Company Profiles
ARC Taps Growing Need For Clear Returns Data
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.