Cazenove Capital Management’s chief executive Andrew Ross could be described as a rare breed compared with some of his industry peers.
During discussions with even the most cool-headed of senior figures from the wealth management industry, one can normally detect an undertone of minor panic as the retail distribution review (RDR) deadline draws closer and challenges a number of business, distribution and charging models.
Ross, to the contrary, seems genuinely calm and optimistic in the face of regulatory change, which is being accompanied by the headwinds of stalling wealth creation and continued market uncertainty.
‘I am quite optimistic about our own business,’ he says. ‘Despite markets going nowhere in a volatile fashion, we have grown a lot and, on a relative basis, I think we are well positioned.
‘We have really good people and the team has been together for a long time. Our turnover is low, so most of these guys have worked together for a decade or more and we have good investment performance.’
Over the past two years, the firm’s private client investment approach has certainly yielded results, attracting about £1 billion gross in new business in both 2011 and 2010, although Ross acknowledges this year is likely to be down on the previous.
Overall, the wealth management business is managing around £11.6 billion in assets for private clients, charities and institutions. Approximately £5 billion of this is run on behalf of 80 families in a strategic investment adviser role, while another £5 billion is run out of London and regional offices in Oxford, Chester, Edinburgh and Jersey.
The firm’s discretionary fund management desk, which works with advisers who outsource investment management, also represents a cornerstone for future growth and has a further £1 billion under management. ‘There are quite a lot of trends that we think are positive for us, although other people might not think they are positive,’ Ross continues.
‘Clients are getting increasingly sophisticated and increasingly demanding. We are fine with that. That is what we do. They want unbiased, high quality advice. Well, we have been operating like that for over 10 years, so that suits us.
‘They want very high quality people and tailored solutions and do not want to be in a model or off the peg. That is exactly what we do. They want to deal with a firm with a good reputation, which I think is becoming more and more important, so we can tick all those boxes. Lots of our competition clearly can’t.’
In fact, Ross expects the firm to pick up business as life gets tougher for a number of its competitors, particularly generalists and smaller companies that can’t afford to spend more on the necessary systems to satisfy both clients and the regulator.
Key to RDR success
With the RDR arriving in less than four months, Ross says the business is ready for the regulation and braced for the opportunities it may present. He believes four factors will determine post-RDR success.
‘One is that you have got to have a good multi-manager team. Marcus [Brookes] and Robin [McDonald] are a really well known and well performing multi-manager team. The second thing is you need a fund range which is well priced and delivers.
‘Third, you need to be recognised in the retail world. I think the branding element here is twofold. It means not only must your IFA recognise the brand but as they increasingly start outsourcing their business, their underlying client has to trust and recognise the brand.
‘The IFA is no longer running a portfolio of different things that he can move around. He is going to have said, “I have put your portfolio with Cazenove”. It is his choice. He has to be confident that we are not going to let him or his underlying client down,’ Ross explains.
The fourth factor he expects to prove crucial after the RDR is to have what he describes as ‘a private client business that really understands how to do discretionary fund management’.
It is something he feels Cazenove is well positioned for, given the longevity of its investment team and the strengths associated with running a centralised investment process that allows for bespoke functionality. Likewise, he anticipates the firm, which offers both financial planning and investment management services, will retain its independent label. This could prove a competitive advantage as several competitors fall foul of the RDR rules.
Rate card unchanged
While the unintended consequences brought about by regulation create growth opportunities for the firm, the chief executive highlights regulatory costs as one of the greatest challenges facing the business.
‘The regulatory burden is huge. They [the regulators] have got more people to produce this stuff than we have got to read it. There appears to be no acknowledgement of how much is coming out at the same time. We have got a well staffed, talented, hard-working compliance team. How smaller firms cope I don’t know,’ he says.
Although regulatory costs have risen, Ross aims to keep Cazenove’s private client business’s rate card unchanged after the RDR. For clients of the discretionary fund management team with up to £1 million in assets, this equates to a fee of 1%, with a sliding scale thereafter.
While he acknowledges Cazenove’s margins are likely to come under pressure, Ross considers this an investment in the longer-term growth story but says it will prove crucial for the company to continue to grow its top line.
‘I don’t believe the pressure on fees is up. We do not see the RDR as an opportunity to put our fees up because I think over the coming years, you could find you moved in the wrong direction,’ he says.
During a time of intense change for the industry, marked by firms restructuring, consolidating and moving into new areas, one gets a sense that for Cazenove – a venerable City institution – the path ahead is likely to be more of the same, with its integrated model acting as the foundations for further growth.
Part of the reasoning behind the seemingly boring forecast is down to the fact the business underwent significant change more than 10 years ago after Ross joined from HSBC Asset Management, where he had led the European business.
At the time, he overhauled both the private client and funds businesses and sought to make sure both communicated with each other properly and worked in tandem. He brought together the firm’s financial planning and investment management teams, and opted to cull the number of funds and teams in the funds business.
‘Right from the outset we changed the business model here, so effectively the investment funds business became the brains trust of the private client business. That does not mean there isn’t some interpretation at the portfolio level. This was the absolute cornerstone to what we were doing.
‘As a private individual, I don’t want one guy in the private client department running my portfolio, because he is unlikely to be Warren Buffett. What I want is the greatest investment brains in the world being concentrated into my portfolio, be they working for us here, or us using third-party funds. That is the model we went about setting up.
‘The other thing that was completely clear to me and now is common currency but wasn’t then, is for a high net worth person you have to have your financial planning and tax bill process absolutely working together with your investment manager. Everyone is doing this now but we have done it for 10 years,’ he says.
The team takes a centralised investment approach, which is driven by input from the funds team, CIO Richard Jeffrey, technical strategist Robin Griffiths alongside private managers, and then tailored to individual client needs and objectives. It is an approach which has paid off with Cazenove’s Sterling PCI Balanced Asset index, submitted to Asset Risk Consultants, posting an 11.35% average return per annum, as at the end of March, over a 36-month period, with 0.48 beta relative to world equities. This compares with a rise of about 7% by ARC’s Balanced PCI median.
Although the macro backdrop is still uncertain, Ross says organic growth remains the key focus, alongside clients.
‘The big ethos for Cazenove in all its decades as a company is that the client is at the centre of what we do. We work on the old-fashioned notion that if we look after our clients well, the business will take care of itself. In today’s market that remains as important as ever.’
With a healthy cash pile in hand, he says the firm is open to acquisition opportunities, particularly in the wake of the successful Thornhill buy in Edinburgh in 2009, but it is cognisant of finding businesses or teams that fit culturally and buy into a centralised approach.