clients salted funds away for their retirement or for the rainy day”.

While the type of investment products that are being sold have changed considerably over the past decade, so too has the structure of those providing the advice.

Globally, the wealth management sector is in a state of flux, as US investment banks retrench from Europe and off-load less profitable private banking operations.

In Ireland, this has resulted in the departure of names such as HSBC and Bank of America Merrill Lynch from the sector, while Quilter initially came to Ireland under the Morgan Stanley brand, before the US investment bank, which itself was acquired by Citibank, sold it on last year to private equity player Bridgepoint.

Nonetheless, Weber expects more consolidation in the Irish market, with firms who are part of larger international groups availing of greater economies of scale and resources than domestic firms.

“Industry consolidation will remain a feature and the number of participants at every level of the domestic financial services industry will continue to consolidate,” he says, noting that the number of member firms on the Irish Stock Exchange has declined from 16 in the late 1980s to just six.

“Twelve member firms either merged, closed or were hammered”.

Appetite to pay
The industry is also likely to see a change in how it gets paid for offering investment advice. With the UK recently having gone through a Retail Distribution Review (RDR), which has increased fee transparency on the sale of retail financial products,

“The debate has already begun in Ireland and I expect we will see something similar come into being here in the not too distant future,” he says, adding that there is an appetite to pay for financial planning.

When it first came to Ireland, Quilter offered clients the option of either paying an all-encompassing fee for its advisory service, or paying through a combination of transaction charges and commissions.

The response was overwhelmingly in favour of paying for advice, with 70 per cent of the firm’s clients opting for this approach.

“I don’t think it entered the clients’ mind about whether it was cheaper or more expensive; the fact was that there was certainty about it”.

A focus on fee transparency is also likely to go hand in hand with a more rigorous assessment of the suitability of a client to a particular investment.

“If you sell a financial product to someone you will have to make sure it’s suitable through the whole life-cycle,” he says, adding that this will differ significantly from the current approach and should be beneficial to investors.

“With upfront commissions, there’s no financial incentive for the provider to go back and check the suitability each year; eaten bread’s soon forgotten”.

So what’s on the investment agenda today? If CFDs and leveraged property deals were the high-risk options of the boom years, what are the dangers facing investors today?

“My fear is buying very long-dated sovereign debt – you could suffer a bumpy ride before you get your money back,” he says.

“Yields have gone so low that you can’t expect the returns you’ve seen in the past,” he says, arguing that investors who have built up a sizeable holding in bonds, perhaps due to the euro zone sovereign debt crisis, might need to consider an asset allocation review and divert some of their bond holdings into equities.

Level of enthusiasm
Indeed, Weber is a lot more bullish on equities, although notes that some investors may have missed out on a strong year for markets in 2012.

“We’re kind of late to the story from a deposit perspective because banks were paying such a good return,” he says, adding, “But they [investors] haven’t missed the boat; there is still potential there”.

Falling deposit rates have recently sparked a return in risk appetite, with Weber noting that the level of inquiries have picked up in the last few years.

“There is a level of enthusiasm for the markets now – but it’s much more conservative and much more realistic,” he says.

“Lessons have been learned – or maybe over-learned to some degree because of the levels of risks. Some clients believe that equities are more risky than they actually are”.

For Weber, emerging markets offer strong growth potential.

“We retain our belief that companies with an exposure to the relatively higher rates of growth of emerging markets will continue to perform well,” he says.

Such is the clamour for access to emerging markets that fund managers such as Aberdeen Asset Management have imposed a surcharge of 2 per cent on one of its funds, to dampen demand.

For investors looking to gain exposure to these markets, Weber suggests looking for a fund focused on these regions or investing in global blue chip that sell into them.

Value of cash
While booming equity markets might be one reason to make the switch from deposits, inflation, although unlikely to rocket, is another factor.

“We repeatedly hear people forecast hyper-inflation is going to be a result of printing money. We remain unconvinced, primarily because of the burden of debt reduction and high unemployment,” Weber says.

So does this mean you can stick it out in deposits and still make a real return on your money?

“Deposit rates are going to come down further below the rate of inflation. Leaving money long-term on deposit is not a solution as you’re going to lose money,” he advises.

But this is not to disregard the value of having money in cash.

“Typically I say to anyone if you’ve a lump sum that you want to live off, you should keep three to five years income on deposit,” he says, adding that his advice when it comes to selecting a deposit provider is to “spread the cash around”.

So what next for investors?

“All in all, we believe the future is bright, there will be obstacles, upsets, bad days and a smattering of crises, but we believe that the structural trends are favourable.”