Reaping the rewards of a contrarian stance

Q: Will you still be offering independent advice under depolarisation?

A: We will remain an independent financial adviser. If you have any integrity in providing advice to clients then we believe financial advisers should really stay independent. This is because it produces independence of thought. When clients understand the issues, we find that they want to be given independent advice. This is particularly the case among the top 20% of the wealthiest clients. These are the clients we want to attract. Financial advisers who remain independent have nothing to fear from the future because this is what the wealthiest clients want. Therefore, independent financial advisers have a greater chance of success in the future.

Q: Will Alan Steel Asset Management remain an independent business?

A: It is important for us to remain independent so that we can continue to control our own destiny and levels of integrity. One reason advisers give for joining a network is the cost of compliance but we outsource ours to a company called 360. As well as compliance, this helps us to obtain professional indemnity insurance. We have been in business for 30 years and our mission statement is knowledge, integrity, innovation, fairness and fun. If a network or a large IFA firm believes in all these qualities then we would be happy to talk to them. By maintaining control of our business, we are also cash rich. This is because we run a tight ship and we gain a high proportion of our income from annual management fees since clients tend to stay with us for many, many years.

Q: What effect will depolarisation have on the industry?

A: We do not agree with depolarisation, and it is seriously flawed. We believe it has been driven by the Treasury, is for the benefit of the banks and is likely to do more harm than good. The Treasury is keen on depolarisation and would like small advisers to go away because it would mean fewer but larger companies for the Financial Services Authority to regulate. But you only have to look at what happened at Equitable Life, which was a major company, and afterwards to see that this is not necessarily a positive development in terms of regulation.

Depolarisation will encourage mediocrity among financial advisers. The business models of multi-ties and tied advisers mean that financial advisers simply become salesmen. I do not see how being able to offer six products from six providers makes much difference compared with one product from one provider. What is important is that clients are being offered quality and independent advice.

Q: Do you favour fees or commission?

A: We offer clients the choice of fees or commission but we are transparent about how much our advice will cost them. They have the choice of paying for their advice as a fee, but VAT is added to this total. We suggest to them that instead we can take the same amount of money through commission on any products they buy minus the VAT. Unsurprisingly, clients usually opt for the commission. We do not take the full commission as we are only being paid the equivalent of the amount we would have charged in fees. We take an average of 1.5% commission across all our clients.

We do not always sell a product when we sit down with clients as we are offering a full financial planning service. We also have two employees dedicated to carrying out research. This has improved our ability to pick funds for clients. We reckon we spend about 5,000 hours a year on research. We also have eight advisers who see clients.

Q: Why are you so bullish about equities at the moment?

A: There are two things that shape our investment views – research and taking contrarian positions. We are bullish because other investors do not like equities. There is no better argument than this. The best time to invest in markets is when equities are cheap, and then sell when they are expensive. Therefore, we believe it is profitable to take contrarian views on markets. When one of the national newspapers was proclaiming the performance of mid-caps a couple of weeks ago, you knew it meant it was right to be increasing exposure to large-caps, which the likes of Anthony Bolton started doing last year.

We also analyse a lot of research, particularly from the US. This research indicates that equities are cheap at the moment and suggests there will be positive returns from stockmarkets. If you read the newspapers, you would hardly think there was any scope for growth in the US market. But the first-quarter earnings season in America has been very good. There has been earnings growth of 12-13% and the price/earnings ratio is down to 15x, which is hardly expensive. We believe the dollar will strengthen as well.

If you look back in history, you will also see that equities can do well in low-inflation environments such as the 1920s and 1950s. This shows you do not need high rates of inflation to produce good returns for equities. We do not think inflation, and therefore interest rates, will rise very high. On a five to 20-year view, you have to be confident about investing in Asian equities as well because of the economic and population growth in the region.

Q: Why are demographics important in affecting equity returns?

A: One of the factors we look at in determining our investment views is demographics. The important number is how many 47-year-olds there are in a country because this is the peak age of spending and earning. What an economy needs is people to spend money. The alarm about the savings rate is overdone as what Britain needs is consumers spending.

Japan is a perfect example of how demographic change affects stockmarket performance. In 1942, the birth rate in Japan plummeted because of the war. Then 47 years later the stockmarket reached the peak price in its bull market at a time when the number of 47-year-olds was about to start declining. This also shows why the savings rate is not as important as many commentators say. Japan has one of the highest savings ratios in the world but its economy needs people to spend money. We have started recommending that clients put some money in Japan, however, because the number of 47-year-olds has begun increasing, and it will also benefit from being located next door to China.

Q: What did you think of the general election result?

A: The Labour victory will not make much difference and was hardly a surprise for the stockmarket. But I am concerned that Tony Blair will be replaced as prime minister by Gordon Brown. I am not happy with the thought of Brown taking over as it may lead to higher taxes. Stockmarkets benefit from low taxes or flat rates of taxes. Most Eastern European countries have flat rates, as does Hong Kong.

Alan steel is chairman of Linlithgow-based Alan Steel Asset Management, which was established in 1975 and provides independent financial advice. In March Alan Steel was named Investment IFA of the Year for 2005 at the Money Marketing awards. Alan Steel Asset Management has eight advisers servicing clients throughout the UK and two employees dedicated to research.