There will be plenty of outlook articles to come, but what is clear is many are facing their toughest conditions in years and this situation looks set to continue as we move into 2024 and contend with a ‘higher for longer' rates regime.
Looking longer-term, this is also a pivotal time for financial services firms as they try to future proof their businesses in response to the regulatory and structural changes shaping our sector.
Cash question
What Square Mile's Mark Harries describes as "the million pound question" remains a big discussion point for advisers with their clients in the current environment: stick to cash or invest in the markets? Although he advocates a balanced response in a column for IW sister title Professional Adviser, Harries acknowledges that persuading clients to move from the safe haven of cash into higher risk assets may be challenging, especially considering the rates on offer. In particular, this could be a difficult shift for clients at the lower risk end of the spectrum who suffered an extremely difficult 2022.
According to global funds network Calastone, money market funds attracted the second highest inflows on record in August as investors bought into high interest rates and safe-haven status. In response, a number of providers have bolstered their money market offerings, while the Bank of England's Financial Policy Committee this month called on money market funds to increase liquidity levels to boost their resilience.
Bank of England calls on money market funds to bolster liquidity levels
Investors are still eagerly awaiting monthly inflation updates, but bond and equity markets are now painfully adjusting to the central bank narrative that rates are likely to be higher for longer, putting renewed pressure on all parts of the financial system. Recessionary fears have not gone away, while concerns about China's growth prospects will have global ramifications for the years ahead.
Investors are being warned they should not expect the levels of returns seen over the past decade, heightening scrutiny on charges at every level of the distribution chain. Although there are brighter spots, the mood is cautious as we head into the latter part of the year, amid warnings the full implications of this regime shift on consumers and corporates are still to play out.
Advisers continue to face challenges as cost-of-living pressures bite, including some clients reducing pension contributions or being increasingly reluctant to consider new products. However, there is an advice opportunity here too as this tough environment has prompted some people to seek advice for the first time, while clients need help navigating their retirement options following the announcement of a raft of changes in the Spring Budget.
Consumer Duty in practice
As well as trying to navigate a challenging investment landscape, firms are adjusting to a new regulatory regime as Consumer Duty beds in and the Financial Conduct Authority (FCA) focuses on reviewing progress.
There are a number of longer-term implications to work through across the financial services industry but the new regulations have already put significant pressure on individuals and firms, especially in the advisory space. One in ten advisers (11%) are already considering leaving the industry due to Consumer Duty as more than a third say regulations are harming their mental health, according to research from CoreData.
Speaking at Professional Adviser's PA360 North event, SimplyBiz head of business consultancy Karl Dines said that businesses and advisers have gone through "sweat and tears" to get Consumer Duty implementation right, so the next challenge is to follow this through and make it practical within their businesses.
Fund rationalisations
In the asset management space, regulatory pressures are likely to have prompted some groups to speed up rationalisations of their fund ranges and assess the viability of certain strategies in their present form.
These moves are likely to continue, especially for outdated legacy vehicles and considering the sheer number of products still on offer. Some fund groups are not as far down the line in terms of restructuring their ranges and distribution teams to adapt to changing demands, while rapid consolidation has created fresh challenges in ensuring consistent consumer outcomes across amalgamated businesses. Meanwhile, it will be interesting to see the impact on product design and new launches, which will now have to pass the Consumer Duty test.
Invesco to close global targeted returns strategy in push to simplify multi-asset range
A notable area of movement in recent months has been the multi-asset sector, which saw the high profile demise of two giants of the absolute return space: abrdn's original GARS and Invesco's challenger Global Targeted Returns fund. A triumph of marketing - especially as there were concerns at the time that some investors and advisers would struggle to explain how it worked - GARS soared to £26.8bn in May 2016, before demonstrating how quickly fortunes can change as it had fallen back to £857m just seven years later in June 2023.
Letting go can be difficult, especially of products which have been popular or historically very tied to a company's success or brand, but providers need to move with the times. Stephanie Butcher, senior managing director and co-head of investments at Invesco, made some interesting comments as she explained the team's decision to close its global targeted return strategy as part of a simplification of its multi-asset proposition. She talked about moving into a "new era of multi-asset", noting demand has shifted and innovation in other areas is "constantly evolving".
Focus on fees
The regulator has also been clear that fund fee structures are firmly on its radar as it expects groups to meet Consumer Duty requirements and Assessment of Value rules.
In a recent review, the FCA found fund managers have significantly improved their value assessments, but more work is needed on fund pricing and fees. Echoing past concerns, the FCA warned firms put "too much emphasis" on comparable market rates rather than conducting reviews and using "the full range of value assessment considerations".
In particular, it noted the assessment of internal economies of scale was often underdeveloped and the benefits not systematically shared with fund investors.
FCA: Managers 'undermine' value assessment process by basing fees off competitors
A blog by Deloitte analysing key findings from the FCA's review highlighted: "Firms need to have carried out a clear analysis of which funds generate economies of scale, which products/services benefit from reinvestment into the business, at what point a new product/service is expected to become self-supporting, and at what point the fees for funds generating economies of scale should be reduced."
Its authors noted that "one way of passing on economies of scale in a transparent way is using a tiered fee model, and we have recently seen more firms using this approach".
The world's largest asset manager BlackRock made a high profile move in this area last month with the announcement of tiered pricing for 41 of its UK retail funds. However, although commentators welcomed "asset managers looking to finally pass on some of the benefits of the vast economies of scale", the plans were criticised for being too complicated and having little immediate effect for investors. Pressure will be put on other groups to demonstrate cost savings are being passed on, but the benefits must be clear to investors.
Sustainable investing inflection point
Meanwhile, ESG and sustainable investing has reached another inflection point, as the sector awaits regulatory announcements which will play a key role in trying to restore confidence in this rapidly-evolving area.
Unfortunately, the rapid, unchecked growth of ESG and sustainable investing in recent years, a slow regulatory response, and subsequent backlash have created a confused landscape and plenty of negative headlines. Catch-all terms abound and attempts at nuance have been lost, in a part of the industry where they are surely needed more than ever to help investors know what they are buying.
EU review of SFDR 'welcomed' by industry despite potential 'frustration'
ESG integration - which the PRI defines as "the process of including ESG factors in investment analysis and decisions to better manage risks and improve returns" - has moved mainstream and the discussion now is about how effectively firms incorporate ESG considerations into their processes and respond to challenges.
However, there is still confusion about the differences between ESG integration, sustainable investing and impact investing, as well as the application of ESG scores & ratings and the information they actually provide.
‘Greenwashing' has become another blanket term with a plethora of meanings, which has been levelled at the whole industry, as well as individual groups or funds. Fears of being accused of greenwashing are rife and have now pushed the industry to play it safe, particularly around fund labelling and disclosure, even though many groups have confidence their propositions meet the required standards.
Getting the regulation right will be crucial to get the industry back on track, but regulators have an unenviable task. The FCA has already struggled to reconcile over 240 responses to its recent Sustainability Disclosure Requirements (SDR) consultation, pushing back its policy statement until later in Q4.
UK wealth managers turn to fixed income and passives for ESG strategies
Timing is an issue and how UK-based rules will fit with constantly changing European regulations. Just last month, the European Commission sent out a 44-page questionnaire for feedback on the current Sustainable Finance Disclosure Regulation (SFDR) and its interactions with other sustainable finance legislation. This doesn't close until 15 December and could lead to significant changes, which presumably the UK regulator will want to consider before releasing final rules.
Importantly, we are also still waiting for final rules for UK advisers on sustainability suitability requirements, and it is hoped the regulator is taking adviser/DFM views into careful consideration (and not just listening to vocal asset managers) as they will play a key role in communicating these changes to clients.
Changing of the guard
Finally, as well as market and regulatory regime change, the changing of the guard also extends to individuals, as many well-known fund managers and leaders have announced their retirement this year. This means opportunities are opening up for fresh talent to shape the industry of tomorrow but we are losing experience and expertise at a time when it is sorely needed.
The pace of change can seem overwhelming and firms will be jostling to position themselves on the right side of future trends. At this time of flux, it is worth remembering one constant which should have always been at the heart of the industry's development and has been highlighted again this year: acting to deliver good outcomes for customers.