Money managers: “Stewardship is an inconvenient responsibility”

Retail FX brokerages and asset management firms, hedge funds and family offices could be a very good match. Stewardship, however, is a moot point and marks the difference

It has long been apparent that the part of the evolution and refinement of the retail FX business lies in the broadening of asset classes and product range toward the emulation of the wealth management and proprietary trading firms.

This means a definitive move toward key financial center-based companies providing multi-asset platforms that are specific to companies and their client bases and away from the marketing-led white labeling that has dogged the lower end of the retail FX industry from island locations.

With evolution into complex and sophisticated financial services sectors comes new considerations, one of which is the need for what is known in portfolio management circles as ‘stewardship’.

Stewardship constitutes the collection of persons who run or manage businesses but are not always those who have invested money and/or resources in the business. They manage money and resources which are owned by others, and act as stewards, or agents, on behalf of owners. The concept of stewardship places an obligation on stewards to provide financial information relating to the resources which they control, but do not own which is particularly relevent to managed portfolios.

Currently, among the white label orientated island based firms that do not own their own infrastructure and whose business model is based on the profit/loss of its usually one-off customers that have been accrued via lead buying before being convinced to bring their network onboard for their accounts to be operated via a MetaTrader MAM account, there are no stewards, as this does not exist in affiliate marketing, which is where most of the island-based white labels – which face obsolescence – come from.

All too often, when looking for governance and advice on how to scale business, smaller retail brokers tend to look toward pseudo-consultancy firms that have been established by former sales people and are really only specific to the MT4 brokerage business, hence advice tends to focus on how to keep the lead cost down, or cost per acquisition and retention – all of which is highly irrelevent to a proper financial markets business sector.

By contrast, the large, established firms are looking at this pragmatically. Willis Towers Watson, which is an Irish-domiciled global multinational risk management, insurance brokerage and advisory company, has today issued a report on stewardship among asset management entities which highlighs the dichotomy between the retail MT4 MAM ‘portfolio management’ sector, some of which has huge volume from Chinese investors, and the bona fide wealth management sector in tier 1 jurisdictions. Willis Towers Watson has roots dating to 1828 and is the third largest insurance broker in the world.

Willis Towers Watson called on six global asset managers, namely Blackrock, Legal & General Investment Management (LGIM), Northern Trust Asset Management, State Street Global Advisors, UBS Asset Management and Vanguard, to lead the way in redoubling stewardship efforts.

Stephen Miles, head of equities at Willis Towers Watson, said: “Some may see it as an inconvenient responsibility as it involves time-consuming and, at times, uncomfortable conversations with company management, but stewardship is a critical part of corporate oversight and value creation within the industry.

“There should be no place for half hearted, reactive stewardship and there is a huge opportunity for those who really step up.” The call for action comes as LGIM, which around £1 trillion assets under management globally, revealed that it voted against a record number of companies globally last year, with board diversity, climate change and audit issues becoming more prominent concerns.

Sacha Sadan, director of corporate governance at LGIM, said the firm was “encouraged” by the increase but “there remains more to be done and real success will be dependent on collaboration”.

ane Sydenham, investment director at Rathbone Investment Management added: “We are now entering the next phase in shareholder activism. “Across the whole industry investment managers are realising that their clients, investors or shareholders want to see companies taking on the management where there is a need.

“The rate of change has accelerated rapidly particularly in the past five years. Whereas in the past they didn’t feel a moral duty to do this, increasingly now they do.”

Asset management companies take this kind of critique very seriously indeed and in FinanceFeeds experience are well aligned with that line of thinking.

Speaking last month to a senior executive at Blackrock at the firm’s London head office, FinanceFeeds explained the rationale behind the forthcoming Professional Trading Thought Leadership Conference that we are hosting at The Ned in London on May 7, detailing that we would like to see a very close emulation of the wealth management and proprietary trading sector by retail FX firms, and a closer interaction between senior executives of prime of prime brokerages, technology vendors and non bank market makers with heads of proprietary trading firms, family offices, hedge funds and asset management firms in Tier 1 regions, as we have the technology and the leadership skills and therefore should not be wasting that level of high quality on low end MT4 white labels in Malta and Cyprus who do not understand our business properly.

The Blackrock executive agreed, and also said “You are trying to change an entire industry, Andrew. I am totally with you and think it would be a very good step for all sides, however there is a lot of old school thought in the wealth management sector.”

Yes indeed, there is, however the combination of ultra modern price matching, prime brokerage and rapid execution with the diligence and quality of asset management would be a very good combination and elevate the customer base and revenues of retail brokerages tremendously… and that is even before getting into the subject of introducing ‘stewardship’ to retail brokers.

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