MOT Health Check for Investment Managers

By Cynthia Poole, Director of Relationship Management and Business Support, Raymond James Investment Services

“Coming together is a beginning; keeping together is progress; working together is success”
(Henry Ford)

Starting a business can be a complex undertaking. In our industry, regulation is an added layer of complication. So why are so many investment managers taking up the challenge?

We like to sum it up in one word: independence.

For an investment manager, independence means controlling your own destiny and owning your client book. You have the freedom to deliver the service proposition that you believe in and that meets your clients’ needs, allowing you to provide a boutique investment management solution.

A small boutique solution, where clients receive personalised, individual attention to their needs, produces benefits to investors. MDRC recently surveyed and held focus groups with HNW investors to determine levels of client satisfaction in the wealth management industry. The results showed that smaller firms continue to dominate the top half of client satisfaction, while the bottom half is dominated by large firms.

Furthermore, the top performing firms tended to be “boutiques” with relatively few clients per relationship manager and where the business managers are also partly business owners. In other words, size and ownership matter.

But starting your own practice is a serious undertaking. You have to consider FCA authorisation, compliance support, capital adequacy, PI cover and of course, finding a partner that can meet your needs in terms of product access, client reporting, research and administration. In the US, Canada and the UK, Raymond James has now successfully assisted thousands of wealth managers to start up and grow their own business through the Independent Contracting model.

We know from experience that a smooth transition requires detailed planning, a high degree of discretion and putting in extensive hours before, during and after the launch of the business. You need a strong partner that has a structured approach with virtually nothing left to chance. The good news is that, while career transitions require a lot of hard work, they can also be highly rewarding – professionally, financially and personally.

Be smart about outsourcing

We have identified some key considerations if you’re thinking about going it alone.

I know it’s not the first thing you want to think about, but compliance is an important consideration and compliance expertise on the discretionary management process can be expensive to obtain. Equally, it takes time to put the right procedures, systems and controls in place, as well as to train someone to take up the required FCA control functions. The consequences of not having adequate systems and controls to comply with the rules can mean hefty fines or worse, being closed down.

You will need to obtain FCA authorisation and professional Indemnity cover, create a T & C Scheme with supervision, training and development and access a complaints handling resource, or find a service partner that can deliver this for you.

Your clients, and the regulator, will expect you to have documentation specific to the investment management process. It sounds like it should be widely available, but it isn’t, and this is one element that you don’t want to have to start from scratch. Look for a tried and tested service and talk to other investment managers with experience of using the service.

You will also want to think about other areas of business support, such as a client opinion survey, which is a key component of ensuring you meet your TCF objectives – another FCA priority.

Your skill as an investment manager will be hampered if you don’t have access to institutional-quality trading and rebalancing functionality, which is also an essential part of ensuring your business has scalability. Without this, your growth is impeded.

You will want to preserve your ability to follow your investment management convictions, so you can support your clients’ aspirations without the restrictions of a large firm’s centralised investment approach that doesn’t match the needs of your target clients.

Building the right team is also crucial. Segregation of duties between the investment management process and marketing produces results in terms of business growth.

You will also want to consider whether you have financial planning expertise in-house to provide the full wealth management service to the clients, or whether your model is designed to work with third party financial advisers, so you focus solely on discretionary investment management.

Time for a service partner health check?

Whether you’re starting anew, or if you already have a service partner, here are some additional good health checks to consider as part of a business MOT:

• Does your client reporting meet the FCA’s requirements for clients receiving discretionary investment management, including performance reported against a relevant benchmark? Is your performance reporting time- and money-weighted?
• Do you have access to a Capital Gains Tax analysis tool?
• Are your clients’ investments protected? Is the custodian financially sound? Are audits conducted regularly to ensure the FCA’s Client Asset Rules are robustly followed and monitored? Clients need confidence so they can sleep at night knowing their investments are safe.
• Do you have the flexibility to offer multiple charging options, including both tiered and flat management fee options?
• Do you have the ability to facilitate payments to financial advisers, solicitors and accountants who introduce business to you?
• Do you have access to multiple tax wrappers with a wide range of pension and offshore bond providers? This will make it easier for new clients with existing investments to move their accounts to you.
• Can you trade all asset classes, including equities, bonds (both corporate and government), exchange traded funds, investment trusts, onshore and offshore funds, clean/institutional share classes, alternative investments and structured products, in multiple currencies?
• Do you have sufficient trading options available? Investment opportunities are becoming increasingly global and diverse requiring real time trading and coverage in all major markets. If your service partner is a member of the London Stock Exchange, they will be able to offer real time trading in exchange traded funds, equities and bonds in UK, US and European markets.
• What added value are you getting? Service partners have to compete too, so it’s worth checking out what the competition is offering. Do they provide access to research?
• Is it only in-house research or can you access research written by a number of credible firms? What analytical tools are on offer? Do they offer pre-negotiated discount rates for any other useful third party tools?

All of these elements will help you become independent – from the administrative burden of compliance and client reporting, from the dilution of your investment prowess by centralised views, and from the shackles of a restrictive world of investment opportunities.

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