The history of financial services has been littered with the launches of firms looking to offer something new, but Quilter Cheviot’s Manchester head David Rothburn believes the safer middle ground is now increasingly where clients want to be.
Following the retail distribution review (RDR) and during a time of regulatory change, having scale is no bad thing and Rothburn’s company, which is currently in the throes of integrating fellow private client firm Cheviot, looks well placed in this regard. It has a regional presence that spans the UK and combined assets of more than £12 billion. He expects the trend towards consolidation to continue, driven by regulation.
‘Regulatory costs are not going to get any cheaper, they are only going to increase,’ he said.
‘Therefore economies of scale are important for bigger businesses, as they can spread that more effectively and there has been margin pressure at the more competitive end. There is a squeeze in the middle so those that can invest and keep their systems up to date and have economies of scale will do well, all of the usual things that help businesses survive.’
He believes a desire for scale at a corporate level and the battered post-financial crisis psyche of some private clients is leading to a growing acceptance of a safer middle ground in terms of company size and approach.
‘I think there is another factor. You will see the trend for the businesses that are occupying what I call the central safe ground, which is where we are. The way we explain or sell a service is understandable to clients, but new entrants that want to grow can’t possibly occupy that ground,’ he said.
‘They have to be “boutiquey” to compete, so they have to sell something sexy and out there. But I believe the safe ground is where the majority of people want their money invested.’
It is for this reason that he finds it unsurprising that regulation is leading to less differentiation among the larger players in the industry, while investment managers are also hovering more closely around the mean performance-wise than perhaps they have done historically.
He does not necessarily view this as a negative, given that private client managers should not lose sight of their central goal: to grow client assets above inflation.
‘Either you are in a business operating in the safe ground and therefore the client expects you to be around the mean – although you have to be clear about what you are selling on the tin – or you sell yourself as something that is more maverick,’ he said.
‘For example, a benchmark plus plus plus where you take bigger bets where there is sex and violence. Obviously within our solutions for clients we are bespoke but the majority of clients will choose a safer option, influenced by their IFA because they are worried about litigation and the risks, the whole environment.’
In fact around 90% of the £475 million in assets that are managed out of Quilter Cheviot’s Manchester office is run on behalf of intermediaries, with a particular focus on bespoke. Following the merger with Cheviot, Rothburn hopes the addition of extra regional business development staff will enable the intermediary channel to represent even more of a growth area.
‘It has already brought extra regional sales people and therefore better geographical coverage of the North of England. It was a big territory for two people to cover, but is perfect for four people,’ he said.
‘We will have much better coverage of people on the ground, talking to IFAs about what we can offer and what it will probably bring is a greater number of events in the region, for example in Leeds and further into Yorkshire.’
Since Rothburn took over the Manchester office in 2002, assets have quadrupled and the investment team is now 12-strong along with four regional business development managers.
He acknowledges the world in which he operates today is very different to the one that pervaded in the early nineties, when he and five of his colleagues opted to set up the office for Quilter Goodison rather than joining Brewin Dolphin after its acquisition of Bell Lawrie White in 1993.
Rothburn gained a lot from his time at Bell Lawrie, not least recognising the growth potential associated with building relationships with intermediaries and the attractions of discretionary business: two factors that have since driven growth through Quilter’s business.
‘We were going through forced corporate change with Brewin Dolphin. The question was did we go for the Brewin deal or for Quilter? We looked at their systems and brand at the time. Interestingly, when I was at Bell Lawrie we were the sister company to Hill Samuel Financial Services. It was there that I started to recognise the power of relationships with financial advisers because they have the ability to walk across the door and say, “We have got a client for you”,’ he said.
While this was hampered by the fact that it was hard to facilitate fee-sharing at the time, Rothburn recalls capitalising on the opportunities after he had joined Quilter when this became easier to administer in the mid-nineties. Although he could also see the value of having a discretionary client bank over advisory, he recalls that once again he had to wait for events – in this case the development of technology – before it became possible.
‘I saw the opportunity but perhaps the technology was not there, so we carried on doing a lot of the normalised stuff, but we started to wake up to the fact that discretionary was a good place to be because you are not on the phone punting stocks to clients. It was the emergence of investment management effectively and all the disciplines. My industry changed around me and I was willing to change with it. Not everyone was willing to do that,’ he recalls.
Establishing a regional office is no easy feat but Rothburn explains that he and his five colleagues were helped by the fact that Quilter’s management was able to engage with the Brewin Dolphin/Bell Lawrie management at the time. Following negotiations, Quilter was able to take over Bell Lawrie’s former office premises and a deal was struck over the division of clients.
Today, the firm has stayed true to its pure investment management roots and can offer clients portfolios comprised of direct securities, funds or a blended approach. Intermediaries can access the firm’s model portfolio service with a minimum investment of £25,000 through to the bespoke offering for those with £200,000-plus in investable assets.
Rothburn is positive about Quilter Cheviot’s defined role as a specialist investment manager with the ability to work alongside external financial advisers who can provide a financial planning overlay.
Portfolios are run on a bespoke basis but investment managers leverage off the firm’s centralised research and asset allocation, which Rothburn views as a positive as managers are engaged in the process while also able to focus on the client relationship.
‘I think we have got the balance right. We have got our list that you have to stick with, but that provides protection if an investment manager from a regional office or a team in London wants to do his or her own thing,’ he said.
‘For example, they buy something and put it in a lot of portfolios and it goes wrong, that is where the reputational risk is and then you have compensation and all of these sorts of things. That is very damaging for a business and you lose the client and IFA relationships. All from making one mistake. You can never recover from that.
‘To me the most important part of the research process is the safety valve you get in avoiding
With the fledgling recovery in the US gaining momentum and markets up from last summer’s lows, Rothburn is finding clients are feeling more positive in review meetings and giving more money to the firm to manage, particularly as they may be worried about having too much in cash.
‘I am more positive in general because corporates seem to be doing well and worries seem to have receded. Some of the numbers coming out of the US seem to be better, but as we know, things can change quickly,’ he added.
The firm is currently bullish on Asian and emerging market equities, overweight UK, US and European equities, and underweight sovereign debt and corporate bonds. On property and hedge/absolute return funds they currently have a neutral stance.
Against this backdrop, Rothburn remains positive on equity income and expects that if markets continue to trend upwards, long-only equity funds will help to drive performance.
While money is run on a bespoke basis, the firm’s medium risk model portfolio – which is based on the same centralised research and asset allocation – has posted an annualised return of 6.5% since the strategy was launched in 2005. Over three years the strategy is up 29.8% versus a 25% rise by the IMA Mixed Investment 40-85% shares sector.
However, the office head is quick to stress that investment managers must never lose sight of the central goal: protecting and growing assets above inflation.
‘Our first principle here is keep it safe. We are a bit boring or may be a bit near benchmark, but I don’t apologise for that, so long as we are making our best efforts to beat the battle against inflation.
‘But always bear in mind that you can’t afford to drop the ball,’ he said. ‘That is the essence of what we are doing. It is a more humanised situation.’