After celebrating the third anniversary of Square Mile Investment Consulting and Research, managing director Richard Romer-Lee tells Jayna Rana about his plans for the business, his key take-aways from the FCA's Asset Management Market Study, and how everyone across the supply chain must share the responsibility of meeting clients' needs.
Richard Romer-Lee has been a well-known commentator on the UK investment industry for close to 20 years, during a period of huge change for the asset management and advisory sectors.
He co-founded Old Broad Street Research (OBSR) in 1999, which was later sold to Morningstar in 2010 where Romer-Lee remained until 2013.
He then decided he was ready for a new challenge, setting up Square Mile Investment Consulting & Research in January 2014 in the wake of the Retail Distribution Review (RDR) to meet the evolving needs of financial advisers, wholesale businesses and asset managers.
Three years on, the firm has grown in terms of client demand and employees, with 11 members in the research team alone.
Its Academy of Funds ratings service has expanded to assess a range of products from 125 different asset managers, while Square Mile also offers a managed portfolio service, advisory portfolio service and sub-advisory service for authorised investment managers who want advice and support on the investment process.
The company's growth has come during a tough period for the industry, as pressure has been mounting on asset managers to make improvements in areas like charging transparency. Fund ratings agencies and buylists were also in the firing line in the Financial Conduct Authority's (FCA) recent Asset Management Market Study.
However, Romer-Lee says the review is no different from other pieces of regulation as they all ultimately point in the same direction: to achieve better outcomes for end investors and ensure market integrity.
"The review was thorough and there were some sensible and clear themes and suggestions," he says. "We must not lose sight of where this is trying to go, which is to work in the best interests of the end customer and ensure there is no complacency."
Commenting on proposals to improve fund charging transparency - one of the paper's key themes - Romer-Lee adds: "The 'all-in' fee will hopefully help with that. Greater transparency has already led to price wars on passives and some active funds have seen movement, although not as quickly and widespread as in the passives space.
"Since RDR, taking out the adviser fee has made it clearer for investors what they are paying for and now more fund houses are cutting prices on some of their core funds. With greater customer awareness and regulatory pressures, we should expect to see more of this."
Ratings agency criticism
But Romer-Lee believes the regulator made some generalisations in the review, particularly regarding third-party ratings agencies and concerns about potential conflicts of interest.
He comments: "We do not get paid to rate funds. The purpose of our research is to help advisers provide recommendations to customers. Should they wish, asset managers can licence the output of that research, but we do not offer pay-to-play models.
"We are fully independent and although only part of the business is regulated, we adopt the FCA's code of conduct across the whole firm, which should provide comfort to both clients and the regulator.
"If it provides more comfort for the client and greater integrity for the industry, I would be more than happy for the whole company to be regulated. Ultimately, we answer to our clients, all of whom are regulated," he adds.
Another generalisation Romer-Lee identifies is criticism passive funds are being overlooked by ratings agencies and platform buylists.
He responds: "We introduced passives to our Academy of Funds in 2015, following demand from our clients. We have put them alongside active funds so no-one should be hindered from looking at both.
"To us it is not an either/or debate. We think about what outcome the investor wants and it is about drawing on the right investment components to deliver that outcome, be they open-or closed-ended, active or passive funds."
But Romer-Lee is keen to stress that Square Mile does much more than provide fund research and issue third-party ratings. It also offers capital markets analysis and frames its research in the context of customer outcomes to help advisers.
The company also requires asset managers to have clear, measurable and realistic objectives before considering any of their funds.
"How can an adviser construct a financial plan without that? Transparency is key," says Romer-Lee. "Human beings can be very short term in their approach in a world where information is so readily available but investing should be for the long term.
"So the only way to assess a fund is against its own objectives. That is something we insisted on when working with a number of asset managers, who in the early days were reluctant to be that specific. We are bringing in accountability."
By being clear about what they aspire to deliver, fund houses can take on a larger share of responsibility and risk, according to Romer-Lee.
"If they deliver they will reap the rewards and if they do not, investors and advisers will move on. We have already seen that through the substitution of unambitious or unsuccessful core mandates with passive products."
However, Romer-Lee says the responsibility should not fall on the asset manager alone, as he believes everyone in the industry should be made accountable for the outcome of an investment, whether that is through greater transparency, or even education.
He comments: "The regulator wants to see other people in the chain sharing the responsibility and risk for the end customer. We can all do that by being clear about what we aspire to deliver with investors' savings. We also need to work together to improve investors' understanding of what it is that each of us actually does.
"Education is a key challenge. The market study revealed a huge number of people are not aware of the charges they are paying, so it is incumbent on us all to help educate investors. After all, they are the ones facing the challenges and consequences if we do not deliver what they need. The whole industry needs to ensure there is market integrity at every turn."
Not just a numbers game
As for Square Mile, the company prides itself on producing high quality research that is regularly updated by a team from varying backgrounds.
The team tracks the performance of the 230 names - 60 of which are passive - within the Academy of Funds every six months and updates are reported to the board and shared with clients. Funds are selected based on the collective expertise of the research team, referencing market intelligence, industry contacts and in-depth sector and fund analysis.
Romer-Lee says: "It is not easy assessing funds, nor is it just a numbers game. It is a combination of art and science and there is much to consider, no matter what asset class or approach you are looking at.
"But we have been successful working with advisers, wholesalers and asset managers in a number of different ways. We continue to work with platforms and life companies by providing governance and guided architecture and increasingly helping them with legacy business."
Commenting on plans for the firm, Romer-Lee expects to expand the team in the short to medium term, adding people with experience looking after clients as "a personalised service is important".
As for prospects for the Academy of Funds, he emphasises Square Mile's research is very much driven by client demand. "For example, we do not look at investment trusts yet but when there is demand, we will consider them," he says.
"Smart-beta is another interesting area but here advisers need to think about the right starting point for investors. It is the ultimate expression of past performance, which might not necessarily be the right starting point if you are trying to generate an income or preserve capital or want a highly active approach to generate long-term returns greater than a market-cap weighted index.
"Some strategies are being brought to the market and we look at those. When demand is sufficient and we think smart-beta can meet investors' needs, we will consider adding those products to the Academy, but we will always be mindful of the needs of our customers."
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