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.