Advisers lack clear information

Advisers are finding ESG research confusing, according to the 2024 Advisers Attitudes Report by financial services firm Aegon.

47% of the 200 advisers surveyed said finding research “confusing” was a key issue for them when selecting ESG investments. A further 30% reported a lack of information was an issue in their selection process.

Despite adviser difficulties, the report found that almost 73% of firms have enhanced their ESG proposition to meet client demand. Almost a quarter (23%) said they’d increased the number of ESG options in their company-wide investment proposition. 12% said they have taken the significant step to include ESG as standard within all recommended portfolios.

This increased focus may come as a surprise to many given as investors’ appetite for ESG has been knocked in recent years. According to the Financial Times, clients have withdrawn a net $40 billion from ESG equity funds so far this year – the first year that flows have trended negative. But, according to Aegon’s report, the majority of advisers had seen little change in demand for the investments. In fact, 16% reported a net increase in client requests for these products in the past 12 months.

An evolving regulatory landscape

Aegon cautioned that if this demand is to be fully realised, more support would be needed from fund providers and industry bodies in terms of education, fund specific information and reporting for the benefit of both advisers and their clients. The firm remained optimistic that things would improve for advisors, however.

“We would expect future reports to show an improvement in the quality and clarity of research and fund-related communications following the introduction of Sustainable Disclosure Requirements [sic]. This should make it easier for consumers and advisers to navigate the ESG landscape,” the report read.

In April, the UK Financial Conduct Authority announced that it would to extend its Sustainability Disclosure Requirements (SDR) and investment labels regime to all forms of portfolio management services. The rules state that if a portfolio manager wants to make sustainability claims, then it must apply to the FCA for one of four labels. These labels relate to the portfolio’s sustainability objective. To use a label at least 70% of the overall portfolio arrangement would need to be invested in accordance with this sustainability objective.

At Industrial Thought, we believe ESG investing should be more transparent. We believe wealth managers should have easier access to accurate and explainable data which is why we invested £100,000 in specialist ESG ratings and analytics platform Integrum ESG.

A solution with Integrum ESG

Integrum ESG has been developed by investment professionals, for investment professionals, to solve the problems associated with opaque methodologies. Its platform offers a ‘glass-box’ approach to ratings, giving clear reasoning for its ESG scores and visibility into the underlying data. This then allows wealth managers to understand and explain a company’s ESG challenges and how it manages those challenges in the market.

Integrum’s platform blends human and artificial intelligence to capture, verify and display data for firms to analyse and assess. Its proprietary machine learning models capture and pull in a variety of data from company-disclosed sources. The captured data is then reviewed by its team of research analysts before being uploaded onto the Integrum ESG dashboard for its clients to see and assess.

If you’d like to learn more about Integrum ESG, get in touch. 

Industrial Thought Ltd has announced the appointment of Mike Baker as its Group Managing Director. Industrial Thought is the parent company of a group of businesses specialising in investment taxation, financial data, and related consultancy services, which include Financial Software Ltd (FSL), creators of CGiX, the UK’s market-leading capital gains calculator.

With around 30 years of experience in the wealth management and technology sector, Mike has spent the last 12 months consulting for Industrial Thought, supporting the leadership team with strategy development and positioning as its portfolio evolves. Before that, he was Managing Director for the progressive financial software company FinoComp.

Mike Baker commented: “It has been a pleasure working with Industrial Thought’s Chairman David Pirrie and his team over recent months. Now I look forward to helping the team execute the plans we have developed as we expand our capabilities and maximise our impact with the quality, breadth, and detail of our securities taxation and corporate event data and well-supported technology products.”

Industrial Thought Chairman David Pirrie added: “Mike’s input has been invaluable during our latest stage of growth. His excellent industry reputation has been built on a long track record of proven success, which has been borne out during his time with us. Undoubtedly, he will add significant value leading the opportunities we are pursuing with new products, services, and related markets within the wealth management sector.”

Industrial Thought is committed to bringing expertise and innovation together in a best-of-breed ecosystem. Its collaborative approach has led to several partnerships that are helping to drive the creation of integrated, innovative products and services for the wealth industry.

About Industrial Thought Ltd.

Founded in 2013, Industrial Thought is the parent company for a group of companies in the field of investment taxation, financial data, and related consultancy services. It aims to drive transformation by creating a complete suite of data, platform, and marketplace services to enhance capabilities and accelerate innovation.

Companies within Industrial Thought include:

• FSL (Financial Software Ltd.), a provider of specialist investment tax solutions and the creator of CGiX, the market-leading capital gains calculator.
• Raw Knowledge, which creates, compiles, and validates specialist financial information underpinning the group’s wealth management products and services, such as tax calculation.

Companies under the Industrial Thought group are supported by its proof-of-concept lab, Thought Train, focused on prototyping and assessing the viability of developments.

Earlier start

According to HSBC’s Affluent Investor Snapshot 2024, which looks into the investment portfolios, behaviours, and priorities of affluent individuals around the world, the younger generations are beginning their investment journey earlier than their older counterparts.

On average, those in Gen Z (ages 25 to 27) began investing at 23, while Millennials (ages 28 to 43) began investing at 27. This compares to 33 for Baby Boomers (ages 60 to 69) and 31 for Gen X (ages 44 to 59).

In addition to investing earlier, Gen Z and Millennials are also dedicating a higher proportion of their income towards investing. Both Gen Z and Millennials invest 27% of their monthly net income, on average. This compares to 24% for Gen X and 22% for Baby Boomers.

Different investments

Affluent investors of all generations, on average, own four asset classes – with asset class diversification increasing with their level of investable assets. However, HSBC’s survey demonstrates a growing awareness and higher intent to own alternative investments among Gen Z and Millennials.

The younger generations exhibit a strong interest in adding private market funds and hedge funds to their portfolios over the next three years. 25% to 27% of Millennials reported high future interest in hedge funds, private credit funds and private equity funds, compared to just 19% to 20% of Baby Boomers.

Lavanya Chari, global head of investments and wealth solutions at HSBC Global Private Banking and Wealth, commented: “The fact that young investors are looking more closely at alternative assets serves as another tailwind for the asset class, as product and platform innovations improve accessibility for a wider range of investors, especially to private markets.”

On average, cash holdings represent 32% of an affluent investor’s portfolio. Of those who plan to change their asset allocation, however, over half (54%) intend to invest their current cash holdings – though this intent varies from generation to generation. Gen Z and Millennials plan to invest 61% and 56% of their cash, respectively, compared to just 49% of Baby Boomers.

Different goals

Financial goals also vary from generation to generation.

Gen Z were the only generation not to list ‘having enough insurance coverage’ within their top five financial goals, instead prioritising investing in properties and securing multiple income streams. In contrast, Baby Boomers’ prioritised planning for retirement and securing money for vacation or leisure.

All generations put gaining wealth for financial security as their first or second financial goals, with planning for retirement also making each generation’s list.

The Affluent Investor Snapshot captures insights from over 11,000 affluent investors, aged 25 to 69, with assets ranging from $100,000 to $2 million (around £75,570 to £1.5 million). The study was conducted by Intuit Research.

Bridging the collaboration gap

Global investment in fintech stood at $51.8 billion in the first half of 2024. This was the lowest level recorded since the first half of 2020, according to accountancy firm KPMG.  

Against a challenging market backdrop, promising start-ups are struggling to find a route to market and financial institutions have an even greater need to ensure they are making informed and smart decisions. 

Finbridge Global helps tackle this issue. Its global platform allows financial institutions to quickly source, assess and compare an extensive array of fintech solutions but goes beyond a simple directory.  

Finbridge’s proprietary intelligent assessment engine offers a streamlined approach to accessing a fintech’s capacity to effectively and efficiently deliver results, providing a dependable, uniform and impartial method for evaluation as well as real-time feedback and in-depth analysis.  

Assessments can be tailored to company preferences and project requirements, resulting in a substantial reduction in research and procurement timelines for financial institutions and dramatically expediating their Request for Information (RFI) processes. This means firms can partner with the right fintech and help to propel them forward.  

When financial institutions are empowered to quickly identify and nurture growth opportunities, the whole financial services industry benefits. It was this shared belief in the power of collaboration to fast-track the future of financial services that forms the basis of Industrial Thought’s partnership with Finbridge.   

Fast-tracking the financial services industry

Industrial Thought aims to drive industry transformation by creating a complete suite of data, platform, and marketplace services that enhance capabilities and accelerate innovation. It believes that by helping start-ups get the funding and support they need, complacency is quashed, and the financial services industry is pushed to be the best it can be. 

“One of these start-ups could be the next FNZ or Avaloq,” said David Pirrie, chair of Industrial Thought, “Finbridge’s platform helps get promising fintechs off the ground and when start-ups are nurtured, the next generation of products and services are created and we as an industry become more dynamic.” 

The oldest company within the Industrial Thought group is investment tax specialists Financial Software Ltd (FSL). Founded in 1994, FSL simplifies the process of investment tax management, analysis and reporting. Its flagship product, CGiX, is trusted by leading members of the UK’s wealth and investment community to accurately calculate their taxable wealth. Though today CGiX stands out as a market leader, the early days for FSL weren’t easy.  

“Securing funding and our first partners was no easy feat, despite the strength of our solution. Had we had a platform like Finbridge’s things could have been much easier for us,” explained Pirrie.  

Barbara Gottardi, CEO and Founder of Finbridge Global, added: “As David has explained, our industry can reap major benefits from technology innovators. Yet, while most of these organisations are keen to engage fintechs, they struggle to get the information they need to establish trust. Our platform simplifies the process, promotes transparency, and ultimately facilitates progress.”

The global picture

Global investment in fintech stood at $51.8 billion (around £39.2 billion) in the first half of 2024, according to the figures from KPMG. This is down 18% from $62.3 billion in the previous six month period and the lowest level of fintech investment recorded by KPMG since the first half of 2020.

Karim Haji, global head of financial services at KPMG International, explained that the high cost of capital and geopolitical uncertainty had put a “significant damper” on investment.

“Investors are acting cautiously, not only when it comes to large transactions, particularly on the [mergers and acquisitions] front, given concerns about valuations and the profitability of potential targets, investors are focused on improving the companies they already own rather than buying new,” Haji said.

All regions saw fintech investment slide against the previous six months. In the Americas, total investment dipped 5% to $36.8 billion from $38.6 billion, while in the Asia Pacific region it fell 22% to $3.6 billion from $4.6 billion. Europe, Middle East and Africa (EMEA) saw the largest drop half-on-half. Total investment in the EMEA region slid 40% to $11.4 billion from $19.1 billion as a high interest rate environment kept investment activity subdued.

Fintech investment in the UK

The UK accounted for the largest share of fintech investment in the EMEA region, representing 64% of its total investment. The UK’s strong performance was driven by several significant deals including the $4 billion buyout of financial software company IRIS Software Group by Leonard Green, the $999 million VC raise by SMB marketplace platform Abound, and a $621 million raise by neobank Monzo.

Total fintech investment in the UK hit $7.3 billion in the first half of 2024, up from $2.5 billion in the same period in 2023. UK dealmaking volumes struggled, however.

198 UK mergers and acquisitions, private equity and venture capital fintech deals were completed in the first half of 2024, down from 284 in the first half of 2023. Despite the fall in the total number of deals, KPMG noted that the UK remains the centre of European fintech investment with British fintechs attracting more funding than their counterparts in the rest of EMEA combined.

“The UK fintech market continues to be dominated by the payments sector and the growing adoption and use of the services of challenger banks. Previously struggling to gain the trust of customers, these challenger banks now lead the way in banking innovation and agility, and we expect their growth to continue,” commented Hannah Dobson, Partner & Co-Lead of Fintech at KPMG UK.

“With the new UK government in situ and the potential long awaited drop in interest rates having finally arrived, there are hopes that fintech investment will start to show signs of recovery as we move into the latter part of the year and early 2025,” Dobson continued.

The global high-net-worth individual population rose by 5.1% in 2023, and their wealth grew by 4.7%, according to Capgemini’s 2024 World Wealth Report.

Population growth across different HNWI wealth bands was highest for the so-called ‘millionaires next door’, described having $1 million to $5 million in assets. Ultra-high-net-worth individuals (UHNWIs) were the most concentrated among the HNWI wealth bands, however.

Capgemini reported that this group held over 34% of the total HNWI wealth but represented just 1% of the total population. They were also found to be more engaged in their investment strategy than any other wealth bands.

It is perhaps unsurprising then that Capgemini found that UHNWIs prioritize value-added services, with 78% of them considering them essential to wealth management firm relationships.

UHNWIs were also found to be more changeable in their relationships with wealth management firms, however. According to Capgemini’s survey, 78% of UHWIs indicated they are likely to switch their primary wealth management firm in 2024.

In addition, the number of UHNWI wealth management relationships is on the up. The number of UHNWI wealth management relationships increased from three in 2020 to seven in 2023, and that means the competition is growing for UHNWI’s wallets.

So how should wealth management firms seek to retain this highly lucrative wealth band?

Capgemini suggests that personalization is a key marketplace differentiator for wealth management firms that want to attract new clients and retain existing investors. This is because, through personalization, firms can ensure “engagement, trust, and loyalty”.

“Firms that can cultivate stronger client relationships will further solidify their loyalty. Heightened loyalty increases customer lifetime value because loyal clients are likelier to entrust additional assets to the firm and recommend its services to others,” the research firm stated.

And wealth management firms’ relationship managers appear to agree. 65% of relationship managers surveyed by Capgemini said they find having individual profiles that include client preferences, pain points and behavioural tendences “critical” to enable personalized, sound advice.

And yet only 13% of wealth firms said they sent customized communication, according to Capgemini’s survey, with 73% of firm choosing instead to distribute generic communication monthly.

In addition, only 8% of wealth management firms updated client profiles weekly. Instead, 52% conducted monthly or quarterly updates, and 40% update profiles annually or less frequently. As a result, firms find it challenging to keep pace with clients’ evolving demands and fail to meet clients’ desire for personalization.

The evolution of artificial intelligence over the last decade has meant that personalization in wealth management no longer must be a time-consuming or laborious process.

AI can analyse vast amounts of client data quickly, identify trends and make predictions in a timeframe that would be impossible for humans. This can then provide deeper insights into clients’ behaviours and preferences, allowing for wealth managers to provide bespoke investment strategies quicker and easier.

A global survey of 1,491 executives across 16 countries conducted by The Harris Poll for Google Cloud found that most executives aren’t measuring their environmental, sustainability and governance (ESG) metrics.

Only 36% of respondents said their organizations have measurement tools in place to quantify their sustainability efforts, despite 65% agreeing they want to advance these efforts.

Without accurate measurement, however, it’s hard to track progress.

In the face of this problem, more and more businesses are turning to artificial intelligence to improve their ESG reporting. MSCI, S&P Global, and LSEG are already successfully using AI to crawl ESG reports and extract insights.

How would AI work?

AI can sift through large amounts of data and identify trends, risks and opportunities quickly and efficiently. By using AI in their processes, firms are able to streamline their work and review huge quantities of data in a fraction of the time it would take a human analyst.

Using technology such as machine learning and natural language processing to analyse lots of data from a variety of sources, AI can identify patterns and spot any potential problems. Through this, AI could then provide insights into things such as working conditions, diversity metrics, and health and safety concerns.

Alternatively, AI could analyse data from audits, certifications, and reports to pinpoint potential issues in their operations and those of their suppliers. This would allow firms to more easily take action and report on their supply chain, for example.

How would AI help?

The World Economic Forum argues that when corporations can see the entire picture and understand all their ESG metrics properly, only then will they be able produce goals that provide meaningful change.

Not only that but research by IBM suggests that companies with more mature sustainability data capabilities outperform their peers in many key areas.  IBM found that these outperformers have a 5% better rate of return on shareholder investment, a 10% higher annual rate of revenue growth and are 43% more likely to outperform peers on profitability.

After the pandemic flipped the world of interaction on its head, most investors got used to some level of digitisation in their relationship with their advisor. But now, more and more investors deciding to cut out the human and embrace the digital entirely.  

According to Polaris Market Research, the robo-advisory market is predicted to grow from $7.4 billion in 2023 to a whopping $72.0 billion by 2032. Deloitte predict similarly impressive growth, estimating that $16.0 trillion in assets under management will be managed with the support of robo-advisory services by the year 2025 up from between $2.2 to $3.7 trillion in 2020.  

Robo-advisors tend to handle investment management, offering services such as automated portfolio allocation and rebalancing. They use algorithms and inputs from an investor, such as risk tolerance or goals, to offer advice or invest. Their typically low fees and minimal account requirements often appeal to those just starting in their investment journey, but they can also appeal to investors who want a modern, more hands-off approach. 

Generational divides

According to Investopedia’s Affluent Millennial Investing Survey, 20% of affluent millennials use robo-advisors, compared to only 9% of investors aged 47 to 54. Their use is most prevalent among 18- to 22-year-olds, however, with 31% of this age group reporting the use of robo-advisors.  

Theresa Carey, brokerage expert at Investopedia, explained that robo-advisors are catching on with younger investors because of their relationship to technology. 

“This is a generation that grew up with mobile phones in hand, so making those services app-based created a natural draw,” Carey noted.  

Despite this, Investopedia found the majority of the affluent millennials it surveyed still reported a preference for human financial advisors.  

Perceived value-add

A study conducted by Vanguard looking into human and robo-advice also found a preference for the human. It surveyed more than 1,500 US investors who reported having a human adviser, a digital adviser, or both and discovered that investors had a better perception of human advisory in terms of value-add. 

Vanguard found that those working with a human adviser estimated their annual average return was 15%. These same investors believed they would have only seen a 10% return if they had been unadvised. Meanwhile, those with digital-only advice reported perceived average portfolio returns of 24%. Without their digital advice, they expected an annual return of 21%.  

Though in terms of absolute performance, this suggests that robo-advised investors believe they achieve higher returns than human-advised investors, Vanguard noted that digital-advised investors tended to self-report being more aggressive in their investments, which could account for this expected outperformance.  

In addition, Vanguard’s survey found that robo-advised investors believe they can achieve a large portion of their performance on their own, further suggesting the better perceived value of a human advisor.  

The survey found that those with a human advisor, on average, achieved 59% of their financial goals and believed they would have only achieved 43% of their goals had they not had their advisor. Robo-advised investors, meanwhile, achieved 50% of their financial goals and believed they could have achieved 45% on their own.  

The median financial goal for both sets of clients was $1 million. 

Combining human and robo-advice

Vanguard found that clients preferred human delivery for many advice services. The survey found that this preference was particularly strong around the emotional and financial success components of advice, rather than the portfolio dimension. Services that investors preferred to digital delivery related to functional tasks and portfolio management, such as diversifying investments and management of taxation. 

For Vanguard, this suggests advisors should leverage technology to scale their business and focus on strengthening their uniquely human value proposition.

A recent study by SEI looking into the state of productivity within the UK wealth management sector found that wealth managers spend, on average, spend just 43% of their time on value-add tasks such as time in front of clients, investing, or business development.

“Outsourcing can help reduce costs, manual process errors, complexities, and time spent recruiting and training. When done well, outsourcing can significantly impact productivity over time – creating room for growth,” said Jim London, head of SEI’s UK Private Banking and Wealth Management business.

Consumer sentiment has been on the up since we’ve entered the second half of the year.

According to GfK’s long-running consumer confidence index, the UK’s overall consumer confidence score in June was up ten points from the previous year and up three points from the month prior.

Though the score remained in negative territory at minus 14, it was the third month that the headline consumer confidence score in the UK had increased. Joe Staton, client strategy director at GfK, explained that the score was bolstered by UK consumers’ improved expectations for the economy.

But how do financial advisers feel? And what do they think their clients are really feeling?

According to the latest Schroders Pulse Survey, advisers are also feeling sunnier about the economy. The study, conducted between 25 April and 8 May, found that 28% advisers are expecting equity market returns to be higher than historical averages over the next five years.

This is the highest level in the past five years of the annual survey and is well above the proportion of advisers (14%) that think equity market returns will be lower than historical averages.

Growth expectations for the next five years are also positive. 69% of advisers are predicting higher global growth over the next five years, with just 5% predicting growth to trend lower.

Despite the positivity, most advisers still expect a good deal of disruption over the next five years. Just over half of advisers (57%) expect higher disruption related to technological advances, while 73% expect considerable disruption due to geopolitics.

The expectation of geopolitics-related disruption has been on a clear upward trajectory in the Schroders survey since Russia’s invasion of Ukraine and has been exacerbated in recent months by the ongoing conflict in Gaza. In addition, of course, there are elections in 64 countries this year, including the recent UK election and the upcoming US election. These elections will naturally shape the future of geopolitics to varying degrees.

When asked by Schroders what advisers think their clients were most concerned about, capital loss, inflation, generating sufficient income or rising interest rates, there was one clear answer. According to advisers, clients remain most concerned about the prospect of losing capital.

47% of advisers ranked this as their clients’ number one concern, down from a peak of 63% in November 2022. Schroders suggested this downward trend may be a result in calming market volatility and the recent improvement in market sentiment, particularly around the expectations of a ‘soft landing’ for the global economy following periods of stagnant growth.

Inflation ranked was the second biggest concern, with 26% of advisers reporting it as their clients’ top concern.

Rising interest rates were of least concern, meanwhile, with only 10% of advisers ranking it in first place for clients. Schroders suggested that as most adviser’s clients tend to be older and wealthier, many won’t be impacted should interest rates increase mortgage rates.

The general election is just around the corner. But what are the UK’s two largest parties saying about the future of tech policy? We looked through the manifestoes of Labour and the Conservatives to see what they’ve promised.  

The Conservatives on tech

In their manifesto, released on 11 June, the Conservatives pledged to increase public spending on research and development (R&D) to £22 billion and maintain R&D tax reliefs.  

They plan to continue investing over £1.5 billion in large-scale computer clusters, with the hope that it will allow the UK to take advantage of the full potential of AI and research into its “safe and responsible” use.  

The party also promises to double digital and AI expertise in the civil service and accelerate the modernisation of the UK’s armed forced by investing in technology through the Defence Innovation Agency. For the NHS, the Conservatives plan to invest £3.4 billion in new technology, including an NHS App which would act as a single front door for NHS services and the use of AI. Beyond this, the party also promise to replace outdated computers and digitise NHS processes through a Federated Data Platform. 

These plans continue the party’s ambition to maintain the UK’s status as a “science and innovation superpower” and leading market for starting and growing a FinTech firm. To ensure this trajectory continues, the Conservatives have also promised in their manifesto to build on the policies set out in the Edinburgh and Mansion House Reforms which aim to drive growth and competitiveness in UK businesses.  

Labour on tech

Labour promised in their manifesto that they will create the conditions to support “innovation and growth” in the financial services sector through supporting a “pro-innovation” regulatory framework and technology such as Open Banking and Open Finance. 

As part of their plans for innovation in the wider technology sector, Labour have said they want to create a new Regulatory Innovation Office to help regulators update regulation, speed up approval timelines and co-ordinate issues that span existing boundaries. 

The party have also expressed a will to ensure that their industrial strategy supports the development of the AI sector, with a commitment to remove planning barriers to new datacentres. They hope that by supporting technologies such as AI they will be able to transform the speed and accuracy of diagnostic services within the NHS. They also plan to create a National Data Library through the use of AI to bring together existing research programmes to help deliver other data-driven public services. 

Labour also promises to scrap short funding cycles for ‘key’ R&D institutions in favour of ten-year budgets. They hope this will lead to “meaningful” partnerships within the industry.