You don’t have to be a cynic to think the investment industry is riddled with bad practice. The industry ombudsman says it is. The Financial Services Consumer Panel recently warned that buyers of retail funds, including ISAs, pensions and investment products, were being misled by “incomplete disclosure and poor management of conflicts of interest”.
The panel went further. It warned of hidden costs up to three times larger than visible charges. These are proven to have “a significant impact on returns”. Performance statistics are opaque or misleading. And too often investment houses put their own profits before client interest. Panel chairwoman Sue Lewis says: “The problems our research has identified are long standing and need fixing urgently.”
So what would the ideal investment firm look like? Twelve years ago a group of seven investment professionals formed Seven Investment Management (7IM) to show the way forward. “We set it up for our own money as well,” says co-founder Justin Urquhart Stewart. “We can look our clients in the eye and tell them our money is still invested in 7IM.”
Costs are transparent. “I find it horrific that our industry has reporting charges, nominee charges, custody charges,” says Mr Urquhart Stewart. “I saw one had an ‘inactivity fee’. You got charged for doing nothing.” By contrast, 7IM charges a flat fee between 0.6 per cent and just over 1 per cent depending on the size of capital managed and client requirements. There are no other charges, not for moving funds in or out and no commissions for the firm to chase. This is precisely the model recommended by the Financial Services Authority (FSA).
The reports are clear and easy to understand. “The industry tends to think the more numbers they send clients the better,” says 7IM head of the asset management service David Carroll. “Some reports are 36 pages of data. For many customers, you might as well send them a page of Japanese.” 7IM reports are designed to be as clear as possible. A summary page details the performance of the client’s capital in clear English. Detailed information is then provided, always adhering to clarity. Again, this is in accordance with the FSA’s guidance for optimum reporting.
7IM charges a flat fee between 0.6 per cent and just over 1 per cent depending on the size of capital managed and client requirements
To help clients, 7IM will soon have its own “university”. This online resource features short videos and papers which explain concepts to clients. Some deal with the basics. Others handle more esoteric investment terms.
Where 7IM really distinguishes itself is in the investment strategy. The goal is to balance risk and opportunity. It is typical for the industry to define a “balanced portfolio” as 75 per cent in equities. In truth, different clients have different appetites for risk. Some want to go for growth and can handle a bit of market volatility. Others want to prioritise capital preservation. So 7IM offers four bands of strategy: cautious, balanced, moderately adventurous and adventurous. Each band has 25 per cent more equities as the appetite for gain and risk increase. The extent of usage of this allocation to equities will vary depending on market conditions.
The approach for all bands is one of wide diversification. “You want to be predictable; dull, even,” says Mr Urquhart Stewart. “Our asset allocation includes lots of asset types: equities, bonds, private equity, property, cash, currency and so on. If your table has four legs and one drops off, you’ll go wobbly. With 12 you are stable.”
In each asset class, 7IM invests in funds, rather than picking individual stocks directly. “Our fund managers prefer to focus on whether to invest in the UK or Japan. This is more important than whether you own BT or Vodafone,” he adds.
All four funds are hedged against currencies, still woefully underused in the industry.
The four-strategy-band approach means all investors, from the richest and newest, to smallest and most loyal, get the same treatment. “When we trade for one investor in that band we trade for all. There is no favouritism,” says Mr Carroll. Again, this is markedly different to the normal industry model which can neglect smaller investors.
The result? Since foundation in 2003, 7IM has consistently returned 6.5 per cent to 7 per cent after fees in the face of varying market conditions. “Ten years ago we had £300 million under management,” says Mr Carroll. “In 2009 we had £2.3 billion. Today we have £8 billion.” Staff now number more than 170.
“Our slogan of radical common sense resonates with investors,” says Mr Urquhart Stewart. The firm continues to innovate. A mobile app offers clients immediate access to their portfolio’s strategy and performance. The app won Moneyfacts’ 2014 Innovation Award.
It is a typical move by a firm still looking to show the industry how it can cast off bad practices, and give clients the products and service they deserve.
“It all comes down to trust,” says Mr Urquhart Stewart. “If people can see exactly what we are doing and they can see it works, we can build that trust.”