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Weekend press review – 50% TFC? Really?

  • By Myles Carey

The Financial Times features a typically combative article from Merryn Somerset-Webb, the editor of MoneyWeek, about what she sees as a return to active management after a long period in which passives have made all the running.

Noting that 90% of active fund managers have failed to equal their benchmarks over the past 15 years, the author says she doesn’t think it’s surprising that even seasoned wealth managers have thrown in the towel and gone with “the modern way”; and the huge growth of the exchange traded funds market (from $700 billion in 2008 to $4.4 trillion now) is a particular manifestation of the trend. But she doesn’t think this is necessarily the end of the matter. In the first half of 2017, she says, more than half of active funds managed to outperform their index.

It’s possible to argue that this is a major shift in the wind direction, caused perhaps by one-off factors such as the winding down of quantitative easing (which was itself responsible for many distortions) – and if that were true, it would also imply that sharp minds ought to be able to find valuation anomalies that the passives won’t ever notice. But at the end of the day, fund management fees and charges will remain a problem for active managers.

Or at least, they will unless something changes. There are some new ideas being floated by the likes of Fidelity, which she says is exploring the idea of variable fees which will reduce if a manager should underperform.

Fancy getting a 50% tax-free lump sum on your pension when you retire, instead of the usual 25%? The Telegraph certainly knows how to get your attention. There is, of course, a catch and a bit of a wangle, and indeed a risk, but you won’t discover that until you’ve read the article in detail. Which we’d guess that an awful lot of your clients will have done.

Forewarned is forearmed, then. It’s a curious argument that revolves around the discrepancy between the 20 multiple that’s used for tax purposes in calculating defined benefit pensions, and the 30-40 multiples that are being commonly applied in practice now that interest and annuity rates are getting so thin.

Ultimately, of course, it’s a reworking of the familiar argument that a transfer out of DB and into DC will often result in a much bigger payout than would have been the case a few years ago. As far as we can see, the authors are essentially looking at the situation through the other end of the microscope and concluding that a well-timed transfer out might result in a fatter cash payment within that 25% definition because the whole sum is bigger than it would otherwise have been.

And the Telegraph doesn’t dodge the fact that such transfers are fraught with risk for the unwary. Which, of course, might not be unrelated to the fact that the FCA has just been recommended to intensify its crackdown on advisers who may (or may not) have been persuading their clients to transfer out, in order to put them in a position where they need investment advice that they wouldn’t have needed if they’d stayed inside DB.

In short, the story is a twist on a familiar dialogue. And none the worse for that. As to whether it casts the advice industry in an unfavourable light? Don’t blame us at IFA Magazine, we’re just the messengers….

The Sunday Times leads with a look at the cost of parental leave, and why there has been such a poor take up by Dads of the scheme launched in 2015 to help encourage shared childcare duties. This one is unlikely to generate many client queries we are guessing!

There’s also a please to “think twice before ditching a defined benefits policy” although the headline of “savers with gold plated pensions short-changed by poor advice” might raise a few brows. It reports that the FCA believes less than half of up to 80,000 people estimated to have cashed in DB schemes have received “suitable” advice.  All the usual risk warnings are there, and advice to only proceed with extreme caution is the direction of travel.

In his regular Personal Account column, Ian Cowie examines Tory government ideas and recent performance at their much-reported conference last week and has some words of advice for Mr Hammond if he truly wants to be seen as a reforming Chancellor.  The topics of NICs and stamp duty are on his agenda.  He wonders if they are saving up something to surprise us in the autumn budget on 22 November, but on the current form, he doesn’t think it is necessarily the way to bet!

In a full page feature, the Sunday Times is considering the likelihood of rising interest rates following Mark Carney’s comments recently. They examine the implications for mortgages, savings and pensions. Not rocket science perhaps, but maybe clients will start to ask a few questions about how such a rise might affect their own position.

The Financial Mail on Sunday also reports that there might be better deals for investors in the pipeline when it comes to fund charges.

Given the relative dominance of passive funds in recent years, it reports that Fidelity is the latest asset manager to respond to the threat posed by the likes of BlackRock and Vanguard, with the announcement of a new ongoing charging structure for its active funds.

Although details are sketchy, its new style ‘fulcrum fee’ will fluctuate between a pre-determined floor and cap according to how well an active fund performs against its benchmark.

 

As Jeff Prestridge explains, until Fidelity fleshes out the detail, it is hard to give a definitive verdict. He also mentions the forthcoming MiFID II regulations which will soon force fund managers to be more transparent over charges – as well as require them (and brokers) to provide investors with greater information before they buy. Are you likely to get questions from clients over MiFID II? We doubt it but you just never know!