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Wealth Manager: Arbuthnot's investment boss on taking a bit-player to the big leagues

Wealth Manager: Arbuthnot's investment boss on taking a bit-player to the big leagues

Since his arrival at the private bank in 2005, StJohn Gardner, Arbuthnot Latham’s head of investment management, has helped drive the company’s assets under management (AUM) up by 500%.

Over the course of just eight years, Gardner has established a range of new services, introduced a collective investment arm, launched an absolute return portfolio and, more recently, helped set up the bank’s first overseas office in Dubai.

‘When I joined, I was given an opportunity by the then-CEO, John Reed, to start on a blank sheet of paper and create a brand new investment service. At the time, the team was investing predominantly in stocks and bonds: it needed to be broadened to a wider range of mandates and incorporate more open-ended funds.’

Gardner, along with David Kidd who also joined the bank in 2005 and now serves as chief investment officer, first established a client risk-profiling process.

He says Arbuthnot Latham was the first company in the UK to use what was then an independent research company, Ibbotson Associates, for quantitative client risk profiling.

This was followed by the introduction of a new charging structure, a switch to rebating all trail commissions to clients and the elimination of transaction fees.

‘I was extremely keen on eliminating any conflicts of interest. I had seen too many poor industry practices, particularly in terms of fee charging between clients and banks,’ says Gardner.

Fees currently stand at 1.25% per annum on the first £1 million, 1% on the next £500,000 and 0.75% on all assets over £1.5 million. For portfolios introduced by intermediaries, fees are flat at 1% to facilitate adviser charging.

‘As a London Stock Exchange member, we can also deal directly with the market, eliminating third party brokerage on smaller trades,’ he says, adding this helps keep fees down.

When he joined Arbuthnot Latham in 2005, the private client portfolios were predominantly invested in equities. Believing they were too equity-oriented, he built in greater diversity, using some alternative asset classes, including property, commodities and hedge funds, as well as exchange traded funds and index-trackers, and open-ended funds.

The private bank now manages 50 mandates, offers a range of six risk-graded portfolios across three currencies, three absolute return  and two income funds, as well a ‘best ideas’ portfolio and a fund of AIM-listed stocks.

 

It also offers tailored portfolios and custody along with execution-only services.

Since revamping the bank’s overall client proposition, its AUM has grown from £90 million to £475 million with Gardner noting that Arbuthnot weathered the 2008 financial crisis ‘incredibly well’ with net new assets rising by 22% that year.

The following year, assets grew by 30% with the bank adding £41 million in discretionary AUM to reach £179 million in 2009.

‘In the early years, our structure was our biggest selling point. Clients were sceptical of the industry, and our structure was a breath of fresh air,’ he says, adding: ‘2008 was our hour of glory. Our bank became recognised by clients as a very cautious one, facing none of the issues the other banks were. We were a safe pair of hands.’

In 2009, in response to low interest rates and a large number of bank customers looking for returns, he looked to provide low risk investment portfolios, and in due course launched an absolute return fund.

Tony Lanning joined Gardner on the project, with the fund aiming to beat cash and inflation, while protecting capital over rolling 12-month periods. Eventually, Lanning left in 2007 to set up the Gartmore MultiManager Absolute Return fund, using the same concept.

The new products and services did not stop there. In 2010, senior portfolio manager Mats Arthursson joined the firm and worked with Gardner to create a euro-denominated low cost managed portfolio service and cater for customers resident in Europe who were seeking euro-based exposure.

‘We had a small existing demand, and hoped to attract an international one, and those businesses are beginning to grow nicely,’ he explains.

Between 2011 and 2013, Gardner also established global investment services in dollar and sterling for the private bank’s new Dubai office. It launched an AIM stock portfolio service, revamped the higher income and ‘best ideas’ portfolios and launched a service to track Apcims members.

‘I have always been adamant we wouldn’t be sellers of our own products, which is something quite rare in private banks. We are closer to discretionary portfolios in that sense,’ Gardner explains.

Intriguingly, he says client demands in the investment management business have not changed since he first joined the industry in 1999.

 

‘UK investors’ demands haven’t evolved, but the more dynamic investment businesses stretched the boundaries. It is mainly driven by investment managers’ desire to expand, and does not directly come from client demand.’

The bank, which has an annual income of £4.4 million, of which 100% is recurring, had ‘little to do’ in respect to the retail distribution review (RDR), Gardner says.

‘We just needed to ensure our staff met the qualification requirements, with some gap fill. The RDR actually really benefited us.’

Unrelated to RDR, he adds, the board of directors committed a ‘substantial’ sum of money to improve efficiency, with the bank recently implementing the Tercero back office system, which includes a wealth-specific integrated customer relationship management system and straight-through processing.

‘This means our fund managers can input a trade directly on clients portfolio screens, with the trade settled immediately,’ he explains.

Looking to the future, the investment chief is relatively confident in his outlook but says his biggest concern is a low return environment, so he is starting to look closely at total expense ratios and how to lower them.

‘But the further we move away from 2008, the more shockwaves are reducing. We are returning back to a fundamentals market, while the market was very politically sound bite-driven four years ago.’

The next stop for Gardner? The creation of new services for clients requiring sharia-compliant services and ethical constraints on their portfolios.

‘These are run on a bespoke basis but as we grow, we’ll create specific models,’ he says.

Gardner first entered the financial world in 1987, soon after completing his A-levels. While he dreamt of an ‘outdoorsy’ job, he ended up in the City, on the advice of his father.

‘A temp agency found me a job at Lloyds, and while I thought I was joining Lloyds bank, I instead joined Lloyd’s of London, the specialist insurance market,’ he recalls.

‘I went to one of Lloyd’s of London’s agencies, Merrett Syndicates and, as an account executive, advised 100 clients on strategic financial planning and administered insurance-based portfolios. I actually really enjoyed it.’

But it was a stormy time for the insurance industry, and within a few years, only two of the Lloyd’s agencies had survived. At its peak, the group had 30,000 members, but figures have since been slashed to a 10th of that, Gardner says.

 

During this period of contraction, he eventually left for another Lloyd’s agency, Murray Lawrence, which he joined as director. At the time, Gardner was thought to be the youngest director of a Lloyd’s company. ‘I don’t know if that was true, but that is what people said.’

At Murray Lawrence, he selected and managed insurance portfolios totalling £100 million for 200 high net worth (HNW) individuals, corporate clients and Masthead Plc, an investment trust, which yielded £600,000 fees before commission.

As the industry persistently contracted, Gardner agreed to depart on condition the agency sponsored his MBA.

‘Before leaving, I managed associated financial products such as stop-loss protection products, which were directed at personal finance. That part of the industry always interested me, but I realised I didn’t have all the skills to be a capable board member.’

He came out of Cranfield School of Management in 1997 and could ‘finally look after HNW clients’, having acquired ‘qualified knowledge’ in financial planning.

In 1998 Gardner joined Finsbury Asset Management, part of the Rea Brothers group, as a private banker, and assisted the chairman.

He managed some of the chairman’s client relationships, providing general financial guidance and putting together tailored financial planning using in-house, and external funds until the small private bank was sold to Close Brothers.

It was in 1999 that Gardner joined the private client division of Merrill Lynch Investment Managers.

‘I joined the managed fund service team as head of the UK pooled team, and allocated client money across Merrill Lynch funds – now BlackRock - in an asset allocation style model. This was my first HNW client servicing, full time investment role,’ he says.

He helped manage money for 800 clients with £270 million in AUM, and directly managed £95 million for 260 clients.

‘But after realising that some clients were questioning the independence of investing solely into Merrill Lynch funds, I began investing into best-of-the-breed funds, in conjunction with director Lance Peltz,’ he says.

‘We had inherited a disorganised service investing in in-house funds, so we introduced models and re-profiled clients to increase commonality across those with similar objectives which improved our efficiency and profitability.’

As a result, 15% of the client base remained highly personalised, and Gardner started a multi-manager service for UK resident clients in 2002.

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