It was after the death of Dalton Strategic Partnership (DSP) figurehead Andrew Dalton that co-founder Magnus Spence decided to embark on a crusade to reinstate industry values that he considered lost.
Last year Spence was also named chairman of the New City Initiative (NCI), a think-tank comprising private asset management companies, to help spearhead this drive.
He recalls: ‘In 2011, we introduced the NCI to Vince Cable, the business secretary. We told him we had just over 40 privately owned members, representing £270 billion in assets. He stepped back, and thought for a while then said: “It’s really interesting because no-one ever knew the City was anything more than a small number of shiny banks in very large buildings in Canary Wharf.”
‘I recognise that in 2011, people were angry – and rightfully so – but we wanted to make a distinction with the banks.’
Spence and Dalton had formerly worked together at Mercury Asset Management in the 1990s, where they managed absolute return products for clients. They then set about launching a new venture.
It did not happen for some time, however, and Spence went on to spend two years as Merrill Lynch’s head of ultra-high net worth team before taking the leap in 2002. That year, he helped launch Dalton Strategic Partnership (DSP), a fund and wealth management business.
‘We took one client with us [from Merrill Lynch] who came along with $100 million on day one, which was enough to create a new integrated investment management firm,’ he says.
DSP today manages $2 billion in assets (£1.2 billion), of which $300 million is managed by the firm’s wealth management business.
While the Dalton name is more recognised in the fund arena, Spence says the company’s $300 million wealth management business is also an important part of its proposition.
‘The business, which is integrated with institutional quality investment management teams and funds is a great model, despite being out of favour,’ he says.
‘In 99% of the cases, wealth management firms want a third party fund selection team, which will spend their whole time looking at US equity funds, but automatically end up invested in the Threadneedle or Findlay Park funds.’
He continues: ‘They [the fund selectors] do all the work, but you know where they will end up.’
However, looking back to when Dalton died, there were concerns his passing could have put the brakes on the wealth management business.
‘I recognise Andrew was really the driver of our wealth management business, and we lost some assets because of the relationships he had with clients – but it was completely understandable,’ Spence says. ‘We had lost our managing partner and the firm’s chief investment officer of the wealth management side.’
He admits the question of selling up was raised. But despite having received offers by outsiders to buyout the business, Spence insists that he always considered selling to be the wrong move.
‘For me, that means making money on the back of our clients. Is selling your clients into someone else’s world they know nothing about the right thing to do? Selling clients’ goodwill never crossed anyone’s mind.’
This period of uncertainty seems to have pushed Spence to re-examine his opinion of the industry.
‘I think private asset management companies are the best structure to manage wealth. If you look at very great partnerships of the likes of the Swiss private banks, the Pictets or Lombard Odiers, they have succeeded because they were able to take a long-term view, and at no point in time, have they ever said “let’s try and monetise the goodwill of our clients”,’ Spence adds.
Refocusing fund range
Dalton’s death also provided an opportunity to refocus DSP’s fund range.
This, Spence says, was an important move. ‘We felt it was necessary because our industry has too many average funds. Clients need to have a good choice, and we didn’t want to add to that long tail of rubbishy funds.’
In the process, DSP arranged its fund offering around five areas: a Japanese fund, run by DSP’s equity team in Tokyo headed by manager Akira Yoshimi, the Asian Opportunities fund which is managed by Citywire A-rated Henrietta Luk, a European fund managed by Leonard Charlton along with North America and global offerings.
Wearing his NCI chairman’s hat, Spence explains the work of the think-tank, and its campaigning against the use of ‘complex jargon’ and risk of ‘uncertain outcomes’ for clients.
‘The industry has tried over many years to inform the consumer but in reality, I suspect it has only served to confuse them a lot more.’
To overcome the problem, Spence is hoping to establish an NCI codes of practice, which would include a scoring system to represent all the different investment types. He speaks enthusiastically about 10 principles that would ‘fit on an A4 paper, with guidance notes’.
‘While there are more codes of practice than hot dinners, we want one that means investors can be comfortable that what they are getting is valuable,’ he says.
First, he points to transparency around dealing commissions. ‘It’s totally bonkers that fund managers incur dealing commission which allows them to buy research, and it doesn’t get reported. If it was reported, a client could wonder why he needs all that dealing commission when he’s a long-term investor.’
Yet, he says going too far in that direction (‘it is illogical that the size of your research budget should be determined by how much you turnover in your fund’) could be dangerous, and could run the risk of discriminating against smaller firms, which rely on external research.
‘If you can get those principles right, they can address so many of the very inherent conflicts of interest that exist in our industry, because everywhere you look there are conflicts of interest,’ he says.
Speaking as the managing partner of a boutique, Spence believes the LLP model is ‘less likely’ to have such a conflict, which he says is a reason DSP has maintained its structure.
As the NCI chairman, there are a number of issues he believes are important to draw the industry’s attention to. The most significant to date is regulation. While he recognises the need for regulation, he believes ‘too much of it is a hindrance’.
UK members of the NCI spend between 15% and 25% of their time tackling regulation, Spencer says. ‘I recognise that the public at large is not interested in us pleading, which is fine, but I do think the people who have a vested interest in the City need to pay attention. Wave after wave of regulation affects everybody and the smaller firms disproportionately.’
Elsewhere, he is continuing to fight against HM Revenue & Customs’ plans to increase the taxation of limited liability partnerships (LLP). Spence believes the legislation, as currently drafted, could have adverse effects on the wealth management industry.
‘LLPs are a good concept because it is all about putting your capital in your business and having flexible structures. Is it really worth putting at risk the structure of choice of small asset management firms to raise £1 billion? You’re slashing choice for consumers, performance and partners control,’ he says.
The effects have already been felt at the NCI. Half of its 30 UK members are structured as LLPs and ‘seven are thinking about it, or have already incorporated’.
Spence adds: ‘Fewer boutiques being set up is not good for either the consumer, because he ends up having less choice, or the small and medium enterprises that employ 53% of the people in the financial sector.’
On that note, he insists the pendulum has undeniably swung. ‘I think the mood has shifted significantly enough for us to come out and talk about these points, without having everyone else telling us to bugger off,’ he says.
‘It’s about time we saw a shift away from consolidation back towards fragmentation, primarily for the consumer to have a better outcome.’