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MERCER IDENTIFIES PRIORITIES FOR WEALTH MANAGEMENT FIRMS AND THEIR CLIENTS IN 2014

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mercer identifies priorities for wealth management firms and their clients

The beginning of a new calendar year is a time when many wealth management firms review the priorities related to the advice they provide their clients, as well as the factors likely to affect their business.

mercer identifies priorities for wealth management firms and their clients

mercer identifies priorities for wealth management firms and their clients

“Recent years have been a period of incredible change for wealth management firms,” said Cara Williams, Global Head of Mercer Investments’ Wealth Management Business. “The financial crisis severely tested the business model for many firms, placing alignment with client’s needs and interests under scrutiny, as well exposing the depth and responsiveness of the resources devoted to the business. These challenges come as a growing proportion of the baby boom generation moves into retirement, taking personal control of their accumulated wealth, and firms adjust to the continued disintermediation of the financial services business.”

Ms. Williams noted that client expectations have also been raised by the extraordinary rebound of developed market equities in 2013. “Now is the time to mobilise the best information resources as background to asking the ‘what if’ questions about market conditions in 2014 and beyond,” she noted. “With these critical challenges in mind, we offer five priorities for wealth management firms related to serving retail and high net worth clients, and five that relate to the structure and risk of a firm’s own wealth management business.”

Five priorities in 2014 for serving wealthy clients:

  1. Ensure a fresh review of client portfolios and investment objectives to assess how the investments have weathered recession and market recovery:
    The extremes of the past several years, from the bear market in 2008, the recession and the strong bull market for developed market equities since 2009 have been a stress test for many investors’ portfolios and savings. Resolve to review how each client has weathered the cycle and whether they currently have a sound strategy to meet their investment objectives.
  2. Revisit exposure to emerging markets, both debt and equity
    In light of the underperformance of emerging markets compared to developed markets, clients’ exposure to the former should be reassessed. The expected divergence between the individual emerging markets will make active management of both emerging market debt and equity more important than ever.
  3. Position fixed income portfolios for growth in a flat or rising rate environment
    The period from 1982 to 2012 was the heyday for those holding a significant fixed income portfolio as interest rates declined from nearly 20% to low single digits. That decline is over. Resolve to review bond portfolio risk with your clients and position their fixed income portfolios for growth in a flat or rising rate world.
  4. Evaluate the place of alternative investment strategies in portfolios
    Alternative investments are being “democratised” and are no longer exclusively available to the wealthiest investors or most sophisticated institutions. Resolve to evaluate how alternatives can be integrated into clients’ investment strategy to reduce risk, enhance returns or otherwise improve the likelihood of realising investment objectives.
  5. Support socially aware investing strategies for clients concerned about where and how their investment managers make their investments 
    As control of record levels of private wealth pass into the hands of a new generation, a rapidly growing number of investors are looking for the ability to “do good while doing well”. That requires investment strategies which integrate environmental, social, and governance (ESG) considerations into management. Resolve to be prepared to integrate these strategies into client investment solutions.

Five priorities in 2014 for ensuring the firm’s success:

  1. Make sound investments in the firm’s future competitiveness, including rational “build versus buy” decisions
    Rapidly changing markets, technology, the regulatory environment and competitive pressures have shattered the economics of the traditional wealth management business. To survive, thrive, and best serve the needs and interests of clients, wealth managers need to review the changing skills and resources that provide a competitive advantage, and evaluate which additional new resources are best developed internally or acquired through a partner, consultant or other vendor. Review the investment resource requirements of an evolving competitive landscape and evaluate what can be done better or more efficiently with external resources.
  2. Assess evolving governance standards and ensure that your firm has a robust governance model responsive to changing requirements
    Traditional governance models are designed to protect the interests of the firm and its clients. Failure in this area can be costly and, at the extreme, can bring down a firm. Yet many firms have been constrained by limited resources, decision making that is not responsive to the changing investment environment or calcified operating models. Evaluate the governance environment, review the firm’s governance protocols and procedures and consider whether these are effective at meeting the needs of the firm and its clients. Most firms then find that they need to contract or develop the resources, data and processes that are necessary for a robust and fluid governance process in today’s investment climate.
  3. Don’t shortchange due diligence regarding operational risk, including risk  at the investment managers responsible for client assets
    When an investment manager is selected who subsequently underperforms the relevant passive benchmark, client opportunity losses are limited to the spread between actual results and that of the benchmark. When a manager is selected who subsequently suffers a profound operational failure or fraud, the loss to the firm and its clients is much more profound. Yet few wealth management firms invest the same care in operational due diligence as investment due diligence. Resolve to evaluate your process for operational due diligence and take the necessary steps to protect the firm and its clients from operational failures.
  4. Know your managers as well as their portfolio holdings
    Wealth management firms expect investment managers to know their portfolio holdings extraordinarily well. Yet, as managers of managers, many wealth management firms invest relatively limited resources in researching and knowing their investment managers. That leads to potential misfits between the managers selected to manage a portfolio and the clients who own that portfolio. This can lead to disappointing results and increased business risk. Develop a manager research and oversight process, internally or with a partner, which allows you to know your managers as well as you know your clients.
  5. Remember that fees always matter
    Resolve to evaluate business models, services and enhancements that allow you to deliver exceptional service and products while continuing to reduce the cost to your clients.

Investing

Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations

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Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations 1

White Paper Sees Increase in Managers Outsourcing Middle and Front Office Functions to Achieve Optimal Business Structures

According to a white paper published today by Northern Trust (Nasdaq: NTRS), investment managers of all sizes and strategies have been prompted to undertake a comprehensive review of their operating models as a result of the Covid-19 pandemic which has accelerated existing trends that are compounding cost pressures. This has led increasing numbers of managers to outsource in-house dealing and other functions, such as foreign exchange and transition management, hitherto seen as core.

While cost savings remain a core driver, and indeed are one outcome of outsourcing, costs are no longer the only focus. Far from being solely a defensive reaction to increased pressure on margins, the white paper (‘From Niche to Norm’) describes outsourcing as part of the target operating model, or moving toward the ‘Optimal State’ for many investment managers, and  explains how the focus “has expanded to the variety of other potential benefits offered – enhanced capabilities, improved governance and operational resilience.”

Gary Paulin, global head of Integrated Trading Solutions at Northern Trust Capital Markets said: “The pandemic has challenged a range of operational assumptions. Working from home has, for example, questioned the need for a portfolio manager to be in close proximity with the dealing desk. Previously considered essential, the pandemic has effectively forced firms to ‘outsource‘ their trading desks to remote working setups and the effectiveness of this process has disproved the requirement for proximity, in turn, easing the path to third-party outsourcing. Many investment managers are actively considering outsourcing to a hyper-scale, expert provider as a potential, cost efficient solution – one that maintains service quality and, hopefully, improves it whilst adding resiliency.”

Northern Trust’s white paper compares outsourced trading to software-as-a-service stating: “instead of carrying the cost and complexity of running an in-house solution, firms move to an outsourced one, free up capital to invest in strategic growth and move costs from a fixed to a variable basis in line with the direction of travel for revenues.” 

Guy Gibson, global head of Institutional Brokerage at Northern Trust Capital Markets said: “The opportunity to deploy capital to build new fund structures, develop new offerings, focus on distribution and enhance in-house research has been taken up by several of our clients to the benefit of their investment approach, and to the benefit of their investors.  Additionally, in the last two months alone, many firms have recognized that outsourcing to a well-capitalized, global platform has enabled them to take advantage of cost-contained growth opportunities in new markets.”

A further development, which has echoes of the journey the technology industry has already undertaken, is the move towards ‘whole office’ solutions, which represent the next potential wave in outsourcing.

According to Paulin; “recently we have observed a growing number of managers wanting to outsource to a single, hyper-scale professional service provider who can do everything, everywhere. This aligns with Northern Trust’s strategy to deliver platform solutions for the whole office, serving our clients’ needs across the entire investment lifecycle.”

The white paper can be downloaded here.

Integrated Trading Solutions is Northern Trust’s outsourced trading capability that combines worldwide locations and trading expertise in equities and fixed income and derivatives with access to global markets, high-quality liquidity and an integrated middle and back office service as well as other services, such as FX. It helps asset owners and asset managers to meaningfully lower costs, reduce risk, manage regulatory compliance and enhance transparency and operational efficiency.

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How are investors traversing the UK’s transition out of lockdown?

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How are investors traversing the UK’s transition out of lockdown? 2

By Giles Coghlan, Chief Currency Analyst, HYCM

Just when we thought we had overcome the initial health challenges posed by COVID-19, the UK Government has once again introduced lockdown measures in certain regions to curb a rise in new cases. This is happening at a time when the government is trying to bring about the country’s post-pandemic recovery and prevent a prolonged economic downturn.

This is the reality of the “new normal” – a constant battle to both contain the spread of the virus but also avoid extended economic stagnation.

Of course, no matter how many policies are introduced to spur on investment, traders and investors are likely to act with caution for the foreseeable future. There are simply too many unknowns to content with at the moment.

To try and measure investor sentiment towards different asset classes at present, HYCM recently commissioned research to uncover which assets investors are planning to invest in over the coming 12 months. After surveying over 900 UK-based investors, our figures show just how COVID-19 has affected different investor portfolios. I have analysed the key findings below.

Cash retreat

At present, it seems that by far the most common asset class for investors is cash savings, with 78% of investors identifying as having some form of savings in a bank account. Other popular assets were stocks and shares (48%) and property (38%). While not surprising, when viewed in the context of investor’s future plans for investment, it becomes evident that security, above all else, is what investors are currently seeking.

A third of those surveyed (32%) said that they intended to put more of their wealth into their savings account, the most common strategy by far among those surveyed. This was followed by stocks and shares (21%), property (17%), and fixed interest securities (17%).

When asked about what impact COVID-19 has had on their portfolios throughout 2020, 43% stated that their portfolio had decreased in value as a consequence of the pandemic. This has evidently had an effect on investors’ mindsets, with 73% stating that they were not planning on making any major investment decisions for the rest of the year.

Looking at the road ahead

So, it seems that many investors are adopting a wait-and-see approach; hoping that the promise of a V-shaped recovery comes to fruition. The issue, however, is that this exact type of hesitancy when it comes to investing may well slow the pace of economic recovery. Financial markets need stimulus in order to help facilitate a post-pandemic economic resurgence, but if said financial stimulation only arrives once the recovery has already begun, the economy risks extended stagnation.

It seems, then, that there are two possible set outcomes on the path ahead. The first is a steady decline in COVID-19 cases, then an economic downturn as the markets correct themselves, followed by a return to relative economic stability. The second potential outcome is a second spike of COVID-19 cases which incurs a second nationwide lockdown – delaying an economic revival for the foreseeable future. At present, the former of these two scenarios is seemingly playing out with economic growth and GDP steadily increasing; but recent COVID-19 case upticks show that it’s still too soon to be certain of either scenario.

A cautious approach, therefore, will evidently remain the most common investment strategy looking ahead. But investors must remember that, even in the most uncertain times, there are always opportunities for returns on investment. Merely transforming a varied portfolio into cash savings risks a long-term decline in value.

High Risk Investment Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. For more information please refer to HYCM’s Risk Disclosure.

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Hatton Gardens 5 top tips for investing in Diamonds

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Hatton Gardens 5 top tips for investing in Diamonds 3

By Ben Stinson, Head of eCommerce at Diamonds Factory

Investing in diamonds can be extremely rewarding, but only if you know what to look for. For investors who lack experience, finding your diamond in the rough can be quite daunting.

For even the most beginner of diamond investors, the essentials are fairly obvious. For instance, you need to ask yourself will the diamond hold its value over time? What’s the overall condition of the stone and the jewellery? Is there history behind the item in question?

Although common sense plays a big part in investing, people often need insider tips and tricks to go from beginner to expert. Tony French, the in-house Diamond Consultant, at Diamonds Factory shares his professional knowledge on the 5 most important things to look for when investing in diamonds.

1: Using cut, weight and colour to determine value

Firstly, consider the shape, colour, and weight of your diamond, as this can play a pivotal role in guaranteeing growth in the value of your item. Granted, investing trends change with time, but a round cut of your diamond will almost always be the most sought after. The cut of your diamond is incredibly important, as it can influence the sparkle and therefore, the overall value. It’s a similar story for the intensity of some colours, such as Pink, Red, Blue, Green etc. Concerning weight, the heavier (bigger) stones will generally increase in value by a bigger percentage. Collectively these factors also contribute to the supply and demand aspect, which will determine their high price, and will ensure your item is re-sellable.

2: Provenance

Looking for significant value? Well, aim to own jewellery or diamonds that come from an important public figure. If you’re lucky enough to own a piece that has significant history, or was owned by a celebrity or person of interest, it’s an absolute must to have concrete evidence of this. Immediately, this proof will increase an item’s overall value, and there’s a good chance the stardom of your item might drum up interest amongst diehard fans, increasing the value even further…

Equally, it’s possible to proactively bring provenance to unique diamonds of yours. For instance, you can offer to loan bespoke, or unusual pieces for film, theatre, or TV performances – then it can be advertised as worn by xyz.

3: Find the source

Ben Stinson

Ben Stinson

Establishing your diamond’s source is one of the most important things you can do when investing in diamonds. If you’re starting out, try to purchase diamonds that have NOT been owned by too many people, as the overall value of the diamond will reflect multiple ownership. Alternatively, I’d always recommend buying from suppliers like ourselves or other suppliers and retailers, who buy directly from the people who have had them certified.

Primarily, this will allow you to have a greater degree of transparency, which is crucial when buying such a valuable item. Next, you should immediately see an increase in value of your diamonds, as identifying a source will allow traceability and therefore, market context.

4: Certification

Linked closely with my previous point, is the requirement to ensure that your diamonds are certified by a credible lab, and you have the evidence to prove so (a written document with specific grading details about your diamonds) – this will remove any doubts of impropriety.

It’s essential to remember that not all labs are the same, and many labs are better than others. Both the AGS (American Gem Society) and GIA (Gemological Institute of America) have great reputations and are world renowned. I’d recommend doing your own research into the labs, and when you’ve found the pieces that you’d like to invest in, then make an informed decision based upon your findings. Ultimately, proving certification will make your stones easier to insure, and deep down, you can have peace of mind knowing you have got what you have paid for.

Don’t forget to keep this paperwork in a safe location as well – you’d be surprised how many people we’ve met who have lost, or forget where they’ve placed it.

5:  Patience is a virtue…

If the market is strong, it might be tempting to look for an immediate sale once you’ve purchased a high value item. However, I suggest holding onto your diamonds for some time before even thinking about selling. More often than not, an item is more likely to increase in value over a few years than a few days – try and wait a little longer!

Equally, I would encourage having your diamonds, or jewellery professionally valued regularly. If you don’t have the knowledge to make a rough judgement on how much your pieces are worth, a consultant or expert can provide both a valuation, and contextualise that amount in the wider market. From there, you should be empowered with the knowledge to decide whether to keep or sell.

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