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Cloud computing is transforming investment management

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Cloud computing is transforming investment management

Some best practices for investment firms to follow in adapting cloud technologies

By Tom Cole, Managing Director – Europe, Abacus Group

The paradigm shift towards cloud computing in the investment management business is exciting. Bleeding edge technologies are accessible to businesses and individuals, at relatively affordable price points. Cool-looking newcomers are frequently entering the market, offering a promise to drive efficiencies and productivity to businesses.

Don’t be fooled. This thriving marketplace with its creatively marketed products and a perceived ease of consumption can be a risky concoction. Managers must be shrewd at selecting cloud solutions, carefully weighing all of the costs and benefits.

If you are a business or technology manager at an investment management firm considering a move into public cloud IT, here are some considerations:

Try before you buy. Cloud services regularly boast benefits such as rapid deployment, self-service, pay as you go and others. Take advantage of this by signing up for free trials (where possible) and advance proof of concepts to wider audiences, absorbing feedback and tracking with key performance indicators (KPIs). Needless to say, approach with caution and be mindful of company policies and procedures for such trials.

Create and evolve KPIs. The term “benefit” is broad. Some benefits can be measured quantitatively, some qualitatively. To instill some structure and add consistency during the selection and evaluation process, KPIs should be firmly considered. It is rare that projects have a clear and straight road — so be nimble, accepting that a KPI may no longer be appropriate. Even better, uncover new KPIs as you evaluate.

Separate reality from marketing myth. A popular misconception about the public cloud is that it is a do-it-yourself proposition. The reality is you need IT expertise and a strong service layer to implement a cloud application and get the most out of it. There are a lot of promotional materials – including “explainer videos” – that make it sound easier than it is. A public cloud service may look simple, but when an investment management firm considers how it should be deployed – including layers of security, regulatory compliance, customer access, ongoing governance to name a few – it suddenly becomes quite complex.

Get buy-in from your key partners and managers. Like with any new IT application, make sure that key people in the organization not only buy-in to the idea, but that they understand how to use it properly. Technology is only as powerful as the consumers engagement and use. Your KPI’s will again be useful here to continually evaluate use and engagement i.e. is the solution being consumed in the real world as intended. Auditabilty is generally the norm for most solutions, such data points should be relatively straight forward to obtain and continually report with.

Take a holistic view. Standards differ from technology to technology; manufacturer to manufacturer; service provider to service provider. Yet there are many workflows and inter-dependencies between different systems. You need to look holistically to see if you can leverage existing technologies in your new cloud environment, and how using existing tools may impact the firm. Furthermore there maybe existing solutions already in place serving a purpose which can eradicate or dilute the requirement for another solution.

Understand the total cost of ownership. On the surface, a cloud product or service may seem to have a set cost. The challenge is understanding what the true cost is, looking at the time and energy you invest, not just for implementation but for maintenance, upgrades and additional security. There will always be underlying costs. Consider this: you buy a public cloud service that allots one terabyte of data per user in your mobile workforce. For staff to fully enjoy vast pools of data are their endpoints capable? Do these need to be upgraded imposing further cost?

Consider managed cloud services. In order achieve full control of your cloud technology, a managed services provider may be your best solution. A competent partner should help you piece together all of the moving parts in your cloud application – with a state-of-the art level of cybersecurity on top. An experienced cloud services partner also brings know-how gained from multiple business relationships to help you understand where everything fits into what you already have. And you won’t have to reinvent the wheel.

How accessible is your provider? With some public cloud environments, you may have limited access to support personnel. Technology does have wobbles and depending on your business, you may need rapid response to resolve. When opting for cloud services you have to accept that your level of transparency and control lessens. You need to ensure that appropriate service level agreements are in place. If these cannot be achieved via the larger cloud providers then the service provider intermediary is a solid consideration, whereby you can enjoy their service level agreements and relationships (at larger scale).

Security, security, security. The age-old saying that you can outsource responsibility but not accountability is even more prevelant with cloud adoption. Cloud providers often boast many information security certifications. Often the cloud provider is the foundation to which your solution is being built on. At time all the hard work and controls imposed by cloud providers can easily be unwound by a misconfigured solution. It is very important that you allocate correctly skilled resources or service providers to ensure the high levels of protection continue on past the cloud platforms offering into your business solution. The operational due diligence microscope is becoming more focused on what both technical and operational controls you impose as a business the compliment cloud providers robust offerings.

Participate in industry groups and forums. To stay up-to-date on the latest benefits as well as risks in cloud computing, it’s a good idea to get involved in user groups and industry events. The Cloud Industry Forum in the UK offers good guidance and advice. Furthermore within the alternative asset manager space AITEC and AIMA are popular consortiums offering frequent and sound advice as to how to tackle such business and technology challenges.

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UK leads the way in sustainable finance with the first set of requirements for investment management

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UK leads the way in sustainable finance with the first set of requirements for investment management 1

BSI, in its role as the UK National Standards Body, has today published the first specification for responsible and sustainable investment management. It addresses the policies and processes needed to create and embed a responsible approach to investment management.

It is the second publication from the Sustainable Finance Standardization Programme delivered in collaboration with the Department for Business, Energy and Industrial Strategy (BEIS) and the UK financial services industry in support of the UK Green Finance Strategy. Its launch coincides with the UK preparing to assume the G7 presidency and host next year’s UN Climate Change Conference (COP26), placing a spotlight on the need for business to unlock sustainable finance in order to build resilience, particularly for those operating in the world’s most climate vulnerable countries.

The new standard, PAS 7341:2020, Responsible and sustainable investment management – Specification, sets out the requirements to establish, implement and manage the process of integrating responsible and sustainable considerations into investment management.

It is structured across five key principles of sustainable investment:

  1. Governance and culture
  2. Strategy alignment
  3. Investment processes
  4. Investor rights and responsibilities
  5. Transparency

It underlines the importance of effective disclosure to appropriate stakeholders, and builds on existing industry guidance, principles and regulatory developments.

Scott Steedman, Director of Standards at BSI, said: “The financial system is playing a crucial role in helping to rebuild a more sustainable future through responsible economic growth. This is the first consensus for delivering responsible investment management at corporate level. The new standard, called PAS 7341, creates a way for financial management organizations to transition from ‘responsible’ to ‘sustainable’ investment management. In our role as the UK National Standards Body we are proud to support the government’s Green Finance Strategy with this globally relevant, pioneering and practical standard.”

Kwasi Kwarteng, Minister of State for Business, Energy and Clean Growth, said: “Transforming our financial system for a greener future is crucial as we build back better from Covid-19 and to meet our legally binding target for net zero carbon emissions by 2050. Building on our pioneering Green Finance Strategy, this new standard will help the UK investment sector become even more sustainable as we strive to lead the world in tackling climate change.”

This free to download standard has been produced by a steering group1 of technical experts made-up of organizations from the UK finance eco-system.

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Why investing should be treated like healthcare

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Why investing should be treated like healthcare 2

By Qiaojia Li, co-founder and CEO at the award winning wealthtech company, Rosecut

For many people, the process of investing can seem opaque and impenetrable, and filled with jargon.

They can see the potential benefits, but they can also see the Financial Conduct Authority (FCA) risk warnings.

Despite – or perhaps because of – this, the long-term trend suggests that more individuals are open to investing. One set of statistics suggests the percentage of individuals investing in stocks and shares in the UK grew nearly three per cent between 2010 and 2018.

Here are four steps for sensible investing:

1. Figure out why you invest, ahead of everything else

The key here is knowing what the overall goal is.

It is a constant source of amazement that when it comes to investing, few people stop to consider why they are actually doing it. Whether they have £100 or £100,000, many do not think about how their approach should be dictated by their overall goals.

For instance, someone looking to buy a house in the next 12 to 24 months should not be looking to dive into the world of bonds and equities, because they have a short-term target which requires reasonably fast access to cash. Tying their resources up in different funds and stocks will not only limit how quickly they can get their hands on their money when it comes to putting down a deposit, but they will not see the return that they would expect due to the short term price fluctuation of these assets. They would be better using a Cash ISA and enjoying the tax-free allowance.

On the other hand, if they have spare cash lying around that they won’t need for the next 3-5 years or longer, or they want to get a headstart on earning their retirement or long-term financial freedom, investing into financial markets is the way to generate compound return. That will give them a chance to beat inflation and, in all likelihood, it will give them a higher return than real estate would.

It is like any big project – determining the overall goal informs the strategy, which dictates the tactics. In the world of investment, this means management. Yet even deciding what goals they are working towards can be challenging for some people – they might have overinflated ideas or be too conservative.

This is where independent, objective, and knowledgeable financial planning comes in. By giving an individual’s finances a thorough check-up – much like visiting a GP – a qualified and experienced financial planner can consider circumstances, wishes and constraints. Only when this has been completed can they assess how feasible a client’s goals are, and the client can start considering how they should invest.

It needs to be a bespoke diagnostic and prescription process, in much the same way that a trip to the doctor requires the practitioner to have an understanding of any contributing factors and your medical history.

2. Seek professional help

If you were going to buy a property, you would look for a capable and qualified property lawyer instead of reading legal textbooks and undertaking training. The same logic applies to other professional advice, such as accounting, medical treatment and tax. Strangely, though, when it comes to investing, many people attempt to teach themselves.

While this approach is to be applauded, and there is certainly a huge amount of information readily available within a couple of clicks, the intricacies and vagaries of asset classes and funds, opposing investment styles, individual savings accounts and a hundred and one other terms can be overwhelming.

Forging ahead without professional guidance is a bit like having a pain in your hand and deciding to do a bit of exploratory surgery based on watching medical documentaries – there is only a slim possibility everything will turn out fine. This is why 99% of people have lost money by DIY-ing their own investments. It is a risky learning curve that, frankly, is better outsourced.  Learning how to find a good investment provider can be a more efficient and less risky use of your time.

3. Do not trade

Qiaojia Li

Qiaojia Li

In the report quoted above, there is an alarming line: “Investors are now holding onto their shares for 0.8 years on average before selling them. In 1980, the average was 9.7 years, representing a decline of 91.75%.”

The proliferation of trading apps brings convenience and lowers barriers, helping people to access financial products, but the user friendliness of the technology often encourages over engagement at a real financial cost.

On an individual basis, each time you buy and sell any financial product (not just shares, but funds too)  you lose a tiny slice of your capital, even if you can trade for free – this is due to “spread” which, put simply,  is the price difference between purchase price and sale price. As you trade, this quickly adds up and eats into your principal, which you need to earn back before seeing any profit. This is a direct cost, in addition to the time you invest, checking the share price several times a day, the sleep you lose during volatile days, and the potential for developing an addiction, which is a common result of trading. Take a look at your work pension investment report if you have any – there is a reason why professional investors don’t buy and sell frequently.

On a collective basis, crowd trading behaviour drives more “boom and bust” cycles of financial markets, which has happened many times before and will continue to happen in the future. It is a more pronounced characteristic of less developed financial markets where there are fewer professional/institutional investors to stabilise  the market for everyone’s benefit.

4. Diversify globally, meaningfully

Sensible investing requires a skillset that is the opposite of most professional careers or entrepreneurship. In the latter, one strives to become an expert in a chosen arena in order to command the highest possible pay or profit margin. A wise investor, meanwhile, needs to be a generalist rather than a specialist, and investing is about hedging all possible risks before seeking a return. One of the biggest principles to reduce risk is to diversify on various levels:

  • Your holding currency – for example, GBP has lost more than 15% in value against USD compared to the pre-Brexit high of five years ago, so it is a bad idea to hold all your assets in GBP only
  • Your country/geography exposure – for example, you can buy GBP priced US assets, or USD priced US assets, such as S&P 500 tracker, to have a slice of US economy growth. We strongly encourage people to consider a globally diversified portfolio, for the reason that different economies go through business cycles and are at different stages at any given point of time. With a globally diversified portfolio, you can always benefit from the growth of some country, somewhere, at any given point of time
  • Asset classes – If all your money is in London real estate, for example, you are likely to have felt some value depreciation since 2014. You take a risk if you tie your financial future to a single city’s economic cycle and potential rise and fall.
  • Industry allocation – as a former banker I never bought banking stocks or bonds, simply because my job and salary were already tied to the UK banking sector, and owning a piece of banks is like doubling down in a casino – not wise for risk mitigation. This is an often overlooked risk – people like to invest into companies and sectors they know well, typically from professional exposure and “inside knowledge” but this leads to blind spots and concentration risk.

Investing should be part of one’s long term financial strategy hence there is no one size fits all recommendation that I could give here. A simple step by step guide is:

1. Save a good portion of your monthly income, that allows you to enjoy your current life but also prepare for the future

2. Shortlist 3 financial planners (include Rosecut as one option) and pick one that you feel you can trust and who is cost effective to lay out your big picture and future plan

3. Invest regularly into a globally diversified, professionally managed portfolio that fits with your future goal and then make minimal changes. Ideally you should only even consider changing on an annual basis

4. Learn from this loop, iterate and optimise, ask many questions along the way!

Rosecut is a financial planning partner and investment manager, giving access to the knowledge you need to plan for the future you want. Start your free financial health check today at https://app.rosecut.com/ or download the app.

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Are clients truly getting value from their BR solution?

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Are clients truly getting value from their BR solution? 3

By Matt Dickens, Senior Business Development Director at Ingenious

Financial planners and wealth managers strive to deliver on the needs of their clients by always providing the most suitable and effective advice. But as with any service, this advice should also be delivered at the best possible value for the investor. Value can be simplistically defined as the service that delivers the most benefit, balanced against the financial cost, but in the estate planning space, how do you assess what good value is?

1. Total fees and charges

Product fees are guaranteed to negatively impact returns, so it is important to minimise their impact when looking to gain the best value from the investment. Some managers report little or no fees paid by the investor to the manager, but instead charge the company or investment service itself. While this might initially be seen as better value for the investor, it is not as simple as that. Investors in unlisted BR services become a shareholder of the portfolio companies, so the reality is that any fees paid by the companies are effectively being paid by the shareholder (or investor). Therefore, both investor fees and company fees will both negatively impact the final return and must be considered together.

Analysis of what a manager is paid by the investor and by the company over a significant period will enable an adviser to conclude if the manager is offering good value, or if a disproportionate amount of fees is going to the manager at the expense of their investors.

2. Real investment returns

Another key component of assessing value is what the investment actually delivers. For BR solutions, investors’ main objective is commonly to pass on the maximum sum possible to their beneficiaries upon death. This may lead to a conclusion that delivering Inheritance Tax relief at the lowest possible cost is the primary driver of value. However, especially for clients with longer time horizons, the one-dimensional goal of avoiding a potential 40% Inheritance Tax bill can easily over-shadow the equally important goal of aiming to steadily grow the investment, preventing erosion by inflation, drawdowns and investment fees. Unlike some IHT-focused solutions, such as trusts or gifting, investors in BR services do not have to accept zero growth of their wealth from the point of investment.  Instead, investors can continue to earn returns, either taking an income stream or increasing the final sum to be passed onto their beneficiaries, precisely in line with their original objective.

While most BR managers predict their ongoing returns at a certain level, those targets are not guaranteed and historic performance varies widely.

3. The relationship between fees and risk

Given that the majority of managers in the BR space state their performance targets net of fees, to produce positive growth and achieve their target return, those managers must first earn back any fees they are taking. Let’s take the below scenario to illustrate this point.

 Are clients truly getting value from their BR solution? 4Manager 1

Annual performance target, net of fees: 3%

Annual fees: 3%

Gross performance target: 6%

 

Are clients truly getting value from their BR solution? 5Manager 2

Annual performance target, net of fees: 4%

Annual fees: 1%

Gross performance target: 5%

Initially, it might appear that Manager 2 must be taking more risk to target a higher net return of 4% than Manager 1, who is targeting 3%. However, Manager 1 has to deliver an additional 2% of gross return than Manager 2, to make up for charging higher fees. Higher fees not only impact returns and value, but they can also mean greater risk.

Market comparison

In the Tax Efficient Review’s most recent analysis of Unlisted BR Services1, they released data that ranks services in the market in terms of both investor returns and total fees. IEP Private Real Estate achieved the top rank for returns delivered, with the second lowest total fees in the market, demonstrating that it represents attractive value for investors in comparison to other services.

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