Asset management

My key takeout is that South African asset managers certainly have their finger on the global pulse. The trends discussed in all conferences and discussions were in line with how our industry currently views global markets. The interconnectedness of global markets means we all end up viewing the same data and dynamics but approaches to building portfolios and balancing risks are nuanced. Consistent themes that we observed were the rise of and potential opportunities in artificial intelligence (AI), current geopolitics and how it may affect markets, macroeconomic data and the tussle between market prices and economic prospects, and megatrends affecting the world for the next 50 years and beyond. What is apparent is that the UK market has a distinct lack of home country bias, with conversations largely focusing on global rather than domestic risk factors. Regulation currently does not restrict foreign exposure in portfolios, and this has resulted in portfolios having only low single-digit exposure to their domestic market.

The impact of regulation on financial planning

One of our key observations was that there is a significant imbalance between the supply and demand of financial advice in the UK. From our meetings, it appears that only between 8% and 10% of UK individuals currently have financial advisers, and the industry needs to appoint more advisers to service the public. This statistic may partly reflect industry regulation. Recently (July 2023), the Financial Conduct Authority introduced new rules called “Consumer Duty”. The rules aim to set higher standards for financial services clients and require firms to “act to deliver good outcomes for retail clients”. While the rules firmly aim to benefit consumers, the onus is on financial advisers to comply with and implement them. The four pillars of Consumer Duty focus on products and services, price and value, consumer understanding, and consumer support. The industry has generally covered these requirements, but the new rules are more onerous to implement and report.

Greater regulatory requirements have also provided impetus to another trend: consolidation. The UK market has seen the entry of private equity investors seeking to acquire independent practices and consolidate them into a bigger firm/network. This allows advisers to leverage off the operational and regulatory ability of a larger advice business without incurring the financial costs of implementing Consumer Duty and other regulations. The nature of the transaction may involve the acquiring company taking a full or partial equity stake in the advice practice, a revenue-sharing agreement, or a vertical integration agreement with the acquirer. A transaction may also provide the benefit of scale to an adviser by providing access to investment portfolios with lower fees or leveraging the technology of the acquirer.

Fees

Similar to SA, the trend is lower, but the race to zero has slowed. Compared to the total cost-to-client a decade ago, fee compression has primarily been felt by the asset management and investment platform industry, with financial advice fees largely unchanged. Fees charged for active management have declined as the retail market has scaled assets and begun to negotiate from a scale previously only seen in the institutional market, while passive/systematic strategies have been able to deliver robust returns for a fraction of the cost. Investment platforms have also faced pressure from the industry to lower costs and improve operational efficiencies, and clients have benefitted from average platform fees that are lower than a decade ago. The platform industry also appears to be on the cusp of a consolidation wave, as already-thin margins become increasingly squeezed. The total fee experience for clients is approximately 1.8% for advice, platform, DFM, and asset management, with the financial adviser demanding the lion’s share of approximately 0.5% to 1% annually.

Discretionary fund management

The trend of using a DFM or model portfolio service (MPS) is firmly entrenched in the UK adviser market. DFMs now play a structural role in the industry and have become the primary gatekeepers of decisions on investment strategy for their financial adviser clients. The introduction of RDR in 2012, and then Consumer Duty in 2023, have been primary drivers of independent financial advisers’ decisions to outsource investment decisions and management to a DFM. Each DFM/MPS has tried to differentiate itself and its product offering by designing portfolios to suit many client needs, but little to no customisation is allowed by the financial adviser. Only a selected few DFM providers allow customisation of investment portfolios, but this is usually only done for the larger adviser networks. Most clients of DFM providers get an “off-the-shelf” solution. The fee squeeze has also been felt by the DFM industry, as their fees have steadily decreased over time, while the use of passive and systematic strategies have reduced the overall fee to clients in DFM solutions. The DFM industry continues to grow and support the professionalisation of the UK’s advice market.

Bringing it home

The trends we observed in the UK market seem strikingly similar to those we have seen in SA. The themes discussed by asset managers are largely the same as those of our local asset managers, and the need to seek differentiated returns going forward is also similar. The regulatory burden on UK advisers continues to increase and we also see this happening in SA, but perhaps to a lesser extent currently. The UK industry continues to professionalise and consolidate, with the need to show value to the clients being constantly top of mind. The value of a DFM continues to be crucial in delivering client objectives and meeting the requirements of the regulator, and we think this rings particularly true in SA too. The bottom line is that all industry role players, both in the UK and SA, are continuing to work hard to improve the efficiency and effectiveness of advice to benefit individuals. If we can all continue to strive for superior client outcomes, then I think our industry can hold its head high. I personally believe we’re well on our way there and can compete with our global counterparts. Nou weet ons wat hulle weet.