Regulatory head firmly in the sand: FX portfolio managers and MAM account providers need not worry about FCA asset management report

Scaremongery is occasionally a powerful and relatively effective method of putting not only population, but also in some cases entire sectors of the corporate world, in its place.

During the course of the last few weeks. some of London’s traditional wealth management companies have taken to the mainstream media in order to disseminate the recently completed Financial Conduct Authority’s final report on the asset management sector which provides its services to retail customers.

The reasoning behind this is that the Financial Conduct Authority’s report centers largely on a division of the private wealth management business that once personified London as a fund management center for global investment management, however London has long since moved onward and upward, and whilst specialists within the wood-paneled, college tie world of West End private practices such as St James Place still nestle around the regal streets of Pimlico and Westminster, the plate glass electronic businesses of the City and Canary Wharf now dominate.

The Financial Conduct Authority has concentrated firmly on the fund and portfolio management business within its report, spurring many to put pen to paper in order to create a scaremongering backdrop, dramatizing the need for such businesses to completely change their strategy. “The clock is ticking” said Charlotte Ransom is founder and CEO at Netwealth this morning.

Ms Ransom looked at the Financial Conduct Authority’s findings and deduced that a new approach to wealth management is needed, and with what she sees as the FCA turning its attention to the sector, notes that pressure is mounting on the traditional culture of high fees and indifferent service.

Indeed that is the case, but this has already been long since addressed in that electronic trading firms across London’s retail sector are already offering massively diversified ranges of asset classes via proprietary platforms that can be provided via MAM accounts and automated trading functionality to highly advanced electronic wealth management companies globally.

In China, for example, many of the world’s largest retail FX brokerages not only survive but prosper due to their ability to do just that.

During a privately held symposium at the Grand Hyatt Hotel in Hong Kong held by Saxo Bank in February this year, FinanceFeeds examined the methodology by which companies with a significant presence in China operate their wealth management business.

China is the world’s largest market for managed portfolio services that are provided to retail customers, and almost all of the order flow these days is spot FX.

At the symposium, disruptive technology was a main focus. “Connectivity and liquidity management are two vital components that must be evolved via the development of disruptive technolgy” explained Jennifer Hansen, Saxo Bank’s Global Head of Institutional Business, who before joining Saxo Bank spent 20 years with Credit Suisse and Goldman Sachs where she was Global Head of Product Management within the Fixed Income division.

The Financial Conduct Authority cannot even begin to demonstrate its understanding of how leading edge non-bank electronic trading companies can develop entire systems that empower entire client bases globally.

“User experience is the product that is being sold these days” said Ms. Hansen, “and therefore financial services products must be sold in a way that suits our digital habits. Google, Apple, Facebook, Amazon, Alibaba all took this lead in the consumer market place, and therefore we can tell that experience in one industry seems to affect experience in other industries and this was a wake up call for the financial industry which took everyone by surprise. We have seen evidence of this type of movement in the robo advisory and payments sectors, and new entrants into those two areas took traditional banks by surprise with regard to how quickly they could garner clients” she said.

Indeed so.

Robo advisory services had been gaining traction in the western world, empowering self-directed traders and turning them away from paying expensive fees to outmoded analog fund managers who look at investments of over $50,000 and have an extremely high fee structure with very little means of demonstrating any transparency to customers, unlike the electronic trading systems which show real time activity on a granular basis.

Among China’s vast introducing brokers, every client is an asset management client, and London-based FCA regulated retail FX companies are the preferred choice of provider.

Most of the introducing brokers across China operate an in house developed automated trading system, often referred to outside of China as an Expert Adviser, but usually they are far more sophisticated than that, and are bona fide asset management and automated trading systems which make use of MetaTrader 4’s compatibility with Expert Advisers in order to connect to portfolio management software.

This is the sole reason why MetaTrader 4 is so dominant – no end customer actually uses it in China, instead it is connected to automated trading software which then executes trades on a MAM account on a vast scale, often in many cases, more than 90,000 lots per month, with an FCA regulated brokerage in many cases being the executor.

The FCA cannot even begin to comprehend this method of managing portfolios, and contrary to what Ms Ransom stated this morning, portfolio managers do not need to change their ways, they already have and have been reinvented in the business synergy that exists between FCA regulated retail FX brokerage and the structure of introducing brokers in other important markets.

“Lets use hand held digital cameras as an example. When smartphones first came out, the users loved the new functionality and connectivity, but the cameras were lambasted as poor quality and inferior to separate, purpose-built digital cameras. At the time the digital camera market was pumping out millions of units a year, and had infrastructure behind it, but that all collapsed when the phone companies evolved the quality of their cameras” – Jennifer Hansen, Global Head of Institutional Business, Saxo Bank

Thus, a traditional asset manager, who may today champion the cause of discretionary wealth management, that being having a team of professionals manage a portion of a client’s money over a medium to long term horizon, and across a diversified asset base, are the celluloid camera, and the modern electronic trading firm is the up-to-the-minute smartphone.

Today, keeping ahead of regulatory change is paramount. Indeed, diversification of product range, fair dealing and best execution are matters that are an intrinsic part of strategy, however most electronic trading companies with their own proprietary system and complete Tier 1 prime brokerage arrangements with banks are able to very quickly evolve to suit specific requirements of customer and regulator.

The FCA itself openly admits that responses to its asset management study suggested that the focus of its assessment of institutional investors was too narrow and could have focused more on investors other than pension trustees while other responses pointed to the small sample size as a weakness of our evidence.

The responses suggested that this may have led the FCA to understate the level of switching in the investment consultant market.

The very matter that the FCA is concentrating on old fashioned aspects such as pension funds, which were the darling of briefcase-wielding 1980s independent financial advisers at a time when everything was on paper, and a £30 commission was paid for selling term assurance along with a personal pension plan.

On this basis, the FCA is looking at an obsolete product range, and a long obsolete audience.

Most of the order flow from managed funds in the retail sector today does not come from pensions, or other illiquid montly-paid products.

Instead, it comes from the returns on property investment in the Far East, with owners of vast malls, apartment complexes and industrial facilities sending the enormous monthly rental income to an FX portfolio manager who executes it on a MAM account and sends the order flow to a London-based retail FX firm.

Risk attitude is very much inconsequential as the investors in such real estate consider that to be their long term, illiquid asset, and the electronic portfolio management on spot FX instruments by an IB in China to be a method of quickly and effectively ramping up the monthly rental income. If less profit is made one month, no problem – next month the same rental income will be invested and then traded on the MAM, all to a very calculated and effective outcome.

Regulatory officials at the FCA cannot even begin to comprehend this type of investment management system and many on home soil do not realize that one of the reasons that the retail FX and CFD industry is under such pressure from regulators to change the method by which it offers products is not to do with risk to clients, but more to do with traditional establishment in the exchanges and fund management firms in London lobbying the FCA in order to try to regain the enormous business that was lost to the FX industry which is far more innovative and able to satisfy retail clients with low fees, instantaneous platform execution and continually evolving service.

The golf clubs in the home counties may well be awash with concern as the officials rub shoulders with the traditional asset managers, however for the plate glass and highly advanced retail FX industry and its associated prime of prime brokerages, integration specialists and technology developers, the level of advancement is already so far ahead of that being chewed over by the blazer brigade.

Business as usual, chaps.