La Mondiale Europartner unveiled a new UK wealth management service in May. What are the key elements of this proposition?
The first part of it is around the desire to offer an offshore investment bond which is cross-border compliant. There seems to be a blind spot within the UK market, which is surprising given we are a very mobile nation.
There are English people all over the world, and yet the traditional offshore bond solutions offered in the UK tend to be UK-centric; so if you go abroad with them, they are not compliant.
That was the first challenge – to develop a product that could move to the main countries within Europe that English people move to. And we have done that by making it cross-border compliant between Spain, Portugal, France, Italy, Belgium and Luxembourg.
The second point is that, if you look at it in world terms, the overall savings market in France is roughly the same size as that in the UK.
However, there is a big difference between the two, in that the French life assurance investment market is much bigger, and [French investors] do most of their saving via one type of fund – which they call fonds en euros and in the UK we refer to as guaranteed capital funds. It is a secure way of saving – there are no penalties, no market value adjustments and [the funds] are completely transparent.
It is the way with-profits funds should have worked but never did. So we wanted to bring attention to that part of the market.
The third area is a Luxembourgish angle, which is that under Luxembourg life assurance law, you can create what is referred to as a dedicated fund.
So for ultra-high or high net worth people with more than €250,000 [$320,000] to invest, you can create an individual portfolio which is managed by a discretionary asset manager. It gives the asset manager a broad range of assets to invest in. One of our objectives is to educate the UK market on how these structures work, and why they are not highly personalised bonds.
Who is the service aimed at?
Within the cross-border sector there are two audiences – non-domiciled people within the UK and UK nationals living in France, Spain and Italy.
Those groups will make up probably 80% of the business we are going to write, with 20% coming from people wanting secure investment funds.
Are your clients likely to be working, or already retired?
To date, it has mainly been older people. However, one of the reasons we did the launch was that we have attracted a lot of interest from private banks.
Our appeal to them is in two areas. First, with the high net worth people they deal with in the UK, there is often a requirement to have a cross-border compliant product.
Second, the dedicated fund structure works particularly well with banks, and that is why they are interested in talking to a Luxembourg-based provider.
Why do dedicated funds appeal to private banks?
Under Luxembourg policyholder protection [rules], no provider in Luxembourg is permitted to hold client assets – the regulator says the money has to be placed into an approved custodian bank. So when the client passes their money across to us, we have to put the money into the custodian bank.
With a dedicated fund, we set up an account for an individual and there is a 40-page document covering the life assurance rules that govern how that pot of money needs to be managed by the asset manager.
The banks like these structures because they can act as the custodian, so they can charge for that; they can access the asset manager, and can charge for that; and they can act as the adviser, so they can charge for that as well.
They are in complete control of the process – they are managing money placed into a custodian account with them.
So the client outsources all investment decisions to the asset manager?
Yes, and it is absolutely crucial. One of the areas where there is a lot of misunderstanding is that the asset manager has quite wide powers when they are managing the portfolio. So they are allowed, for instance, to invest directly into equities and other types of assets.
Under UK rules, that would normally be classed as a highly personalised bond. But under the Luxembourg structure it is not. The reason it is not, is that we divorce the relationship between the asset manager and the client. Essentially, the provider becomes the client of the asset manager.
Therefore, it is our custodian account that they are managing in our name, and we never give away custody of the assets to the asset manager.
How much flexibility do asset managers have under this structure?
The Luxembourg life assurance rules classify people by their wealth and how much they contribute. There are four types of dedicated fund you can establish in Luxembourg: A, B, C and D.
The most interesting, in terms of flexibility, is type D. This is for someone who is investing more than €2.5m, or the currency equivalent. With that type of individual, the asset manager has a very free hand with regard to where they can invest the assets. Most hedge funds would be acceptable. You could have art in there – provided something can be valued, it can go into the fund.
Are there disadvantages to dedicated funds, versus a traditional offshore bond?
The disadvantage from an asset managers’ point of view is that they are not allowed to have custody of the assets, so [a traditional offshore bond] can be perceived as offering more control. But the price they pay for that higher control is that they are only allowed to invest in a restricted range of funds while it is classed as a highly-personalised bond.
La Mondiale’s UK wealth management service also offers access to the firm’s multi-asset guaranteed capital funds. How do these work?
Around €140bn a year is invested into what the French refer to as assurance vie – or life assurance – products. So that makes it well over ten times the size of the UK market, because the UK market is dominated by pensions. Of that amount, 80% goes into guaranteed capital funds.
The La Mondiale fund has [total assets of] just under €40bn and accepts contributions in three currencies – sterling, euro and dollar.
The fund is made up predominantly of bonds. The asset breakdown at the end of last year was 80.7% in bonds, 9.4% in equities, 7.8% in property, and 2.1% in cash.
They operate like very large deposit funds. At the start of the year an interim rate is declared.
So for 2012, the interim rate [of the La Mondiale euro guaranteed fund] is 3%. Each week, one-52nd of that 3% is added to the client’s policy and, once it is added, it cannot be taken away.
At the end of the year a final declaration is made, which historically has always been higher than the interim rate.
So the final declaration may be 4%, and in January or February of the following year you have that bonus added to your account. It is as simple as that.
They do not have any penalties, these funds – you can go in today and go out tomorrow – and they are immensely popular.
In 2008, after the stock market crash, the [La Mondiale euro] fund returned 4.7% to policyholders, in 2009 it returned 4.4%, in 2010 it returned 4.2%.
I remember doing seminars to UK expats, many of whom had lost a lot of money, and thinking: many of these people were not even made aware that in France people do not take risks with their money.
They could have been invested in this product and got what they wanted – which is 4% or 5% each year.
So it is very attractive for people wanting to keep their money on deposit without having to tie it up for a long period of time, over one or two years. They can move out whenever they like.
How are guaranteed capital funds typically used in portfolios?
On the continent, a high percentage – between 60% and 70%, of the amount invested – goes into the guaranteed fund.
Brits tend to be quite risky when they create portfolios. A typical portfolio may be 30% to 40% in a guaranteed capital fund, with the balance in a range of Ucits funds selected by the IFA.
Looking ahead, what are La Mondiale’s priorities?
The big priority for us is to work with some of the private banks. We have been working with a couple of big [banks] and we are keen to take that forward. Working with the private banks is a little bit like pushing an open door with us, because we only deal with private banks in Europe.
We would also like to put our toe in the water with regard to family offices, specifically around the guaranteed capital fund – it gives us an asset that they would like to hold. We have got no experience with them in the UK, but it is something we would like to experiment more with.
We would also very much like to focus on French nationals in London. We already do business with firms that specialise in dealing with French people living in London, and we want to develop that.
