The Investment Research Partnership

Consultancy Case Study 3

Advising a UK SRO in respect of performance analysis.

Summary

Regulation of Independent Financial Advisors acting as Broker fund managers by UK regulator FIMBRA. In particular the regular reporting to clients with respect to the performance of the fund against alternative investments and benchmarks.

Client's Business

Self Regulating Organisation FIMBRA was required to tightened rules regulating third party investment funds own by Life Assurance companies but managed through 3^rd party agreements by the IFA who in most cases was also the advisor to the client. As part of a range of special rules (referred to as SP rules) brokers managing these funds were to be subject to a set of enhanced rules to ensure that investors were not disadvantaged by the broker with the returns achieved and charges made. These rules were also required to set down a basic competency level to be demanded of IFAs who, up until this time, had to have no additional abilities, skills or qualification requirements other than to be registered with the SRO.

Critical Client Issues

These new rules were designed to cover a number of aspects not covered under standard practice rules. These included:-

Disclosure of Conflict of Interest

Need to set clear investment objectives and strategy

Produce regular reports to the client

Produce comparable performance figures against peer group or benchmark

These key objectives were a new requirement in 1992 although common place today in private portfolios, trust portfolios and pension portfolios.

Our response to this proposal

A key problem for FIMBRA was that they had little understanding of how big the market was. This included not knowing how many life assurance companies were involved, the number of brokers acting as investment managers, how many clients and the total sum of money involved.

Grahame Goodyer took the lead role as part of the development team at Micropal who were charged with researching this market to ascertain three criteria;

Research the marketplace (size, value, number of IFAs involved, number of life assurance companies involved on shore and off shore),

work with FIMBRA in developing the rules,

develop a product that could meet these new requirements in a cost effective way for Life Assurance companies and the larger IFAs and

was there a market here for Micropal to sell database service products into

At this time, Micropal were the leading suppliers of data to the mutual fund industry and as such were able to carry out market research at a senior level within life Assurance groups and obtain the data needed as to how large the market was in terms of number of brokers, life assurance companies and most importantly, the number of investors/clients. The research also included a review on whether the companies intended continuing within the marketplace once new legislation was in force.

Grahame Goodyer was able, with this detailed market knowledge, to advise FIMBRA and in turn Life assurance companies of the requirements and how these could be accomplished in a useable form that did not unduly hamper the marketplace but at the same time safeguarded the investor.

The key aspects Grahame proposed was:-

a) Periodic statements. A report produced by the broker manager to the client which covered key aspects of the clients’ investment within a managed pooled collective investment fund.

b) Key criteria to be shown in the report including:-

Objective
Strategy
Benchmark
Peer group comparison
Comment of the performance of the fund
Comment on future suitability for the client

These criteria were written into the FIMBRA rule book under section SP2.2 sections F, G, H and J. When FIMBRA merged with LAUTRO, IMRO and SIB under the new industry regulator PIA, these rules were adopted in full in 1994 and continued in use until the creation of the FSA and a new consolidated rule book in 2000.

Client Results/Benefits

These rules were designed to monitor how well the broker managers were performing against peer group sector averages and other market indices. Grahame worked closely with the director of retail services at the time advising on both content of the reports and suitable wording of the rule book governing these reports. The process was completed within 5 months of the initial request for assistance.

Not only did this benefit FIMBRA and investment marketplace in general but Micropal were able to successfully and financially produce a new database of broker funds.

This database became accepted as the most comprehensive listing of Broker funds within the UK and was used to review and reward successful and distinguished investment brokers. It regularly featured in Planned Savings and Money Management performance tables as well as other financial publications.

Next Case Study

Return to Case Studies menu

Home