The International Investment Offshore Forum this year displayed its usual wide array of topics but a...
The International Investment Offshore Forum this year displayed its usual wide array of topics but a single strand linked together all the speeches and that was: how can an adviser or an investor cope with the tough investment environment? The topics included looking for alternative asset classes to counteract equity sluggishness; developing new income streams through selling international health products; what the current state of the offshore financial services sector is and how advisers should adapt.
The first speaker was in fact a double act from multi-manager specialists NIB International. After an introduction from managing director, Andrew Lodge, NIBI's international sales director, Chris Trower, challenged advisers to never make another asset allocation decision.
This controversial suggestion came from a question about what the research capability of advisers really is and whether it is deep enough to sell it as part of an advisory package.
One of the issues faced by intermediaries who want to sell themselves on investment advice is the range of products available. For example, there are 650 international equity funds to choose from, with a wide range of different volatilities.
'To compound the whole thing,' added Trower, 'there are six currencies to make a decision about and, if you start to get into currency plays, that opens up a whole new ball game and suddenly it gets very dangerous indeed.'
Funds of funds are an effective outsourcing solution ' particularly with the advent of hedge funds, for which a fund of funds solution is particularly appropriate. The fund of funds route will be a great enabler for hedge funds to reach the retail market.
Meanwhile, Brian O'Neill, product and market development director for Prudential International, gave a comparison of three of the most popular European offshore financial centres: Luxembourg, the Isle of Man and Dublin.
He explained why not all offshore locations are the same and even pointed out that certain locations, for certain products, are even tax disadvantageous. With the continual changes in the international regulatory environment, many people feel that the offshore industry is under threat. O'Neill is not so pessimistic.
'While there are significant challenges ahead, there is also a huge opportunity to exploit,' said O'Neill.
As far as cross-border premiums are concerned, the Isle of Man is the surprise winner, with the island writing nearly E8bn in 2001, with Dublin at E5.6bn and Luxembourg E5.1bn. He pointed out that 2002 figures were mysteriously hard to come by, with many companies being very shy about supplying the (presumably disappointing) data.
The main difference between the Isle of Man and the other two jurisdictions was the fact that it is not in the EU and so has focused on non-EU business at its core.
'The key restriction for the Isle of Man is its inability to qualify for the freedom of services provisions under the third life directive,' said O'Neill.
Instead, the jurisdiction has focused on securing substantial business from Asia and the Middle East, in which it has been successful. Also, it is the market leader in terms of the UK friendly portfolio bonds and with-profits bonds.
A further advantage is that the Manx authority is a pragmatic regulator and encourages niche, progressive products and innovations.
Luxembourg, somewhat in contrast to the Isle of Man, is very anxious not to be seen as an offshore centre, but instead as a professional international financial services centre providing excellence of service, not simply low tax.
The jurisdiction led the development of unit-linked investment bonds in Europe and the emphasis is on investment products, as is the Isle of Man, according to O'Neill.
However, unlike the Isle of Man, it does not have gross roll-up as one of its fundamental advantages over its continental competitors because many of them have it anyway.
'Gross roll-up is a feature of many continental European markets, so confidentiality is a key feature,' explained O'Neill.
Ireland, on the other hand, is a relative newcomer to the international financial scene. It is a high-growth jurisdiction, with 27 international life companies having a presence there, 19 of which came between 1999 and 2001 and there are a further three awaiting licenses.
The new, fresh-faced centre has not only a friendly, commercially-aware regulatory regime, but also has the ability to tap into both the markets of the Isle of Man, through its historic UK links, but also the European market, through its membership of the EU and the single currency.
Unitised investment products dominate the market, along with a healthy with-profits industry and a growing portfolio bond market.
O'Neill proceeded to outline some of the most important drivers of change in the cross-border financial services industry, the primary ones being:
l An increasing regulatory presence, with the introduction of the EU Savings Directive and Intermediation Directive; the growth of a cross-border pensions industry; and reviews such as the UK's Sandler review.
l A growing demand for cross border products generally, especially in the fields of low-risk or guaranteed products.
l A lowering of the tax differences between jurisdictions.
l The commoditisation of investment products. This has come about through the lack of differentiation between funds in falling markets and, on the guaranteed side, the ease with which structured products can be copied.
Stephen Bishop, the general manager of Scottish Equitable's Dublin operation, talked directly about the challenges facing offshore product providers and intermediaries in the face of the changing international environment.
Taxation, he claimed, was no longer the main selling point for those in the offshore business.
'We have all been out there, touting the benefits of gross roll-up relative to a UK onshore fund and it is perfectly true, subject to withholding tax, these funds will always grow gross of tax,' said Bishop. 'But what it tends to ignore is the charging equation: what level of charges have there been on the product, which may erode some of these benefits? That is still a myth in the industry.'
This idea no longer holds true, according to Bishop. The downward pricing pressure on the global financial services industry has been equally felt by the cross-border providers and, as a result, offshore products have never offered better value for money.
Inheritance tax, trust planning and management of company accounts have always been a core competence of the offshore market.
Although these are still attractive elements in financial planning, the main selling point for the future is going to be on the basis of the quality and appropriateness of the investment choice.
However, increasingly high net worth investors want to see an ongoing oversight of their portfolios by the adviser and, in general, this requires more client contact.
'There is an end consumer buying this contract,' said Bishop. 'We make our money by making sure that this client stays with us and the adviser typically will make their money by making sure the client stays with them.'
The offshore insurance products that are particularly popular or look set to be the growth areas in the near future are typically the low-risk products. One example is money market funds, which previously have only been available to institutions. Providers with institutional relationships, however, can offer these products to individual investors and this is increasingly happening.
Guaranteed structures have already been a success story. However, Bishop pointed out that it is vital the investment structure offered to the investor allows for the flexibility to give equity exposure for the time when the equity markets at last pick up.
James Tew, head of fund ratings Europe for Standard & Poor's, next took the podium to discuss a type of service that is set to become an important new weapon in the adviser's arsenal ' the managed account or wrap.
He noted the bewildering array of different types of wraps:
l Individually-managed accounts.
l Separately-managed accounts.
l Separate accounts.
l Managed accounts.
l Unified-managed accounts.
l Mutual fund advisory programmes.
l Separate account consultant programmes.
l Fee-based brokerage programmes.
Tew gave a simple definition of what a managed account is. He said: 'a managed account is a program or product that enables an individual's disparate assets to be administered and managed as one on a tailor-made basis.'
Although that to some extent describes the job of an adviser, no adviser or product provider could claim to be the best manager of every investment type, whether government bond products, European equities, emerging market debt or mortgages.
Administration of all these products by advisers can take up an inordinate amount of time. Tew advocated the managed account as a more efficient solution to this.
He said: 'A managed account program allows the investor to have an open architecture shop of products choosing the right horse for the right course with all the administration aggregated under one technological platform.'
Tew said he believed that managed accounts of the American, open- architecture model have a positive future in Europe both for high-net worth and, eventually, mass affluent investors as the demand for tailor-made solutions becomes more widespread.
Meanwhile, Nick Jopling, partner at property specialist Allsop & Co, laid out the arguments for investing in the UK retail property market, despite the suspicion among certain observers that over a decade of consistent upward pressure on prices must end with a fall of some sort. Jopling examined some of the underlying factors specific to the UK, especially London, which would guarantee a healthy degree of demand with a falling supply.
He said that the UK population is set to rise by more than five million over next 25 years, not including immigration. Meanwhile, the life expectancy of UK inhabitants was continually improving. Furthermore, the trend towards single occupancy of households was continuing. All these indicated a strong increase in demand for property in the long term.
Meanwhile, supply has slumped, said Jopling. The building of new houses has dropped to its lowest level for 77 years. As a result, there is a housing supply crisis ' particularly in London and the South East of England.
To cope with this pressure, the target new housing build has to be just under 45,000 houses per year. However, the actual level of building has been less than half that for more than 10 years.
In the short term, Jopling admitted there were some valid concerns, although the high affordability ratio ' housing cost as a multiple of salary ' was not one of them. This is because it is mortgage-servicing costs that determine how affordable a house is, not some arbitrary ratio between salary and price. Of course this brings up the question of what would affect these costs and the most important factor is interest rates.
However, according to research done by FPD Savills, UK interest rates in the UK would have to rise to 5% before there was a serious knock-on effect in the UK residential property market.
A further possible problem would be the collapse of the decreasingly lucrative buy-to-let market in the UK, which could be brought about by ongoing downward pressure on rents.
As a result of some of these concerns, Jopling predicted lower yields than in the previous decade, during which UK residential property outperformed most other asset classes, including equities after the recent market crash.
Nevertheless, he claimed that large-scale underlying pressures would help prevent a house price crash and would keep UK residential property a healthy asset class for many years to come.
The last speaker of the day advocated looking at what would be a new source of revenue for many investment intermediaries ' international health insurance. But it is not an easy sell, according to Ed Watling, European sales manager for International Health Insurance Danmark. This is especially the case as the buyer hopes never to have to use the insurance he or she has bought. And yet health is a very important part of quality of life. A poll conducted for the American Heart Foundation found that 1% of people regarded the pursuit of fame as the most important aspect of their lives; for 7% it was the acquisition of money; 39% of people regarded their love lives as the vital key to happiness; but 53% thought being healthy the most important aspect of their well being.
The old way of regarding insurance was that it was a 'grudge purchase', bought out of need rather than desire. It was a one-off transaction rather than part of an ongoing relationship with an intermediary and it was a commoditised, volume transaction.
He said that the way to regard these products was as a form of investment ' an investment in the future health of the client, rather than a cost for today. By turning the product into a high quality, personalised, service-driven proposition, it will more effectively meet client needs and potentially provide a better margin.
Watling went on to describe the three dominant market models: the US style, the UK/European style and the global style with their pros and cons. In a similar way, he then described two pricing models. The first was the 'price driven model', where the insurer determines premium mechanistically by commission costs, service costs and the predicted costs of claims. This system ensures that there is a commercial pressure to refuse claims and provide the minimum service needed to maintain a client.
Instead, Watling put forward the 'quality driven model', where the assumption is made that claims will be honoured and premiums are calculated on the basis of the needs of the clients, not the providers. This is a much more profitable, productive and pleasant area to be in, according to Watling, as it tends to lead to client happiness through a high-quality service. He recommended that every adviser should look into adding these sorts of services to his or her product offering.
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