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Pandemic drives financial advisers to speed tech change



For years, having a financial adviser has meant lots of paperwork and attending face-to-face meetings to dissect a portfolio’s performance.

But the coronavirus crisis has pushed many UK advisers and their clients to embrace new practices. Like many businesses, executives are turning a spare room into a workplace and using phone and online technology to communicate with clients.

The shift brings complications and costs. But it is transforming the industry by creating the potential for faster and more flexible links which could ultimately improve services, reduce charges and make advice more accessible to a wider group of investors.

Covid-19 could therefore be an opportunity for Britain’s 27,000 financial advisers as well as a cause of headaches and heartache. The firms at the top of the sector, which are ranked in this year’s FTAdviser Top 100 Financial Advisers, are making particular efforts to adapt.

The pandemic raises other serious challenges, notably the fears of many clients about their investments, their pensions and, for some, their jobs. Also, financial advisers must simultaneously prepare for Brexit, for example, in helping clients with EU-based investments.

Steve Carlson, a chartered financial planner at Cardiff-based Carlson Wealth Management, says no one could have predicted the current circumstances. But he adds: “If you’re in it for the long term you know markets are going to go down . . . I plan with clients expecting that you have to be prepared for the worst to happen.”

Advice for all

As far as the digital shift is concerned, financial advisers face specific pressures because the rules governing their profession require regular contact with clients — to discuss their portfolios, for example. But what previously often involved a face-to-face meeting is now done almost entirely remotely.

Heather Hopkins, managing director of consultancy NextWealth, says: “The first and most obvious [change] is to client engagement. Advisers are relying heavily on phone and video conferences to connect with clients. The other big change is working with a team remotely.”

For many advisers this change is welcome: removing the need to travel to clients allows them to be more efficient, and social distancing has convinced even reluctant clients to take it up.

Richard Ross of Norfolk-based advice firm Chadwicks says video calls are “better for us, better for the planet and better for [clients]” because they allow him to talk to them more often.

But the real benefit could be felt by less wealthy investors whom advisers might previously not have seen as potential clients.

In 2012 commission charges on retail investments were banned by the Financial Conduct Authority. Advisers and platforms could no longer receive commission from fund managers for investing their clients’ money. Advisers are now largely paid by clients on a percentage of assets basis.

As a result, many advisers left the profession. Banks, which once provided advice to the mass market, pulled out. Advice has become the preserve of the wealthy. Between 2013 and 2015 the proportion of advisers insisting on a portfolio of at least £100,000 more than doubled to 32 per cent.

The FCA has since admitted that these reforms contributed to an “advice gap” for consumers, though the number affected is hotly contested with estimates ranging from 310,000 to 2m.

Ms Hopkins says new practices introduced because of coronavirus could reduce the cost of taking on a new client, which NextWealth puts at £1,500.

She says: “I think the efficiencies will mean that advisers will be able to work with clients that might not have been a target audience in the past. If costs can be brought down for onboarding clients and working with them on an ongoing basis.”

One financial advice firm which is using the pandemic to innovate is Sanlam. It launched an online “on demand” service to prospective clients, advertised through Facebook and offered free 45-minute same-day consultations. 

Jonathan Polin, Sanlam chief executive, says demand is greater than he expected. “I would never have thought that we would see that level of interaction from no face-to-face relationship, purely over a screen.

“This has allowed us to catch up with the real world and start getting out of the 20th century and into the modern day.” He expects the changes to persist beyond the pandemic.

Ms Hopkins’s research found one of the biggest drags on efficiency was volume of paperwork done at fund managers. With many now being forced to invest in paperless processes, many financial advisers think this bottleneck could be permanently eased.

Mark Polson, principal at Edinburgh-based consultancy the Lang Cat, says he struggles to believe fund managers will get away with returning to their previous cumbersome processes after giving advisers a glimpse of a more efficient alternative. For many a return to pre-pandemic practices would be seen as a “worsening” of service.

A spokesman for Quilter, the second largest financial advice business in the UK, adds: “The advice industry and indeed financial services in general have been behind the times in terms of their adoption of technology.

“Technology does have the power to create more efficient and cost-effective ways of providing advice and hopefully the momentum garnered by Covid-19 will continue.”

Strong performance

At least advisers are busy, unlike companies in many sectors of the UK economy. Despite the volatility of 2020, or perhaps because of it, the top financial advice companies in the UK have been doing plenty of business. Research by Ms Hopkins found 45 per cent of financial advisers have increased their client base in 2020.

While net flows of money into advisory firms have fallen, they have not dropped as much as was feared when market volatility was peaking. It seems the year’s turbulence has persuaded investors to seek a guiding hand. Average net flows into the top 10 advice firms last year were £491m, while this year they were £409m, according to FT Adviser calculations.

Stephen Harper, managing director of Cheltenham-based financial adviser Attivo, says the impact of the coronavirus on his clients’ wealth was minimal. “Clients’ portfolios are diverse and have weathered the storm of the pandemic well. Most clients are in a positive position year to date,” he says.

For many advisers, market volatility is a time for caution, rather than an opportunity to start pulling apart a portfolio and rebuilding it from scratch. 

Mr Carlson highlights the divergent possibilities ahead. There could, for example, be a vaccine-induced market surge or another market crash driven by worsening UK economic prospects.

He says: “If you’re doing a fund switch then you could be out of the market for three days minimum but realistically five days and [in volatile times like these] you can miss a 10 per cent rise.

“If you’re selling something down into cash, that can take two or three weeks and if you have existing investments it is very risky to move them at the moment. The best thing to do is ride it out.”

Darren Cooke, a chartered financial planner at Derbyshire-based Red Circle Financial Planning, adds: “At some point we get a kicking from the markets, sooner or later. That’s just about educating your clients, not taking the credit on the way up and not taking the blame on the way down.”

An interest in their customers’ wellbeing at a difficult time has seen some financial advisers such as Sanlam help clients with more than their finances. Mr Polin says his company organised online group exercise sessions and live cookery lessons, such as how to prepare the perfect steak, to provide social interaction. Around 100 took part.

Myriad firms and multiple outcomes

The economic impact of the pandemic is compounded by the effects of Brexit. Mr Harper says: “Brexit impacts primarily the UK and our portfolios are diverse with worldwide exposure, reducing the impact Brexit will have on clients’ wealth.”

Pension freedom reforms from 2015 have given retirees much more choice — not least about converting their savings into a retirement income — at a time when the range of potential market outcomes is particularly extreme. Retirement questions have long fuelled demand for advice and most advisers have seen surging demand.

Large firms backed by life companies or fund houses — Quilter and Standard Life Aberdeen’s 1825 — rub shoulders with midsized firms such as Punter Southall, a nationwide group, and smaller companies such as Canterbury-based Pharon Independent Financial Advisers.

The UK’s financial advice profession remains very diverse — unlike in continental Europe, for example, where it is dominated by banks and insurers. There are more than 5,000 regulated firms, more than 70 per cent of which are classified as “small”.

The FCA has contributed to this development with its ban on commission and imposition of higher qualification standards. Advisers are professionals offering regulated financial guidance — rather than sales people employed by banks or insurers.

So investors have a choice between large firms which operate their own funds and platforms, such as Quilter, and smaller firms which operate more independently.

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US banks could cut 200,000 jobs over next decade, top analyst says




US banks stand to shed 200,000 jobs, or 10 per cent of employees, over the next decade as they manoeuvre to increase profitability in the face of changing customer behaviour, according to a banking analyst. 

“This will be the biggest reduction in US bank headcount in history,” Wells Fargo analyst Mike Mayo told the Financial Times. If his forecast bears out, this year would mark an inflection point for the US banking sector, where the number of jobs has remained roughly flat at 2m for the past decade.

The jobs most at risk are those in branches and call centres as banks prune their sprawling networks to match the new realities of post-pandemic banking, Mayo’s report found. That is consistent with Department of Labor statistics that predict a 15 per cent decline in bank teller jobs over the next decade.

Historically, lay-offs, particularly for lower-paying jobs, have been a contentious issue for the banking industry, which is often held up by progressive politicians as an example of a wealthy industry prioritising profits over people.

But the threat of technology companies and non-bank lenders chipping away at the business of payments and lending, which have traditionally been dominated by banks, has intensified over the past year, making job cuts necessary, Mayo said.

“Banks must become more productive to remain relevant. And that means more computers and less people,” he said.

Most of the reductions can be achieved through attrition over the next 10 years rather than cuts, reducing the risk of a backlash, Mayo said.

The new research, reported first by the FT, comes on the heels of disappointing jobs data that showed the US economy added just 266,000 jobs last month, sharply missing estimates of 1m. Structural elements of unemployment like accelerated automation that took place during the pandemic could pose stronger than anticipated headwinds to a recovery in the labour, economic officials said following the report. 

Pandemic activity pushed headcount up roughly 2 per cent last year as banks hired staff to meet the sudden demand for labour-intensive mortgages and government-backed small-business loans. But that trend is likely to be reversed in the near-term as lenders refocus on efficiency to compete more effectively with technology companies that increased their share of business during the health crisis. 

Increased competition from unregulated companies such as PayPal and Amazon entering financial services was one of the principal concerns JPMorgan Chase chief executive Jamie Dimon outlined in his annual letter to shareholders last month. 

Mayo estimates that banks currently represent just a third of the overall financing market.

“Digitisation accelerated and that played to the strength of some fintech and other tech providers,” Mayo said. 

Many of the bank branches that were closed during the pandemic will probably stay that way, and even those that remain open are likely to be more lightly staffed as branches become more focused on providing advice than facilitating transactions. A large amount of back-office roles also stand to be automated but those numbers are harder to quantify, the report said. 

Mayo said his team 20 years ago was twice as large and responsible for half as much. Doing more with less was the new norm across the industry.

“If I was giving advice to my kids, I’d say you probably don’t want to go into the financial industry,” Mayo said, adding that technology and customer or client-facing roles are probably the only areas that will see growth. “It’s likely to be a shrinking industry.”

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Inflation wild card unsettles markets




Regime changes usually take a while to fully register among investors. The big talking point in markets at the moment surrounds the potential return of a more troublesome level of consumer price inflation and what protective action investors should take.

The underlying trend of inflation matters a great deal for financial markets and investor returns. The rise in both equity and bond prices in recent decades has occurred during a long period of subsiding inflation pressure and from recent efforts by central banks to arrest disinflationary shocks since the financial crisis. 

A year after the global economy abruptly shut down, activity is duly picking up speed. The logical outcome has been a surge in readings of inflation and this week, a measure of US core prices recorded its largest annual gain since 1996, running at a pace of 3 per cent*.

Core readings exclude food and energy prices and are deemed a smoother gauge of underlying inflation pressure, a point that many people outside finance find baffling when budgeting the cost of groceries and petrol.

So the significant jump in the core measure, and even accounting for the base effect of the pandemic’s brief deflationary shock a year ago, has understandably generated plenty of noise.

This will remain loud in the months ahead as activity recovers from lockdowns with a hefty tailwind of fiscal stimulus working its way through the broad economy.

But muddying the waters for investors is that the outlook for inflation is still difficult to judge at this stage.

“There is so much dislocation in the economy from the reopening and base effects from a year ago that it will take at least six to 12 months before we get a clear view of the underlying inflation trend,” said Jason Bloom, head of fixed income and alternatives ETF strategies at Invesco.

Investors who are now worried about an inflation shock face a dilemma. Some assets seen as traditional hedges against such a risk, like inflation-protected bonds and commodities, have already risen appreciably. Effectively a period of inflation running hot has been priced in to some degree.

And history does provide a cautionary note for those moving late to buy expensive inflation protection.

Past inflationary alarms, as economies recovered in the wake of the dotcom bust in the early 2000s and the financial crisis of 2008, proved false dawns. After a mercifully brief pandemic recession, the powerful and well entrenched disinflationary trends of ageing populations and falling costs associated with technological innovation are by no means in retreat.

For such reasons, a number of investors and the US Federal Reserve expect inflationary pressure this year will prove “transitory”. But stacked against deflationary forces is the immense scale of the monetary and fiscal stimulus of the past year.

The effects of monetary and fiscal stimulus means “inflation may settle into a pace of 2.5 per cent (annualised) and that would be different from the average of 1.5 per cent before the pandemic”, said Jason Pride, chief investment officer of private wealth at Glenmede Investment Management. “Inflation will be higher. At a dangerous level? No.”

In an environment of firmer growth and moderate inflation pressure, equities will benefit, led by companies that have earnings more influenced by the economic cycle. Investors also will seek companies that have the ability to pass on higher prices to customers in the near term and offset a squeeze on profit margins.

Still, a troublesome period of elevated inflation cannot be easily dismissed. The “transitory” argument could be challenged if economic growth continues to run hot into next year, accompanied by a trend of higher wages from companies finding it hard to attract workers.

Before reaching that point, expected inflation priced into the bond market may well push past the peaks of the past two decades and enter uncharted territory in the US and also for other developed markets in the UK and Europe.

Bond market forecasts of future inflation pressure over the next five to 10 years have already risen sharply in recent months. But the rebound is from a low level and for now, expected inflation is not far beyond the Fed’s long-term target of 2 per cent.

“It is the change in inflation expectations that drives asset returns,” said Nicholas Johnson, portfolio manager of commodities at Pimco. Assessing almost 50 years of data, a portfolio holding equities and bonds underperforms during bouts of elevated inflation, while real assets including inflation-linked bonds and commodities prosper, according to the asset manager.

“Most investors have not experienced a period where inflation surprised to the upside,” added Johnson. Clients are asking more questions about insulating their portfolios, but their present exposure to commodities and other assets show that in broad terms investors are “not paying much of an inflation premium”.

That can change and the prospect of inflation regime change remains a wild card for investors.

*The value of core inflation has been changed since first publication.

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How traders might exploit quantum computing




If you had a sports almanac from the future as did Biff Tannen, the brutish bully of the time-travelling Back to the Future movie trilogy, how might you be inclined to take advantage of the foresight buried within it?

The obvious temptation would be to place sure bets in the market that make you rich. In Biff’s case, the wealth is then used to change the world into a dystopian reality in which he himself exists as “America’s greatest living hero”.

That sort of thing used to be considered fiction. But the dawn of so-called “supremacy” of quantum computing over conventional technology raises the possibility that one day soon someone might be able to effectively see into the future.

This is because quantum computers, when they become fully capable, are likely to be uniquely good at crunching probability scenarios. They are based on the mysterious world of quantum physics. Quantum bits or qubits are the basic units of information in quantum computers. Unlike the binary bits of traditional computing, which must be either zero or one, qubits can be both at the same time.

This gives quantum computers super powers that will allow them to solve probability-based tasks that would previously have been impossibly hard for conventional counterparts in realistic timeframes. If the problem at hand was a game of football, adding quantum computers to the mix is like allowing footballers to use their hands to get the ball into the net, say quantum experts.

It’s a prospect that poses an entire new set of challenges for market regulators and participants. If super quantum computers really can help institutions see into the future, the information advantage will be unprecedented.

It might also represent an entirely new type of front-running and market manipulation risk, one that regulators can’t necessarily even identify unless they too have a quantum computer at hand.

In Back to the Future, the almanac gave Biff a 60-year insight advantage over everyone else in his home 1955 timeline. With quantum computers, the edge might only be nanoseconds. But in the fast and furious world of high-frequency trading, that could be enough to sweep up.

The reassuring news — at least for now — is that we’re still at least five years away from quantum computers being powerful enough to compete with existing supercomputers on much simpler problems. Prediction might not even be their initial forte.

Goldman Sachs research recently noted, as and when quantum computers are rolled out, they are far more likely to be deployed on crunching options pricing conundrums or running Monte Carlo simulations that value existing portfolios than they are on predicting future movements of asset classes.

According to Tristan Fletcher, of artificial intelligence-forecasting start-up ChAI, that’s because prediction is ultimately about solving a very specific, deep problem by understanding the nuances of the data that matters.

“We are already at the limits of what any system that isn’t actually listening to Opec meetings and five-year plans is capable of,” he said. It’s not the complexity of the calculation that is the issue as much as the breadth of the data sample at hand. That means prediction wouldn’t necessarily get more accurate with quantum power.

The appeal to focus on “brute-force” problems such as optimising portfolio analysis or cracking cryptographic problems such as those that underpin bitcoin, the cryptocurrency, is far greater.

But this poses its own problems. If cryptographic systems can be broken, exceptionally sensitive data held across the financial system could be exposed and taken advantage of in unfair and market manipulative ways.

Rather than being able to better predict the market, the true pay off in the arms race might lie in achieving quantum-level encryption-breaking capability and using it subtly to seize the information that can get a trader ahead. Experts say the chances someone is already up to this, however, are low. If quantum supremacy had been achieved, the news of it would leak pretty quickly.

“We don’t know what we don’t know,” said Jan Goetz, chief executive of IQM, a quantum computing builder. “But generally the community is very small so everyone knows what’s going on. The status quo is clear.”

Nonetheless, the financial sector seems to be waking up to this quantum computing issue. Many banks and institutions are introducing teams to think exclusively about how quantum computing will affect their business. How far ahead they are on making their systems quantum secure is harder to say. It’s a secretive issue. For now, most agree, the threat level is low, not least because — as the hacking of the Colonial pipeline shows — system security is low enough to ensure far cheaper and simpler ways to hijack digital systems.

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