In this article we’ll review three areas where better client outcomes can be achieved, to help advisory firms demonstrate value to their clients...
The use of unique personal features for personal identification is not a new idea; this approach has been a key pillar of forensic science since the late 1800s, when French police officer Alphonse Bertillon applied the technique of anthropometry to law enforcement, creating an identification system based on physical measurements. The notion of that identification by means of ‘biometric verification’ could be made instantaneous by electronic gadgetry, however, seems far more futuristic...
With the unprecedented events of 2020 ongoing and the environment for acquiring new clients still challenging due to the COVID 19 restrictions, we’ve been working with some of our advisory firms to help them review the value they deliver to their clients during these difficult times.
For many years now advisory firms have focused on trying to drive down the basic platform charges levied by providers. As we all know, cheap doesn’t mean better, but there are ‘hidden’ savings which can be unlocked for clients if you’re working with a partner like Novia Financial.
In this article we’ll review three areas where better client outcomes can be achieved, to help advisory firms demonstrate value to their clients:
Shielded share classes
It’s well known that the FCA are constantly reviewing value for money for investors, to eliminate actively managed closet trackers and drive down fees in the investment management industry for consumers.
Therefore, many fund managers now offer different priced share classes of their funds in the retail space, but they do not offer access to all investors. To help advisory firms drive down their clients’ investment fees in their advisory models, Novia enable cheaper share classes to be loaded to the platform and shielded for that advisory firm’s clients to access, driving better value for clients and keeping the fund manager protected in the process.
In some instances this has created a reduction in annual fund management fees of between 6 to 30 bps on some investment funds, where an advisory firm has negotiated access to a cheaper share class for a specific fund.
Any kind of fee reduction can have a positive impact on a client’s portfolio returns over the longer term and enhance your client relationship, so we expect this trend to continue due to the pressure being exerted on the fund management groups.
Novia can facilitate this process, unlike many other platforms, allowing advisory firms to negotiate directly with their selected fund managers for discounted share classes. This also benefits advisory firms who utilise DFM services, as they too have access to these systems.
Fractional Trading for Exchange Traded Funds (ETFs)
For those of you who know the ETF market well this will be familiar already, but just to clarify: many ETF funds have substantial unit prices, some being more than £400 a unit. The problem this creates is when you come to buy or sell down units to fund charges or withdrawals, you are forced to sell down more than you need, or indeed hold additional cash that you don’t want in your client’s portfolio as you can’t invest in partial units, creating a cash drag on performance. This can have a substantial impact on client returns over the longer term.
Novia are one of just a very few platforms who offer ‘fractional trading’ to remove the above issues, so you can buy or sell down partial units.
We have calculated that this can save as much as 1100bps* in client fees over a ten-year cycle…and no that is not a typo! Or put it another way, that would be an additional return of £11,267 on a client’s £100,000 portfolio over a 10-year period.
This makes Novia the ‘go to’ platform for many DFMs and advisory firms who run their own models and invest using ETFs.
Tax treatment of Notional Distributions
Another area of value which can be easily overlooked by advisory firms is how platforms treat notional distributions from a capital gains tax perspective (CGT) for clients who invest via a General Investment Account (GIA).
The Novia Capital Gains tool takes into account notional distributions on accumulation units, where income is reinvested back into units instead of being paid out to the Investor (as with Income units). Up until 6 April 2017, a withholding tax of 20% was taken from assets which contained at least 60% of fixed interest securities. This means there has always been the risk of double taxation. To avoid double taxation, the notional distribution is treated as allowable expenditure for capital gains tax purposes, and therefore the cost must be adjusted. The tool achieves this by raising the acquisition cost of the asset by the same amount as the notional distribution, removing it from CGT.
Additionally, where an Investor purchases units between the ex-dividend date and the dividend payment date, they will not be entitled to any income which has accrued in the fund before the units are purchased. Instead they will receive an equalisation payment, which represents the extra cost that they paid for the units (from accrued income) and is treated as a return of capital for CGT purposes. The capital receipt should therefore be deducted from the cost of the units for capital gains tax purposes when calculating the charge on eventual disposal.
We have calculated that this can save your clients as much as 191bps or £955 in tax on a £50,000 investment in some scenarios.**
Speaking with advisory firms during lockdown, it’s become apparent that this isn’t always the case with other platforms, so the quality of the CGT tool can really help in driving better client outcomes and serves as a good reminder to clients on how you manage their wealth to minimise their tax liabilities.
If you would like to know more about any of the subjects covered above, contact your Novia Regional Sales Manager or Account Manager.
*Novia internal calculations for a £100,000 portfolio invested in 10 ETFs, assuming 8% growth pa and 16% volatility.
**Novia internal calculations for a £50,000 investment with notional distributions of £4,778 and assuming a 20% CGT liability.
The use of unique personal features for identification is not a new idea; this approach has been a key pillar of forensic science since the late 1800s, when French police officer Alphonse Bertillon applied the technique of anthropometry to law enforcement, creating an identification system based on physical measurements. The notion that identification by means of ‘biometric verification’ could be made instantaneous by electronic gadgetry, however, seems far more futuristic. Indeed, it’s the stuff of Hollywood movies, evoking for many of us memories of pre-millennial science fiction: voice activated controls on the bridge of Starship Enterprise, Robocop identifying foes using facial recognition or Marty McFly fingerprint scanning to open his front door.
The premise that our face, our voice or our fingerprint could be used as a unique key made compelling viewing, but science fiction is often a parable for the misuse of technology and the very gadgetry that intrigued and excited us also gave us reason to be afraid, calling to mind the use of personal identities by totalitarian regimes as a means of control, George Orwell’s book 1984 being an obvious example.
I’m still waiting for my light sabre, but the ideas that the science fiction put forward were a precursor for real world innovation and application. Reality caught up with fiction in 2013 when Apple released the iPhone 5S, and it put such technology right in our hands - literally. This global endorsement allowed many to start trying it and trusting it. Other manufacturers and industries were quick to follow suit and now, in 2020, the usage is widespread.
The financial services market, however, is a somewhat different beast, and was slower to engage. Tech providers have a target demographic and that demographic will have been selected based on whether the product or service has engagement anticipated. A bank or a pension company has such a broad demographic that it would be inconceivable to expect meaningful investment into a technology that would only suit 25% of customers.
Novia’s exploration of this space started last year and was not actually initiated as a reactive move in response to the pandemic. It’s no secret that we aspire to maximise straight through processing and leverage technology to do so. We’ve been regularly asked why we’ve never made a move to digital signature software but we knew it didn’t fit our business, our usage or our aspirations. Signatures were one of several ways for us to verify client instructions, so when we were going to ultimately replace them, it had to be with a true verification product that would satisfy the needs of the now as well as the future.
After researching the market and conducting appropriate due diligence, we signed with facial recognition firm Credas. Credas allowed us to trial this technology without significant infrastructural and developmental cost, meaning that a gradual uptake was commercially viable.
Facial recognition works by measuring highly personal facial dimensions such as spacing between eyes and distance between lips and chin and then assessing these with an algorithm. The algorithm considers other factors such as ageing, hairstyle changes, lighting and expression. With the technology to capture a facial fingerprint (so to speak), the software will compare it against the photograph in a legal document to verify that this face matches as well as pulling the personal details via OCR (Optical Character Recognition) and comparing against our records. We also have the means to analyse the legal document for forgery or tampering. Consequently we gained the ability to verify an identity which is incalculably more difficult to circumvent than a wet signature.
From a Compliance & Risk perspective, it has always been a supported trajectory. Fraud and the methods facilitating acts of fraud are constantly becoming more sophisticated and verification methods need to keep pace. Signatures, whilst universally accepted as a means to attest agreement or permission are becoming less and less trusted as a form of identification and our obligation to safeguard client assets must evolve. We aren’t saying that signatures are a dead process, but what we are acknowledging is that signing an agreement and moving your child’s inheritance via several proxies are in different leagues and require different approaches.
Movement to a more advanced verification method inevitably means the gathering of more personal data. Personal data and the potential loss or misuse of that personal data has received significant press coverage over the last few years, with GDPR regulation coming into effect, and with the emergence of stories about Facebook and Cambridge Analytica reportedly using mined data for nefarious purposes. The desire for protection from identity theft and fraud is high, with the trust in technology and the technology vendors needing some positivity. This is an area where Novia now accepts different risk exposures, as a consequence of gathering more personal data. The result is that we had to ensure that this additional risk was comprehensively covered. All data gathered for this technology is held behind 2048 bit RSA encryption and you would need to count the time it would take a computer to crack it in the trillions of years.
We’re excited by this technology and we are enthusiastic by what propositional doors it opens now and what future opportunities it can offer our adviser community. We believe it delivers the integral level of protection from fraud and we encourage our adviser community to engage with it for the mutual benefit of you and your clients.