In a new series, Funds Europe in conjunction with Investec Asset Management looks at the challenges affecting fund distributors around the world. Mike Estment, chief executive of NFB Financial Services Group, discusses how regulation is both a cost and an opportunity.
What lessons have you learned in the last five years?
Patience, humility and understanding the needs of the investor. It’s important to realise that nothing stays the same. You have to deal with change.
However, quality equities, while being volatile, pay dividends and reward patience. That means providing lower-risk profile clients with cautious and balanced portfolios. In a protracted period, growth-asset risk pays dividends handsomely.
Also, businesses are about the people they employ. So we have spent a lot of time inside our business growing talent.
It’s as important for a wealth manager to interview clients as it is for clients to interview and choose a like-minded adviser. It’s about understanding that clients can be patient and appreciate the process. It’s easy to take ownership of results, but it’s as easy or easier to blame others when equity and risk and volatility manifest.
Finally, you should commit personal funds to the investments that your firm markets. It’s one of the greatest sources of comfort to clients, introducers and trustees if the principals in the firm are investing alongside you.
What are the biggest challenges facing your business?
Regulatory pressure is big. The UK and Australia are leading indicators to South Africa in terms of where regulation is headed. The Retail Distribution Review (RDR) or Treating Customers Fairly (TCF) regulation that others have been through is imminent in South Africa and that’s a big challenge.
When regulators regulate, it’s normally done as a response to the industry not self-regulating. Then they often over-regulate, so the pendulum swings almost too far and they moderate to a reasonable balance point.
One of the advantages we have in South Africa is that the UK has already experienced the RDR and it’s probably had some unintended consequences. Our regulator will have the luxury of being forewarned. But regulatory pressure is certainly something which is a challenge facing our industry, as it is worldwide.
It is also important to note that regulation here is forcing a high level of competition in the high-net-worth market.
The middle market has become less advised because of TCF and RDR. There’s a concentration of effort into the high-net-worth market, which is typical of our firm, and that’s creating commoditisation pressures and cost risks.
Technology has created an enormous amount of information sharing, which creates confusion and anxiousness with relatively inexperienced clients. This has to be dealt with, so a focus on communication and correspondence is in our strategy.
A further challenge is local bias. People tend to invest in their own country and their own market. South Africa is a limited market. Though it is a substantial African market it certainly isn’t a fair reflection of global alternatives and global diversity.
We have a history of exchange controls, which has supported an inward looking bias. We have to wrestle with that to try and get people to take a view on diversification.
Where do you see the greatest opportunities in future?
The regulatory environment will create consolidation. This will mean new opportunities for businesses like ours to scale up and to acquire or collaborate with groups of former competitors.
Technology is an opportunity as well, because if you use technology to offer “mass customised” and cost efficient solutions, you can enter a large and developing middle-worth market in South Africa.
South Africa is going through a massive retirement reform, which is changing the landscape in pension and retirement products. The Treasury and the Ministry of Finance are seeing to it that a broader range of vendors is created and that’s an enormous area of opportunity for all of us.
It’s probably going to be the reserve of the larger players, because of the risks of manipulation or poor advice. But if you’re a substantial private wealth management firm, then you will probably be able to apply for a licence.
The model will change into a sort of 401K or superannuation (Australian) model. Our retirement industry has evolved into defined contribution savings. The investor will rely on their savings to provide security and income in their retirement.
How do you see your business model changing as a result of new business pressures?
Our firm has been forward thinking. I have watched the regulatory changes that have happened in all sorts of different environments very carefully with my board. We’ve also paid attention to the developments on the advisory side and we’ve adapted our business to ensure we are ready to apply those systems effectively, and can set an example to others.
We are tooling up our technology, as a means of communication and delivering a quality, cost effective service. We want to go live online and make sure we select institutional product houses and make investment choices that can talk to our technology so it’s seamless and accurate.
How do you make a difference for your clients?
I’ve got a philosophical take on this. A wealth management business isn’t about a product, it’s about an experience. I try and emphasise that it’s like walking into a room where they sell nice Italian coffee: it just makes you want to order a cappuccino. One, you have to be comfortable; two, it needs to be appealing; and three, if it is, you’re probably going to tell other people about it.
Our aim is to make the mechanical job of money management something more than that, which will encourage clients to take ownership and responsibility for their portfolios, and to be knowledgeable and comfortable to ask questions.
Looking five years ahead how do you see the industry?
Massively consolidated, highly smart in terms of technology, very interactive. It’s going to be an industry where self-help and developing your own software and your own marketing strategy is a thing of the past.
We are engaging with outside expertise and have sought leadership in areas that are not our particular skills. I’ve got a saying, which I drum into our young employees, and that is that “experts are people who know what they don’t”. So stick to what you know, and employ and be prepared to pay others for skills you don’t have.
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