Brexit: How are advisers preparing clients?

UK and EU negotiators are gathered in Brussels this week in the hope of finally hammering out a Brexit deal.

However, even if negotiations are successful, some experts fear it could still be too late for a trade deal to be in place before the end of the year.

The controversy surrounding the Internal Markets Bill, which could see the return of a hard border in Ireland, also remains a stumbling block.

If no agreement is in place by the end of the year, trade between the UK and the EU will default to World Trade Organisation rules. Tariffs will be introduced on imports and exports, pushing up prices.

The UK left the EU on 31 January but continues to follow the bloc's rules until the end of the year while negotiations take place.

Whatever happens, Brexit is likely to bring short-term volatility, while passporting rights also remain an issue for advisers with clients in the EU.

There just six weeks to go before the end of the transition period and the threat of a no-deal still remains. So how are advisers preparing clients?

Keith Churchouse, director at Chapters Financial, says the biggest challenge for advisers and clients at the moment is the threat of uncertainty.

"Brexit creates uncertainty for businesses and for clients who have funds invested or are looking to invest.

"Stories in the press have alarmed clients, many of whom have decided to hold off from investing."

He says he is not doing anything, in particular, to prepare clients for Brexit as he does not believe it will have a major impact.

"Most of the markets have already factored in some position on Brexit. We must stay steady in our asset allocations and our existing models because I am not sure Brexit is going to be as big an issue as people are making it out to be."

Justin King, managing director at MFP Wealth Management, says that it is up to advisers to demonstrate to clients how Brexit has been factored into investments.

"We are long-term investors. Events like Brexit and the US election are all just noise and are factored into the investment plan," he says.

"None of my clients have approached me saying they are worried about Brexit but it has definitely been a topic of the conversation over the past couple of years - more so for new clients.

"We explain to them we have a well-diversified portfolio with 11,000 different companies in it. The UK stock market represents just 5% of the world's stocks, so Brexit is not that important overall."

Jeannie Boyle, executive director and Chartered financial planner at EQ Investors, says it is important to explain to clients that their investments are part of a long-term financial planning strategy.

She says: "As with all big events, clients are worried about investment markets, so we are reassuring them. It is about making sure they understand their investments are part of their long-term financial planning strategy and not what might happen early next year."

Boyle says that over the past year EQ Investors has been moving assets into a more globally diversified portfolio which will help protect investors from any short-term Brexit shocks.

"Lots of clients who perhaps have been looking after their own investments tend to buy UK companies that are familiar.

"Over the past year, we have been gradually moving assets out of UK equities into a more globally diversified portfolio in order to reduce home bias. It is the rational thing to do when the global economy is so interlinked."

Neil Moles, chief executive of Progeny, says: "We have guided clients through one of the most significant periods of financial uncertainty in living memory in the pandemic. As a result of this, I believe that many clients are even better prepared for what Brexit might bring.

"In March we saw some of the biggest percentage falls in the markets since the 1980s, but recent news of a vaccine saw them surge back to pre-pandemic levels. As advisers, it's our job to remind people that they should not make decisions about long-term financial goals based on short-term events.

"It is also important in instances like Brexit that we do not speculate on the outcome of events but always be ready to take stock afterwards. Our portfolios have been resilient throughout the pandemic and when we are through the Brexit process it will be a time to look back and reflect on performance, resetting as necessary."

Passporting

For advisers who wish to continue to deal with clients who are based in Europe they will have to make sure they are legally allowed to do so if the UK and EU fail to agree arrangements.

Financial organisations need to be authorised and regulated to provide services to clients in their country of residence - known as passporting.

The UK will also lose passporting rights unless an agreement is reached to allow cross-border financial arrangements.

This means UK advisers will no longer be able to legally support clients who are based in the EU.

Paul Stanfield, chief executive of the Federation of European Independent Financial Advisers (FEIFA), doubts a solution will be found that "is as simple and smooth as the existing arrangement".

"It seems increasingly unlikely that UK advisers will retain passporting rights or anything similar. I would suggest that UK advisers follow the old adage - hope for the best but plan for the worst," he says.

One option for advisers to carry on servicing clients is to become regulated in the European country they are doing business in. This would give them access to all 27 member EU states but would most likely require a base of operations.

Stanfield sees three main ways for advisers to carry on advising their clients in mainland Europe.

He says: "One way this can be done is by joining a Europe-wide network based in the EU and passported. Another solution is operating under the umbrella of a company already regulated in the EU. Alternatively, advisers can arrange a B2B relationship with a firm regulated in the EU.

"Obviously, a UK adviser would need to ensure that whatever arrangement he or she decided on for such clients did not create issues with their licencing and situation in the UK."

Tim Fassam, director of government relations and policy at PIMFA, says: "Things are going to be particularly complex if clients have overseas property or other exposures in the EU.

"The best thing to do is have an open conversation with the clients about what their goals are and what they are trying to achieve.

"As is often the case with short term volatility, it is the adviser's job is to keep the client focused on the longer term and avoid making decisions they might regret.

"Advisers need to consider the various different Brexit scenarios and what this means for their clients' investments. There won't be one solution for all their clients."