Resolutely independent despite depolarisation

Adrian Shandley, managing director of Premier Wealth Management, answers questions from Simon Hildrey.

Premier Wealth Management is an independent financial adviser with offices in Southport and London. It predominantly advises on investments, inheritance tax planning, capital gains tax calculations and income requirements.

Q: How would you describe the client base of Premier Wealth Management?

A: The client base of Premier Wealth Management is predominantly high net worth private investors. We advise clients on lump sum investments and manage portfolios ranging from 100,000 up to 10m. About half our clients are based in the North-west, with the other half located all over the UK. We work predominantly on an advisory basis and offer our clients advice that is forward-focused.

Q: Will Premier Wealth Management continue to offer independent advice under depolarisation?

A: Premier Wealth Management remains committed to independent financial advice. I personally can’t see how I could sleep at night if the firm was to multi-tie or become a tied agent. I came into financial services believing that independent financial advice was the only way to advise clients and I still believe that today. While some financial advisers are planning to run an independent and a multi-tied operation, I think you have to ask yourself whose benefit this is for. Is it for the client or the adviser? I personally believe it is the latter.

Q: What effect will depolarisation have on the industry?

A: Depolarisation will confuse consumers and remove a financial services regime that was understood by most investors. The small transactional clients will thankfully be dismissed at a very early point in the advice process once the adviser makes it clear that he will be charging a fee.

The menu system will not really affect us because our clients recognise the importance of quality advice, while commissions or fees are a secondary consideration. If you are charging a fair commission or fee for the time you have invested in a case then any client who chooses to argue about the amount payable is not worth retaining.

In the long term, if you continue to produce successful investment returns for clients you will continue to attract new, quality clients on an ongoing basis. Depolarisation will also have the effect of further removing pensions advice from the mass market. While high net worth individuals will continue to take advantages of the tax breaks offered by pensions, the people who really need to save will no longer be able to access financial advice because they will not be able to afford the fees. Even with the abolition of RU64, the financial viability of advising clients on pension contributions of less than 250 per month will be marginal.

Q: Do you believer smaller, independent IFAs can survive under depolarisation and greater regulation?

A: I don’t believe the size of the IFA will predominantly determine whether or not they survive. I think the IFAs that will not survive will be those that try to compete on price with the discount houses or those who simply do not recognise the cost and value of the services they provide. Many of the smaller IFAs continue to provide ongoing service to clients without charging them. Clients have to recognise the value of the services and advice that you provide, but so do the advisers themselves.

I think smaller IFAs that are not highly computerised and efficient within the office environment may also not survive depolarisation. Efficient back-office systems are essential to deal with regulations and administration.

Q: Are you trying to move clients to fee-based advice rather than commission?

A: We do already have some clients on a fee-based proposition, but we try to explain clearly to the client at the outset the difference between fees, initial commissions and annual wealth percentage fees. As long as the client is clear about what you are going to charge and the basis on which you are going to implement those charges, I don’t actually think that it makes a difference. If the choice is up to the client at the outset and they have periodic points at which they can change the basis on which they remunerate you then you should have a successful client/adviser relationship.

Q: What is the basis of your belief that the economic andinvestment cycle should determineclients’ asset allocation strategy.

A: I believe that if you use gross domestic product in conjunction with interest rate cycles, it is one of the most valuable tools in achieving outperformance. In the UK interest rates generally shadow the GDP figures by around six months. There is a lag because by the time data feeds through, the information is already historical.

As the economy grows, interest rates are raised to try to control the economy and restrain inflation. In response the growth cycle in the economy slows, peaks and then starts to fall. As the economy is falling into recession, interest rates may continue to rise because of the time lag in data. When it is realised that GDP is falling, interest rates are reduced in stages. With interest rates falling, the economy starts to grow again with the usual time lag before interest rates stop falling.

The cycle repeats itself. Where we are on the cycle determines the asset class investors should focus on. The first phase is at the peak of the interest rate cycle, when it is a good idea to hold fixed term, fixed rate cash investments.

In the second phase, when GDP starts to fall and interest rates are cut, bond yields start to look attractive and many companies start to convert equity into debt through bonds. This phase is also characterised by rising property values. Portfolios should be weighted towards corporate bonds, gilts and property. The re-weighting should be done as this phase of the cycle begins.

Phase three is when interest rates rise as a result of a growth in GDP. From the low point on the GDP cycle to its peak, portfolios should be weighted towards equities and particularly high income equities.

Q: You are a strong believer in the benefits of investors focusing on income. What are the advantages of this approach?

A: Whatever point we are at in the economic cycle (equities, bonds, gilts or property), we try to ensure clients’ investments are focused towards income-yielding assets. Very simply, if you have yield or dividend then you always have some return, and this return can itself be used to increase returns in a bull market, reduce losses in a bear market, or produce some return in a flat market. In the long term growth funds may outperform periodically, but any growth can be lost again the next day.

With income funds there is always true return and true income coming into the fund, whether the investor is looking for income or accumulation units. We deal with high net worth investors who recognise the value of “true income” and we have produced fantastic returns for clients over the last three years by focusing on equity income funds late in 2002. All I can add is that you will be judged on the returns you generate for your clients, and up to now we have a very good track record.