Fidelity International’s CEO Robert Higginbotham urges firms to use the financial crisis to re-shape the industry for a new era
As the financial services industry comes through the recent crisis there are two hazards asset management firms should strive to avoid, according to Robert Higginbotham, president and CEO of Fidelity International’s (FIL) European business.
One is the temptation to revert to the old ways of doing things as if nothing has happened, and the other is to succumb to the daunting challenges that face any firm wanting to engage meaningfully to develop an industry which is the custodian of people’s long term savings
At a time when proliferating multi jurisdiction legislation, volatile markets and fragile investor confidence seem overwhelming to some asset managers, Higginbotham, who joined FIL in 2007 from Schroders to take on business and investment operations across the UK, Europe, Middle East and India, is resolutely optimistic and determined.
He combines a shrewd commercial strategy with a target to serve the greater social good, and at the same time refuses to minimise any of the obstacles to achieving either. “It will all take a long time to deliver – five to 10 years at least,” he says of Fidelity’s strategy to encourage savings across Europe, and deliver accessible products to financial consumers. “But it may take 15 to 20 years. It does not matter. We are here for the long haul.”
Active in European policy circles, he is joining other asset management CEOs calling for governments to address the savings challenge implied by the region’s demographics, and then implement transparent, efficient pan-European distribution of retail financial products. He is one of 23 signatories to a report published by the European Fund and Asset Management Association (EFAMA), which makes eight recommendations to that end (see box).
There is solid consensus around the idea long-term savings for retirement are important (although the debate on why savings and investments are treated differently continues). In a report entitled Social impact of the crisis – demographic challenges and the pension system, the EU’s economic and scientific policies department states the “impact of the crisis on pensions is in the order of 5% to 15%, while the impact of ageing is doubling the burden on the younger generation, “an increase in the order of more than 100% in many member states”.
Politicians agree the savings conundrum should be addressed, but not exactly how. In continental Europe, the savings rate is a reasonable 11-15% of earnings but in the UK, it is less than 5%, and possibly as low as 3%. It is a big task to shift that number. Higginbotham agrees.
“But it is never a good time to launch a major policy move. You have to start somewhere and get on with it because with the demographic trends, the longer you leave it the more difficult it gets.”
It remains true the consumer of financial products is not a “willing purchaser”, he notes. “The old saying is financial products are sold, not bought and that is as true as ever. But it would be easier to sell if there were top quality products on the market.”
At this point, many asset managers start to complain about the ignorance of their clients, how governments should make financial education and saving compulsory. The real barriers to financial security for all, according to this argument, are poor client understanding and the cost of advice.
Higginbotham disputes both, and believes a sustainable solution revolves around four core values the industry needs to embrace: transparency, simplicity, choice and value. “We need to get policy measures behind each of these to be effective, and it does not have to be all that difficult or expensive.”
Emerging from the deepest financial crisis for two generations may not be the easiest time for the industry to ask for trust, but Higginbotham believes there is a growing understanding of the necessary symbiosis between the public and private sectors.
Policymakers want financial product providers to step up to the plate and offer inclusive services, not just profitable ones. Says Higginbotham: “We recognise political concerns about social inclusion of financial products, but it needs people who want to do the right thing. We have to work with the system and also build consensus on the industry side.”
He points to the EFAMA report which asserts: “We are all on the same side; it is not one sector versus another sector”. It makes the case that a healthy savings industry contributes to improving democracy and prosperity because it gives consumers control of their lives.
But Higginbotham wants more involvement from the industry. “Asset managers are not great at sticking at things. They need to make sure they are heard, for example in Brussels. It takes time to build relationships. We must have a commercial and a policy agenda, and we will be heard because what we are talking about is a concern of all governments.”
Asset management firms also need to accept that an informed and engaged consumer is to their long term benefit. “Many asset managers are frightened of that engagement because it moves the power to the consumer. But if consumers like the product they will buy more, and that is best for the industry.”
Any major change is not easy, and may even put some business models at risk but that is an issue for those firms concerned. “There will be winners and losers, yes, but that is commercial reality. Fundamentally the change has to come from the industry. Others can help, but we have to do it, to show that determination.”
He says the Retail Directive Review in the UK will go some way towards improving transparency and choice, but this is closely tied to the concept of ‘advice’, the definition of which bears further examination. “What consumers actually want is varying degrees of help. You have full and complete advice, which is basically taking the decision for the client. But some clients may only want guidance, which involves a little filtering and explaining. The regulatory view of what constitutes advice may be a bit dogmatic at the moment.”
Another mantra from the industry is that providing advice can be prohibitively costly. But Higginbotham disagrees. “It absolutely does not have to. The internet is made for financial products. The accessibility is enormous. Our industry could be completely dematerialised. Even with a service like Amazon, selling books, someone eventually has to deliver the goods.
Financial services can all be online. Providing choice and advice is not complex, we have made it like that. If the infrastructure is expensive, that is for the industry to sort out.”
The concept of value describes what the consumer should be paying for. Apart from advice, they also pay for the servicing of wrappers and administration, and for the management of the product. If it is an insurance product that is the risk management, and if it is a savings product, there is a fee for the investment management. With RDR, some kinds of help or advice will be more expensive than others.
“But any buyer needs to be able to compare costs across providers,” adds Higginbotham. “At the moment there is more and more disclosure required, but it is never put in the context of other choices that the consumer could make. So it is not meaningful, and it occurs too late in the sales process. The client can’t see if they are getting value.”
EFAMA is calling for standardisation of transparency requirements across Europe which would block regulatory arbitrage and promote efficiencies of scale for product providers. For consumers it would also make for better and easier comparison of products, which ultimately drives up the quality.
The association is working towards the introduction of PRIPS (packaged retail investment products) in Europe. If that happens it will allow advisers and consumers to compare effectively, in the way they can with Ucits now, which are a very good example of how a pan European market can work.
Higginbotham has been urging regulatory authorities to protect the financial adviser networks that exist and avoid measures that “harm the channel”. The introduction of the RDR in the UK is likely to see between 10% and 30% of financial advisers quit the industry, according to some estimates. Those that remain need to be even better supported.
Fidelity is committed to building distribution through financial advisers in the UK and in Europe, where it will mean changing established behaviours, as previously consumers have gone through their banks. “But we will work with the trade bodies and the regulators to create conditions that allow the channel to flourish. There is more we can do still to achieve that,” says Higginbotham.
Consumers readily understand what financial advisers are for, and the model is most likely to deliver best advice. “We in the UK have a strong independent advice market, alongside Australia and the US. It is not perfect, but we have to work to strengthen it, rather than making rules that inadvertently punish it. Product providers may not all realise the worth of IFAs, and regulators struggle to deal with them, but it is in all our interests to support them. If you engage, deal consistently and early, they will be responsive.”
Financial education, especially of the end-client, is often touted as the key long term solution to increased savings and investment. Higginbotham says any such measures are of course welcome. “But framing it as the core issue relies on the premise that if we could make our consumers smarter, they will buy from us. The better way round is to offer the products that they want, and make it easy for people to get where you want them to go.”
He believes workplace marketing and education could play a far greater role in reaching the consumer, as it does in Australia and the US. But so do tax and distribution policies: “There is no one silver bullet that will deliver everything at once. In Asia for example, there is a great savings tradition but also a strong trading mentality. Some governments there are using the tax system to get consumers to invest for longer.”
Distribution remains a critical part of the investment chain, although regulatory focus has been on investment products and capital reserves. “The main regulatory tool to manage the industry has been capital,” notes Higginbotham. “We are all having to hold more of it. But asset management is not a capital intensive business. A major question is how capital intensive distribution should be -- the debate about that is just beginning. RDR, for example, will raise the capital requirement of IFAs. But the barriers to entry for investment management are not high. They are higher on the product wrap and distribution side.”
The EFAMA report says this factor has led to distorted competition between different product types at the point of sale. “Given the impact that the right combination of investment products has on overall returns, and that asset allocation is typically done at the point of sale, the focus of regulation should shift from production to distribution. This is the point at which the individual investor is significantly exposed to the risk of making bad investment decisions.”
Higginbotham warns that although scale is rightly considered important for the efficient functioning of an asset management business, it is not equally important to all areas. “In investment based products, you can be a niche operation handling very large flows. The value is in the intellectual capital of the key members of the firm. With risk based products it is a little different. There is not enough risk capital in the world to provide the protection that some
regulators and some consumers want. You cannot achieve big returns with low risk. The insurance industry, which is capital intensive, is under pressure already. This needs to be thought through clearly.”
EFAMA says the industry must use the crisis to re-think its business. “It would be a grave error for the asset management industry to use the early signs of recovery as a chance to sit back and revert to the pre-crisis ways of doing business,” says Jean-Baptiste de Franssu, president of EFAMA and CEO of Invesco Europe, in a foreword to the report. “We need to seize the opportunities that the crisis has presented. Investors have been badly shaken and we must rebuild their confidence in our abilities and our integrity. This is even more important for an industry that acts as the custodian of individuals’ private savings for retirement.”
Higginbotham’s own corporate agenda is to extend Fidelity’s defined contribution business overall, including the advice, wrappers and asset management components. “The asset management industry has got further away from the consumer, so now most are just managing the product -- Blackrock being a possible exception,” he explains. “Many firms stepped away from the customer when they needed help most. We want to remain very active in the retail and DC business, and keep a strong conversation going with the consumer.”
How to do it? “Stick to core values. We are always trying to get closer to the goals of Transparency, simplicity, choice and value,” he says. “The company ethos is relentless dissatisfaction.”
