Regulators around the world, such as the FCA in the UK and FINMA in Switzerland, are tightening oversight of areas such as wealth management. And that means clearer, more intelligible investment performance data is a must. We talk to Asset Risk Consultants about its work and "mission."

The UK’s Financial Conduct Authority is bringing in new “consumer duty” rules in 2023 that are designed to put more focus on how products are governed and explained to consumers. 

That requirement for more clarity and transparency means that wealth managers must raise their game over how their investment results are set out.

Turmoil in markets – as seen by falls in stocks this year and gyrations in UK government bonds (gilts) – is certainly turning up the heat on firms to show their returns in a clear way. That’s no surprise to Paul Kearney (pictured), managing director at Asset Risk Consultants, or ARC, who recently spoke to WealthBriefing. 

“Each month ARC receives performance data (net of all fees) on just under 400,000 underlying client portfolios from over 140 wealth managers. It is an enormously rich insight into the actual client experience,” Kearney said.

Kearney comes from the private banking side of the table, having most recently been private banking head at Kleinwort Hambros.

The need for end clients, and their advisors to receive unconflicted, clear and understandable data on how well firms perform is not a new requirement. The pitfalls of simply comparing performance against a market benchmark, or focusing on whether a portfolio is “top-quartile” or “best-in-class” or some other metric are well known. That said, comparisons of some kind are necessary.

“Any firm making a statement about their investment performance will necessarily be against their reference index or benchmark. Whilst it is important to know how a firm delivers against its benchmark the more interesting question is how did a firm compare against its peer?” he said. “I think that we all gain comfort from knowing that comparisons are being made on a like-for-like basis, or ‘apples-to-apples'.”

The ARC Indices compare performance data from all of the contributing firms taking account of the risk of the portfolios and comparing the net of fee outcomes received by investors.

Illuminating
"Merely comparing your performance against a benchmark, such as the FTSE100, may not be very illuminating. The portfolios may have different equity weighting and the FTSE is not a total return index, so the compounding effects of dividends are ignored," Kearney continued. 

This news service talked to Kearney about how it is often difficult, even impossible, to obtain data on what firms deliver for clients in all cases. He said the industry has a transparency problem, but argued that organisations such as ARC are pushing progress.

ARC takes data from portfolios that follow an unconstrained approach. This means that ARC can see what happens in different risk categories, he said. End users receive the data free of charge. ARC charges the investment firms a fee. 

“We can show them [firms] how they compare against their peers and we provide them with a market intelligence report’,” he said.
 

Other sources of data
ARC isn’t the only player in this field. In Switzerland, for example, Performance Watcher by IBO (Investment by Objectives), has been around for a few years. it gathers daily price and related data from banks and other financial organisations in return for giving these contributors information showing whether their portfolios are in line with, or drifting away from, stated objectives. (Information is given on condition of anonymity, to protect privacy.) IBO earns a living by licensing its software. (We interviewed IBO back in 2016.)

What such businesses do, in some ways, is provide users with an early warning that something might be going wrong. With the FCA and other regulators such as Switzerland’s FINMA cracking the whip over various firms, such as external asset managers, ensuring that they have good performance data, and seeing how it stacks up against risk, is no longer just a “nice to have” item. It’s non-negotiable. 

ARC’s Kearney said the rise in inflation has changed conversations on performance. Inflation is going to hit groups such as charities, he said, as they face the dilemma of being able to sustain the real value of donations while also protecting their portfolios.

Making new friends
Delivering performance figures is also important for firms in winning and keeping clients.

“The ARC Indices allow firms to provide robust and reliable peer-to-peer performance comparisons that are now widely accepted as the reference point for investment performance in the private client arena,” he said.

“We know that investors experience more ‘pain’ from a drop in the value of their portfolios than the pleasure they gain from an equivalent increase. This year we have seen Steady Growth portfolios (the most common risk profile) falling on average by over 12 per cent: more than half of investors will have seen falls of more than that,” Kearney continued. “This often leads investors to question things. Firstly, do they have the right strategy; are they happy with the level of risk they are taking? And, secondly, are they comfortable that the manager is performing reasonably in light of the current market conditions? The ARC Indices provide an easy reference point for the second question,” he said.  

There have been a number of regulatory reforms, such as the UK’s Retail Distribution Review of 2013, designed to weed out poorly-run, biased financial advisors. WealthBriefing asked Kearney about his view of the quality of information disclosure by firms.

“The last 10 years since the advent of RDR have seen a vast improvement in the quality of information across the industry. The amount of information disclosed is not an issue. The key question is how you interpret it,” he said.

Another challenge is that there has been a shift towards areas such as private markets (private equity, credit, venture capital, property, commodities, etc). This publication asked how ARC handles this area.

“The data on all investments within a client’s portfolio is provided to us by the investment manager or their custodian. Where a manager has a strategy that allocates to private assets they will need to have taken account of the pricing framework to ensure that they can effectively report performance to their clients,” Kearney said.

ARC acts for clients in 20 jurisdictions and the ARC Indices are available in five currencies: sterling, US dollar, euro, Swiss franc and Canadian dollar.