We have recently been through a period where the financial market plumbing has been tested to its limits. But also a time where the savings market continues to be transformed as governments and companies hand responsibility for retirement to individuals. Described as the democratisation of the savings market - but a democratisation with implications for the provision of advice, the cost of that advice and where the liabilities attaching to that advice might sit.
Richard Dunbar and Rennie McConnochie look back over 30 years in the industry, one they conclude is more professional, better regulated and socially responsible than ever before.
Richard Dunbar: Hi, my name is Richard Dunbar, and welcome to the latest ASI Investment Insights podcast.
Today, I am delighted to be joined by Rennie McConnochie our Global Head of Banks in our Strategic Client program.
Rennie: Thank you Richard. Good to be here.
Richard: Now, this discussion takes place in the first quarter of 2021 at an interesting time for the asset management profession. We have perhaps never seen such external scrutiny of what we do. We've just been through a period where the financial market plumbing has been tested to its limits. But it's also time where the savings market continues to be transformed as governments and companies hand responsibility for retirement to individuals - the democratisation of the savings market, but a democratisation with implications for the provision of advice, the cost of that advice and where the liabilities attaching to that advice might sit. And so an interesting time as they say Rennie!
But first of all, one thing I didn't mention was that you and I go back almost 30 years in this business and it might be worth starting off by reflecting on how things have changed - quite a lot I suspect - and in particular how the savings market has evolved and ebbed and flowed over that time. So, back three decades Rennie, how have we progressed? Or have we progressed?
Rennie: That’s a very good question Richard and I know this is a podcast but if we were on camera no one would believe it was possible we've known each other 30 years obviously.
Richard: Yes indeed!
Rennie: I think the industry, whether you're talking about asset management or wealth management has changed a lot. I think it's become a lot more professional and if I look back at how the industry was run and the levels of professionalism, I think things have improved dramatically, which I think has been good news for the users of our services collectively i.e. the end-clients. So that's definitely been a good thing.
We've seen consolidation in the industry both within the asset management business and also wealth management as well. We've seen a big increase in regulation. Normally a lot of industries associate that with bad things. But actually increases in regulation, I think, have been part of the professionalisation of the industry. So it's not been all bad at all. We've seen new products come into the industry. I'm thinking particularly of ETFs for example, which were created in the late 90s early 2000s, or at least became known in the market at that point. And we've also seen a significant growth of what I'd call outcome-oriented solutions for clients which I think has been very much driven by the fact that our industry, the asset management and the wealth management industry are playing an increasing role in the savings ecosystem. So the development of outcome-oriented solutions I think has been a very important development as well.
Richard: The core is the same isn't it Rennie? The core of what we were doing or helping to do 30 years ago – it’s professional investors doing things that individuals aren't able to do themselves, and matching savings with investments I suppose.
Rennie: Yes, I think the core is the same. We're operating with more or less the same building blocks if you like, to create savings solutions. There are changes to that - I mentioned the rise of ETFs - and we'll talk later about private markets and also the rise of ESG - but essentially we’re trying to do the same thing. Just the way in which we're doing it has evolved and I think improved. And I think if we talk about savings and retirement savings, Richard, income-based solutions were always important. But I think they're growing in importance - again we can touch on this a little later on - when you're looking at an environment where interest rates have gotten significantly lower and are likely to remain there for some time.
Richard: I think it is a more complex world and a more complex savings ecosystem. Is that just a fact or is that a good thing or a bad thing?Rennie: Yes, I think it has become slightly more complex and that's been driven by regulation. It's also been driven, I think, by where we are in the long-term cycle. If we look back over our fabled 30 years, we've basically been in a bull market for virtually all of that time. You put money in the stock market the stock market went up. You put money in bond funds, bond prices went up. We did have significant corrections along the way. I think we were both around for the first one in our careers which was the ‘87 crash. We had the dot-com boom-and-bust in and around the year 2000. We had the global financial crisis of 2008. But each time, the markets - whether we're talking equities or fixed income - have recovered and reached new highs. And within that environment as well, we also enjoyed low inflation and inflation continuing to decrease. It was a very, very favourable backdrop in markets. Which meant that savings and the provision of retirement funds and retirement income was arguably more straightforward than it's looking over the next few years with markets at all-time highs and interest rates, although they've picked up a little bit of late, at all-time lows.
Richard: Just on that front, Rennie, because you touch on that, on the bull market in equities and bonds. It's been a slight ebb and flow in the equity world; we've had booms and busts. But it's been a switch from a bond investor’s perspective. Virtually from the early part of our careers, or the early 90s, it's been an inexorable decline in bond yields from the 10 to 15 percent we saw in those years down to either nothing or negative, to where we are now. That fuelled the 60/40 equity/bond portfolio which has served clients extremely well over that 30-year period. But, I suppose that you touched on it, we’re at an interesting juncture as they say, in that nexus in terms of that appropriate mix. That touches then on where the savings market needs to go now. Is that fair?
Rennie: Yes I think that's very fair, and that's one of the great challenges that faces the asset and wealth management industries. The 60/40 split of equities and bonds has been almost like a religious text over the last 20 to 30 years and it has served very well. When equities corrected, the fixed-income elements of portfolios kicked in to provide cushion and defence and income in difficult times. But with bond yields where they are now and bonds having performed the way they have for the last 30 to 35 years, it's difficult to look at an allocation to traditional fixed income and call that defensive. Thinking does have to evolve, and it is evolving in terms of the solutions that our industry, the asset management industry, will be offering wealth management and clients of wealth management so that they can still provide for retirement and get income in retirement over the next five, 10, 15, 20 years. Definitely fresh challenges, and different and new demands being placed on our industry.
Richard: Do you think this is a problem, Rennie, that the only people who've got experience of having lived through developed market inflation are older than us!
Rennie: Well if they're older than us they're probably retired so they're not going to be able to help! But basically these challenges present opportunities. And in an environment where access to investment products has just become cheaper and cheaper, and I'm thinking very specifically about the ETF phenomenon which I touched on before, and that's very much here to stay, it's very much behoven on active managers to earn their corn so to say. Therefore the ability to come up with solutions that are capable of providing a diversified and secure income in retirement is one of the challenges that the industry must step up to, and I think will. And in our own business and in others, I think we're seeing plenty of examples of that. Particularly with regards to some of the multi-asset solutions we are offering our clients. And also, and we can touch on this in a little more detail, in the importance or relative importance perhaps of private markets in providing some of these outcomes, or helping to provide some of these outcomes as well.
Richard: It might be worth just touching on that particular latter point, Rennie, now. Access to private markets has always been more difficult than access to the public markets and in essence, in reality, they've been an asset class for the few rather than the many. Getting access and getting liquidity, or getting appropriate liquidity, has always been a challenge. Presumably we can do better as an industry?
Rennie: Yes we can do it better, and we are doing it better. It's not just a challenge for the industry, it's a challenge for the regulators as well. I think the regulators are endeavouring to take a more constructive view on access to private markets. I think what a lot of regulators have realised is that some of the best-performing asset classes out there, like private equity for example, to your point Richard, are really not accessible at all to 95 percent of the investors. You've got almost this elitist-type argument where some of the best-performing asset classes are only available to the most wealthy. And so regulators have been working closely with the industry to take perhaps a broader view on liquidity - looking to see if the industry can provide products that will give some access to that illiquidity premium, but maybe still giving some degree of liquidity quarterly, annually for those investors that need it. I know we, as a business, have worked very closely with the regulator in the creation of one of our private markets products and there are some others out there doing the same. So I think you talk about the democratisation of savings, I think there's also a slow but steady democratisation of access to private markets as well. And I think that will be an important and growing trend over the next five or 10 years.
Richard: There's not a day goes by where you don't see a new fundraising from a private company from private markets. The number of companies that when we started would have floated on the stock exchange - that just doesn't happen now. There seems to be, I wouldn't say unlimited funding, but significant funding that can be funded off the public markets. And so that market cap seems to be getting bigger and bigger. That is less accessible to your average saver as you've touched on, Rennie.
Rennie: Yes, and not even the average saver! I think it goes even further up the curve than that. You're right, the IPO calendar used to be a very dominant part of what investment banks did. And increased retail participation in the stock market and in IPOs was a big thing. Now as you say, companies are staying private for an awful lot longer, and more and more of those economic gains are in private markets not public markets, and a lot of savers just simply don't have access to them.
Richard: You touched on the banking sector there. This has been a sector that you have close links with in your in your current role, but it's been a sector that's had varying levels of enthusiasm for the provision of savings products over the years. Where do you think they are now? Particularly in this environment where responsibility for savings, as we discussed, really now lies with individuals.
Rennie: Well I think that is the fundamental change in the outlook for wealth management, not just in the UK but globally, and the banks’ role within that. Because you're right, banks’ interest in this has waxed and waned. And there have been regulatory scandals, and banks have been accused of mis-selling things to the public. And not just in asset management products but a lot of other areas as well. But what has changed is where the responsibility for saving for the future now lies. And it lies more and more and more, pushed by governments, pushed by companies themselves - as they exit DB schemes, move into DC schemes and so on and so forth - those responsibilities are now lying more and more on the shoulders of the individual.
If you look at what's happened with banks, you know the low-interest-rate environment means their ability to make money on deposits and lend money out has become increasingly under pressure. We've seen that in net-interest margins which have been squeezed and squeezed. The role that banks can play in investment banking, it does vary globally obviously. But, in the UK, there's probably one bank that has been significantly investing in its investment banking business, which is Barclays. HSBC much less so but that's predominantly about it. What we've seen is that wealth management has become a much more important part of the longer-term strategy of all of these banks, so we can see it in Barclays, we can see it in HSBC, we know about Lloyds’ ambitions in that space. The banks, I think, are now very much here to stay and we're seeing that globally as well. Citibank have enormous ambitions in wealth management. And I'm talking very specifically here about wealth management as opposed to private banking - which is looking at the more ultra-high-net-worth end of the curve. We're looking at the Credit Suisse, UBS and Merrill Lynch-es. Wealth management is now absolutely front and centre within their strategies. Whereas historically, there's been a bit of a cyclical and regulatory ebbing and flowing of interest, I think that interest is now very much here to stay, and I think it's seen very much as a growth area for these banks.
Richard: I'm conscious it's a short queue for people wanting to have sympathy for banks in most jurisdictions. Buy one of the areas that the banks have consistently observed, and or complained about - and which is part of the reason for the ebb and flow I think as you described it - is that giving advice is quite expensive and giving good advice is even more expensive. Some of the banks have said that, with the regulatory pressure, the competition pressure, the margins are not sufficient to do the job properly. Is that a fair observation? Or is it economies of scale, is it ‘robo-advice’, is it the various versions of managing costs, either by scale or by the way they're doing it, are they getting better at that. Or is that criticism still a valid one?
Rennie: You're right, the pricing of advice has been a very difficult issue and, like all things, in part-driven by regulation. You know, the pendulum swings too far one way and then it swings too far the other. I think tacitly - we're just focusing on the UK - the regulator is aware of the fact that the burden is falling increasingly on retail investors to provide for their long-term future. The cost of advice is arguably prohibitive and people struggle to pay for something that is slightly intangible and the benefits of which will only be seen to accrue over time.
The other side of that is perhaps a lot of savers are taking decisions that are not necessarily in their longer-term best interests, just because they don't want to pay for advice. This is something that I think is attracting a lot of attention from a regulatory perspective, and it's a case of trying to get the balance right. Nobody wants to see banks, or anyone else, over-charging for advice. But equally, as savings retirement becomes much more an individual responsibility, I think regulators and the market want to see those savers make long-term intelligent decisions, so it's a case of getting the balance right. It's probably not at the moment but I see that very much as a subset of the trend that we spoke about just before. That train has left the station - individuals will be increasingly responsible for providing for their own retirement income. Banks are going to be increasingly responsible for offering those solutions. You touched on scale. I think scale becomes a lot more important because obviously the bigger you are, then the more keenly you can price your products, including advice. In an environment where arguably we should be expecting lower returns going forward, price becomes important and you want to see investment products keenly priced for the marketplace.
Richard: Can the smaller banks compete in this market? Or is it niche areas that they can win?
Rennie: Yes they can, but it's not easy. By definition a smaller bank won't get scale. And, by definition, the amount of resource you need to provide reasonably sophisticated long-term savings and retirement plans means that scale is becoming increasingly important. But what we're seeing, and I think we could touch on this slightly later on, is we're seeing some of these smaller financial institutions looking to develop partnerships with asset managers to provide wealth management solutions to their clients. By focusing on a much smaller number of providers they can demand keener pricing. And that allows them to be relatively competitive within what might be still a much smaller customer base than some of the big national global wealth managers are serving.
Richard: Are those sorts of partnerships different relationships than we would have had before? More than contractual, but in terms of the way you're describing them, a partnership, a solution, working in a way that is that different to what went before?
Rennie: Yes it is and it's working at different levels with different banks. A lot of the time, historically a lot of the banks owned asset managers and had very much a closed architecture where the vast bulk of the investment products that were supplied to their wealth management arms came from their own asset manager. That's being tightened up significantly depending on what regulatory jurisdiction you're looking at. So you're getting a lot more open architecture in terms of the investment solutions that they're providing their clients and within partnerships.
You talk about contractual obligations - we've been involved in several ourselves where we are contracting to supply investment solutions to small-to-medium-sized financial institutions, But we will also do that on an open-architecture basis. So yes, there will be an Aberdeen Standard Investments product that will be part of that offering, but there will also be plenty of exposure to third-party asset managers in those solutions as well. But we will contractually provide those solutions to those financial institutions over a certain period of time. We will price those services keenly. From the small-to-medium-sized institutions’ point of view, they’re getting keen pricing, so they are able to offer their clients keen pricing of an open architecture, diversified wealth management solution.
Richard: You talked about solutions and ETFs earlier and the all-pervasive nature of ETFs at a very, very low fee. Presumably you see that as a tool in the toolbox of an active manager, as well as a competitive threat to the broader asset management industry?
Rennie: It's described as a competitive threat. At the end of the day, the way the industry is evolving, there is plenty of room for ETFs, just as there is for active management. But there’s no doubt that ETFs have led to fee compression, which has been to the benefit of underlying clients. So that ultimately must be seen as a good thing for the end-investor. But ETFs can be very useful building blocks - perhaps in gaining developed markets exposure, where maybe you just want to provide beta exposure to, for example, the S&P 500, the FTSE All-Share, the Euro Stoxxs 50, whatever it happens to be. And then perhaps there are other areas like emerging markets, like parts of the credit world, like private markets, like multi-asset itself where having active management solutions baked into those offerings makes an awful lot more sense. A lot of the portfolio construction now evolves around ETFs, providing very cheap beta exposure and then some of the more sophisticated asset management solutions being in the hands of active managers. For example, I talked about emerging markets. Very specifically you're seeing China becoming a much bigger part of indices globally. I think it's fair to say that, in a highly complex market such as China, having an active manager investing your money in China makes an awful lot of sense where there are still enormous pitfalls that you can run into if you don't do your in-depth research on the companies you're investing in. An ETF will attract the good and the bad. So ETFs will form part of portfolio allocation, but they sit well alongside active management and I think the two are joined at the hip and will remain so, going forward.
Richard: Rennie you've touched on this already but, going back 30 years, an area that was new and was nascent, all but growing when we started in the profession was ESG. Today it is all-pervasive and is important to all asset managers. So how does it fit into the relationships that we have already spoken about?
Rennie: It's interesting because ESG has been a phenomenal sort of growth area of the asset management industry and the savings industry in general. I think over the last 12 or 18 months, those who were sceptical about this purely being a ‘fad’ and a ‘bubble’ have probably now had this completely disproven. One of the very few benefits of the Covid-19 pandemic that we've all had to endure is it really has cemented ESG front and centre as part of, not only just part of, but integral to, investment solutions. I think there was a view historically that you gave up return in order to ‘do good’ with your investments. That has been categorically proven to be not true, and we are seeing any number of ESG portfolios outperforming underlying indices.
There's still a lot of maturing to occur within ESG. There are a lot of mixed definitions, and ESG means different things to different people and I think we're going to have to see that standardised. But if you look at a number of asset managers now, and you look at a number of wealth managers, ESG has almost become a sine qua non i.e. if you cannot show that your investment process is very much ESG-driven then you don't get on fund platforms, you won't be selected for mandates in the institutional space. And retail investors really care. There's a demographic thing going on here as well. As millennials mature, inherit portfolios, and get more wealthy as they get older, they care very significantly about how their money is invested and what it's trying to achieve. Impact investing becomes a lot more important, for example. So ESG is not a fad. It's very much here to stay.
At Aberdeen Standard Investments, it has been integral to our investment processes for any number of years. We've probably not been as good at articulating how important it is to what we do as we could be, and I know we're working very hard on that. To coin a phrase, we should be “preaching what we practice” because we definitely do practice it in depth, in terms of how we build portfolios, so it’s very important indeed.
I think the regulators can do us a favour in really focusing in on ESG taxonomy and giving a clearer definition to what being an ESG investor actually entails and means, because those definitions are still very fragmented. But this is here to stay, it is additive to returns and, as I said, is already in a number of areas becoming a sine qua non, and that will only grow.
Richard: Presumably that is irrespective of geography? The direction of travel is the same everywhere, albeit at perhaps different speeds?
Rennie: Yes it is different speeds. I think it will be irrespective of geography, but different geographies are getting there at a different pace. Within Europe, most countries are now very much ESG-oriented and have ESG integrated into their asset management and therefore wealth management and savings products. In particular, in the Nordics, in France, in the Benelux area and very much increasingly in the UK. So Europe is, I think, ahead of the US and Asia. It's growing in the US and it's starting to grow in Asia. In terms of the relationships I have with global banks, those relationships are in the US, they're in Europe, they're in the Asian time zone. Two years ago, in Asia nobody cared - that's definitively not the case now. I say Asia - that's very sweeping. I think in Australia and Japan there was much more enthusiasm for ESG. But that is now very much being articulated in some of the other very big savings markets like Hong Kong and Singapore and others. So, yes, different paces of growth and interest but the direction of travel is very, very clear.
Richard: Unfortunately on that note Rennie I think we have run out of time. I do share your initial thoughts at the start that we are part of a better-regulated, more professional industry and profession than when we first emerged into it. And probably, touching on your points on ESG, more in tune with the desires of our customers and the desires of the broader savings market.
I appreciate your time and candour. We've ranged across quite a lot today Rennie. We've ranged over more years than we probably care to remember, over a changing savings landscape, over banks and strategic partnerships and importantly over that ESG thread that runs through all of what we do. It's been a fascinating 40 minutes and I really appreciate your time to do it and I look forward to speaking again. But in the meantime, thank you.
Rennie: Thank you Richard. We probably haven't got another 30 years of our careers, sadly, but I still think we're to reach our prime!
Richard: Agreed, thanks Rennie.
Rennie: Thank you very much.