20 - Introducing our new podcast series: Pathways to Freedom

The title of our new series of podcast is Path to freedom: What lies ahead of us in the Wealth and Asset Management industry? Now that we are exiting lockdowns, hopefully leaving Covid behind, and partly returning to the workplace, we have lots to discuss. Listen in to find out about our new topics and episodes we'll be sharing over the coming weeks.

Guests
Luuk Jacobs, Partner, AlgoMe Consulting
Pierre-Yves Rahari, Partner, AlgoMe Consulting

Presenter
Chris New, AlgoMe Consulting

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Transcript

Read the Transcript of our Podcast - Pathway to freedom 

Introduction: In this podcast we are introducing our new series of podcast “Pathway to freedom”; What lies ahead of us in the Wealth and Asset Management Industry now that we are exiting lockdowns, hopefully leaving Covid behind and partly return to the workplace.

Please note that Coffee with AlgoMe Consulting is produced for the ear and designed to be heard. Therefore, it is very conversational and not an article. Transcripts are generated using a combination of speech recognition software and human correction and may contain errors

Enjoy the reading of this discussion on the pathway to freedom with the partners of AlgoMe Consulting, Pierre-Yves Rahari and Luuk Jacobs and as usual presented by Chris New.

Chris New: Hello, and welcome to coffee meet with AlgoMe consulting, with me your host, Chris New. Today's podcast is a first in our fourth series of podcasts titled "Pathway to freedom". Today, we're going to talk to AlgoMe Consulting partners, Pierre-Yves Rahari and Luuk Jacobs about what we can expect from this latest series and why these scenes represent a root deliberation for the WAM industry.

Good morning, Luuk. Good morning, Pierre-Yves 

Luuk Jacobs: Good morning. 

Pierre-Yves Rahari: Hello, Chris. 

Chris New: Pathway to freedom is the title of our new series. Pierre-Yves maybe you can give us an idea of what brought us to that title. Why are we calling it pathway to freedom? 

Pierre-Yves Rahari: I suppose we're in the situation where we're exiting from COVID. There are new things going on, people are back in the city, New GEO political landscape and so on and so forth. And what we really want to examine in these series of podcasts is how are these transformations going to impact the industry and what we can do about it. 

Chris New: Excellent. Seeing that sort of shift in some of these paradigms that you discussed.

Maybe we could talk about the first podcast we're going to look at, which is our managers back to managing money. Now, obviously we don't look at investment management sort of fundamentals too much, but in terms of this subject, what does that mean for us and our client? 

Pierre-Yves Rahari: Absolutely Chris. We'll start with the first set of observation. We're hearing a lot of industry comments saying that we have reached the bottom of the price war between active and passive funds and that managers are back on concentrating on managing money. So, we want to examine if it's really the case.

And then to add to this conversation, we're bringing in another set of observations, which is the concentration of asset managers continuous unabated with a very clear stated objective of getting scale. You're thinking about Franklin merging with Leg, Invesco merging with State Street Bank, GSAM merging with NN all of that is happening.

In parallel, we are also observing in an increased volume of outsourcing of operations. So there again, usual names, Invesco is outsourcing their operations to State Street Bank, Investec is doing the same. And we're seeing the very clear trends towards a concentration of service providers. So just to name a few, the latest is the merger of State Street Bank with BBH and we've noticed the merger of Apex and Sane.

If you add all of this with the emergence of new share class, new structures, and of course all the questions related to ESG. You can't help wondering whether the asset managers really have the capability or the appetite to manage all this complexity and whether they are not moving back to managing money and leave it to others to manage this ecosystem and complexity.

Chris New: Excellent. That sounds like a change in business and operating models so look forward to that being discussed in detail. Luuk moving to the next, in our series, what are the future drivers for growth in the investment management industry. Obviously, we've seen the stock market boom after the initial fall in the pandemic and the wealthy getting wealthier what else is going to be the driver apart from just inflated asset prices? 

Luuk Jacobs: There has been a sharp increase in values of equity, et cetera. But overall, I think there is also just an increase of wealth in the world. And how is the investment industry continuing to grow within that. Is that beyond just AUM increase and investment performance, or will that also be other elements that will enable that growth of the industry? For instance, platform business quite a few asset managers have been investing in that. Some with success, some with less of a success and in the end, it didn't live up to the promise. And so they subsequently sold it their platform to others. 

But we see also in the asset management companies moving into the personal wealth space, which it's quite new for the industry. And in that way, they're capturing the market underneath high net worth individuals.

There are new technology opportunities to create bespoken individual portfolios for clients. And that is a significant opportunity for the industry, but equally retail investors are also looking for access to new sources of return because bonds have and are likely not to deliver hugely in the coming years. Where are other sources of return and private markets investments, not been the foray of the retail investors. So how could they get better access to that, and in that sense, also the returns of this asset. 

Chris New: Interesting. I think that sort of ties into our next podcast as well. You mentioned the personalization of investment as we see these different markets opened up, as you talk about, private markets and obviously the additional risk and potential regulation they may bring. What other kinds of personalization of investment funds do you see but fundamentally how much personalization can people really get? 

Luuk Jacobs: I do think that it's something relatively new. Maybe not completely new, but really putting that I in investments is a new area for the industry.

That doesn't mean that it hasn't been tried and there are some green shoots of it already, but it is a new direction for the industry, and it is all about the individual needs of the investor. Up till now, it was in general, very much around pensions and if it were not pensions than it were just investments with a certain return that were in the interest of the retail investor. But now it is more looking at the life events of the investors and how can investing, support those events in life; your children going to study, the purchase of your first property, et cetera. 

Equally we should be thinking of the fact that investors do no longer think of individual stocks held by an investment product, but about the impact it has on society and the environment. And then we get to ESG considerations and in recent articles in for instance, ignites It has been clear that European ESG stocks deliver outperformance.

In new flows of investments, there is a clear shift to impactful article nine funds. This is a trend that is not going to go away. And in this podcast, we want to dive deeper into that.

Chris New: Brilliant. As you say, there's a lot of different competing things to manage there. So, in terms of personalization, the democratization of the investment process. It's going to be interesting how these are managed and balanced. As we deal with clients with ultra-high net worth individuals, there's obviously a lot of tailoring that can happen there on a one-to-one basis and I think this looks at that sort of layer underneath that. 

Pierre-Yves maybe something a little bit dry. We'll get a look at regulations and whether they are here to stay. What's on the horizon? And obviously regulation is probably the thing that keeps most of our clients awake at night. 

Pierre-Yves Rahari: We need to take a little bit of step back when we are going to talk about regulation Chris, if you look at the regulation that were implemented in the post financial crisis. They've been very resounding themes, which were around investor protection, market protection, especially against systemic risk and transparency. 

So, we've talked about the tsunami of regulation over the last decades, and now we're moving into a post COVID world, and we really want to examine what drives the agenda of the regulation.

If you look at the current calendar, there's some very specific things happening. There's a follow up of the march 2021 SFDR regulation on sustainable finance. On January 1st there will be the implementation of IFDR, which is intended to simplify the Prudential regimes of investment firms. In March 2022nd there will be the first submission of the self-assessment reports on operational resilience and so on and so forth. And that we are aware of some open questions that need to be addressed by the regulators. For example, by July 2022, the EU will need to clarify whether they want to extend permission for firms to use UK clearing houses. And there are a number of emerging questions in the ESG space, the EU taxonomy, the question of green washing, that seems to be emerging again, the E S and G in ESG. 

And then finally you need to put all of this into context. A couple of major points from a work perspective. One is Brexit is done. Now we're looking on one side of the channel the CMU, the Capital Markets Union going fast-forward and we need to understand what the impact of all of this will be on the convergence or not of EU and UK regulation. 

The second point is of course the exit from COVID. Which raises some questions around work, flexibility debate, cybersecurity, and does that need to be translated into regulation. 

And last but not least, there is a very clear polarization of the GEO political landscape, US, China, others change of the guards in major European countries. Is that going to impact the regulation on the industry? 

All of that we want to examine in this podcast. It indicates that the regulations are here to stay. So, we want to look into that, and we think it be interesting to look at what happens in other jurisdictions or regions.

Chris New: I think the theme running through that is even if you've implemented a regulation, they come at several phases several years. And that's going to be the running theme for the next two years of really implementing those different phases as an increasing complexity to meet those.

I think one we were going to follow up with after that sort of overview of the regulatory landscape is a deep dive, a particular interest for our UK clients around the UK Prudential regime, which you mentioned is coming in on Jan 1, 2022. Maybe you can give a little bit of a deeper sort of insight into what we're going to look at in that discussion.

Luuk Jacobs: The PR will definitely shift the focus of Prudential requirements and expectations away from the risks that firms face to address the harm that firms can post to consumers or markets. And the last bit is very much in line also with operational resilience. 

The new requirements seek to capture the potential harm post by a regulated MiFID investment firm, to their clients and the markets in which they operate. It also considers the amount of capital and liquid assets the FCA investment firm should hold. So that, if it does have to wind down or exit the market, that it can do so in an orderly way.

Because let's say the past has shown that was not always possible. Woodford was an example of that and there have been others like that. And the IFDR means there will be a single Prudential regime for all FCA investment firms simplifying ultimately the current approach.

 The FCA investment firms will have to have meaningful capital and liquidity requirements, as I said before. And that means for some that will be the first time. 

Further there will be remuneration requirements, which is not to be thought of lightly because it's just more than policy design. It also looks at governance and oversight of remuneration policies and practices, and fixed and variable remuneration indicators, a restriction on variable remuneration as well. 

At the moment this is within a UK environment unlimited, not within an EU environment where there are already those kind of restrictions in place.

Yes, new regulation, but hopefully let's say that objective of simplifying, we'll definitely come to the forefront. 

Chris New: Wonderful. I think what I find interesting about this particular sort of Prudential regime is, it's following on from what was implemented for the banks.

And is probably seen as best practice now around governance, risk management and controls. Although, this may seem very abstract to a lot of the population. Actually, if we look at the current fuel crisis, that is all around the lack of regulation, governance controls, and there's even now discussion about a Prudential regime for them.

I think when you look at the big pictures, you can actually still put this to reality is, people were impacted by Woodford. People were impacted by the banking crisis. This is something that makes the industry stronger and it's not just regulatory overhead for the sake of it. 

Okay. Pierre-Yves Luuk thank you very much for that whistle-stop silver next series. I think there's a lot there for most of our listeners to get involved in.

To our listeners, I hope this introduction to our fourth series of podcasts, "Pathway to freedom" has whetted your appetite. And we look forward to you joining us next time.

If you want to discuss this podcast further with us, have any questions on the series or would like to get in touch with us through enquiries@algome-consulting.com or via LinkedIn AlgoMe Consulting and we look forward to hearing from you. 

Thank you and goodbye.