- The mass-affluent financial adviser who often relies on tax wrappers targeting the clients with net wealth of £50,000+;
- The retail bank wealth manager who relies heavily on package products targeting clients of £100,000+;
- The high net worth (HNW) independent advisor who will increasingly target specific client types such as City-based executives, and who can be viewed as having net wealth of £250,000+,
- The ultra high net worths (UHNW) with £500,000 - £10m, which SEI believes will grow significantly within the next couple of years.
The report claims that IFAs will need to become wealth managers to survive as the 'flight to advice' becomes more important than the 'flight to quality' in current and future turbulent financial markets.
However, IFAs have challenged the notion that they need to become wealth managers to survive.
Darius McDermott, Chelsea Financial Services' managing director says: "It is too general a statement. IFAs do more than just investments. They deal with mortgages, pension planning, insurance, protection. It is more than just investment being an IFA."
Colin Jackson, Baronworth Investment Services’ director, says: "The idea that IFAs have to become wealth managers to survive is not true because with RDR certain parts of the industry will not be wealth managers. They will be sales only, so you don’t need to be a wealth manager to survive."
A number of IFAs have taken issue with SEI’s client segmentation:
Chris Gilchrist, director of Churchill Investments, says: "Above £250k is the zone for wealth management of capital. But below this there are increasing numbers of high-income, low-asset clients in accumulation phase. They may be saving upwards of £20k a year. They need advice on structuring savings portfolios just as much as people with capital do. At Churchill we run savings portfolios for such clients using the same core portfolios as we use for clients with large capital sums."
McDermott says: "We have a wide range of clients, more in the under £50,000 category, and we certainly don’t need to be a wealth manager in order to help those clients. IN our experience, simple platforms with transparent charging and some basic research models mean that people are able to pick their own funds.
"As far as brackets go you could make any bracket up. We would say under £30,000, and between £30,000 and £100,000 would be another, and anything over £100,000 is a high net worth client. They have got this £500,000 to £10m category which they think will grow. I have no evidence to suggest whether they will or won’t, all I know is that people are not making much money at the moment.
"People are losing money so in the short term given the downward trend in the stock market and the fact that hedge funds are going bust, it is unlikely that segment will be growing. It may well be that it grows over time."
Jackson does not believe the segmentation is appropriate:
He says: "I don’t know how extensive the research was. ‘The £50,000 often relies on tax wrappers’ – well we have extremely wealth clients reliant on tax wrappers well in excess of 50k so you can’t put a top band on that, or a bottom band for that matter. Somebody with £3,000 will go into a cash ISA, which is a tax wrapper. So tax wrappers apply to everybody.
"I agree that the £100k bracket rely heavily on packaged products but not necessarily only that segment. There is a massive market and a growing market of packaged products and we very wealthy clients well above £100k who deal in packaged products. It seems to imply exclusion of people below £ge – I’ve got one on my desk that’s £2,000. The bottom line is I don’t personally think you can categorise. The issue is not the amount to invest; it is all the factors rolled into one – amount, returns, and risk.
"And with regard to IFAs ‘increasingly targeting £250k specific client types' - well that used to be the case before the current climate. City based executives probably haven’t got £250k any more – their bonus has gone out the window this year so they would probably come out of the equation fairly rapidly."
Gilchrist disagrees with SEI's notion that the £500k-10m client base is the one likely to grow fastest over next couple of years: "No, [I don’t agree] because most SIPPs are below this level and this is still a huge growth area. In terms of client numbers (not total AUM), the £100k to £500k segment is likely to be much faster growing and it's also much easier to acquire clients.
"Our view is that for clients with £5m or above you need much more bespoke services that are highly demanding in terms of time and expertise. We don't believe many IFAs are capable of offering such services, though we think the banks are extremely capable of alienating clients and we suspect a lot of their wealth management clients are exposed to SP counterparty losses though Lehman and AIG."
McDermott also disagrees: "A lot of people have lost a lot of wealth in the last few years, whether it be in their companies their share prices going down or their investments going down. Maybe over the next ten years they may well rise.
"Our experience is that most SIPPs are below £500k. The SIPP area is a huge growth area. But the SIPP is a flexible pension product – not a packaged product."
McDermott concedes that high net worths tend to need more specialised services: "They will have tax planning as a higher requirement than just making the best of their investments. Somebody under £50,000 they are likely to making investments into cash products and equity products looking to get a return to supplement a pension or something like that.
"If you are in the higher net worth bracket – the £500,000 to £10m camp – you are much more likely to have tax issues and hence you are going to need a more specialist type of advice. But there is nothing new in that."
He doesn’t think IFAs need to become wealth managers: "They may want to have outsourced stuff in respect of their own brand, as a number of IFA firms have already done where they will have the x y and z growth portfolio where they don’t run it themselves. But our part of the market - that is the non-advised part of the market – seems to work pretty well on its own.
"And that is not just us it is the likes of Hargreaves Lansdown and their direct book, as opposed to their IFA side, and in aggregate our services still seem to be applicable to people regardless of how much money that have. If we’ve got clients with over £1m they don’t come to us for tax advice – they can get it elsewhere – but they still like our services in respect of what we do.
"If you are an IFA trying to bulk into the high net worth end area then obviously you will need to have those sort of services but lots of IFAs deal with lots of people who are not high net worth."
Segmentation would mean that some fund types would be more successful than others, and IFA’s would need to rethink their current assessment of asset allocation for clients.
For example in future there could be more scope for using boutiques among the client base worth net £500,000 to £10m. In addition, there is a possibility that those with net wealth of £50k will be more likely to use fund of fund products to achieve asset allocation matching acceptable risk levels.
However, Gilchrist points out: "If you look at the bank wealth managers, what they sell most of to really HNW clients is structured products! This is partly because bank wealth managers don't charge high annual %-of-asset fees - clients prefer them to earn by transactional charges, which are easiest to conceal in structured products. These clients don't want advisory diversified portfolios of funds - if they want that sort of portfolio it will be discretionary. If they want an advisory service it will probably be heavily biased towards structured products and multimanager multi-asset funds."
He continues: "Platforms allow you to offer a wide spread of funds in an advisory portfolio to someone with £50k. The only issue is how you make money from such a service. We believe it's a flat fee plus %-of-assets. But I suspect most IFAs will use multimanager funds, which in reality will be the usual 'buy and forget' sale with relatively passive monitoring, because a straight %-of-assets charge alone won't be enough to justify a proactive service.
"The really recondite boutiques and specialist funds will be bought tomorrow - as they are today - almost exclusively by discretionary managers. Even with an advisory portfolio of £500k, no more than £50k is likely to go into highly specialised funds. And we've learnt in this bear market that most of them don't actually give you any downside diversification benefit, which will make them even less popular in future."
Jackson believes there is little demand for boutique funds:
He says: "In the current climate I don’t the investor wants boutique products. They want either absolutely safety or they are going for the structured products where their risk is known. I think the outflow of funds from the various unit trusts and OEICS probably supports that."
The research suggests that IFAs will need to operate more like lawyers covering assets and liabilities – not just funds – if they are to offer an advisory service as an independent wealth adviser.
Jackson says: “If that is the case there will be very few IFAs either qualified or competent to do that properly. I would be very surprised if there are many people that could take up that task. It is too specialist and puts them at tremendous risk, particularly with their PII (professional indemnity insurance.)"
"If you are going to start going down that route you may have to notify your insurers, and it may result in your premium going through the roof because you are taking on a massive responsibility there."
Turning to the issue of fund of fund managers, Gilchrist says: "If fund of fund managers had produced significantly better results in the bear market, they might reasonably expect to win more business in future. We see multi-asset-class funds as a new type of fund to be offered by fund management groups and FOF managers. Look at Cautious Managed funds and see how Cardamons Cautious Managed stands out. There really aren't that many managers who are going to be good at multi-asset-class investing and we don't expect many of them to be FOFs."
Chris Gilchrist says: "We currently use the Scottish Widows Personal Pension Plan, Churchill Investments Growth Portfolio for people accumulating from monthly contributions in pension funds. It's for a minimum 15-20 year term to retirement, hence the high equity allocation. Not all the funds are what we regard as the best in their sectors but they are the best of those available with low management charges in the Scottish Widow PPP.
"For people with capital of £50k plus we would generally use the SW Retirement Account instead and have a larger portfolio of 20 funds. For those with larger capital still we'd use a SIPP in one of the wrap platforms, eg Standard Life. For SIPPs using commercial property and bespoke investments we'd use one of the independent-administrator SIPPs and use a fund supermarket inside it for the fund investments and hold an even more diverse portfolio including investment companies as well as open-ended funds.
"But the point is that even at the starting level you can get a sensible fund portfolio without having to use multimanager funds."