Case Study Steadyhand Investment Funds. A Fresh Approach to Wealth Management in Canada

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1 Case Study Steadyhand Investment Funds A Fresh Approach to Wealth Management in Canada

2 2 Nonconforming, brutally honest and unusually simple When you walk into Steadyhand s offices in Vancouver, you don t feel like you re in an up-market asset management firm. The simplicity is striking - it s largely open plan, employees are dressed casually, everyone speaks on a first name basis and there is no back room full of IT servers. You notice straightaway that this is an institution that is trying to be different, trying to stand out from the rest. The asset management landscape in Canada is dominated by big institutions. When you re competing against the behemoths, you have to be different explains Tom Bradley, former CEO of Phillips, Hager & North and co-founder of Steadyhand, as we drink coffee (prepared by him!) in his office. We try to keep things as simple as possible and our business practices emanate from how we want to be dealt with as consumers and investors ourselves. Bradley along with co-founder Neil Jensen set up Steadyhand in 2007 because they believed there was a gap in the Canadian market for a different kind of money management firm. The aim of the firm is to be nonconforming, brutally honest and unusually simple. This case study examines the Steadyhand business model in the context of the Canadian market and looks at successes to date. Asset Management in Canada ready for change? Compared to most other countries, the Canadian asset management industry passed through the global financial crisis with relatively little pain. Total assets under management dipped in 2008 but have since resumed climbing and now sit above pre-crisis levels. Nonetheless, asset managers in Canada are facing an increasing number of challenges in the form of new regulations, cost pressures, more demanding customers and continued economic uncertainty. While these challenges need to be addressed by existing firms in the market they also provide opportunities to new entrants or innovative incumbents.

3 3 The three planks of Steadyhand s business model Steadyhand s views on the asset management marketplace in Canada are clear. It believes the investment industry is out of shape. Portfolios are over-diversified, managers are obsessed with tracking indices, fees are bloated, focus is on the short term and poor reporting is the norm. 1 As a result, Steadyhand believes it can differentiate itself in the market through a three-pronged approach based on a low & simple fee structure, unconstrained investment managers and high conviction investing. Low and simple fee structure One of the main areas where the asset management industry in Canada appears ready for change is fees. In fact, Canada was the only one of 24 countries rated to receive an F rating for fees and expenses in Morningstar s 2013 Global Fund Investor Experience Report 2. While there are certain factors that lead to fees being somewhat higher in Canada than other countries tax rates, unbundled fees, use of advisors and associated fees, etc. it is clear that there is room for fees to decrease. In fact, according to Morningstar, average fees in Canada were 2.4%, and all things considered, Canadian fund investors pay up to 0.50% more in annual fund expenses per year than do investors in fund markets of a similar size elsewhere in the world 3. Steadyhand identified the excessive fees in the Canadian market and launched a simple fee structure as one of the main ways to differentiate itself in the marketplace. Steadyhand charges customers a fixed pre-determined fee for each of the funds it operates. Steadyhand calls this One Simple Fee. The fee includes all services Steadyhand provides as manager and all of the fund s operating expenses. Table 1: Steadyhand s simple fee structure One Simple Fee Steadyhand fund Fee Savings fund 0.65% Income fund 1.04% Founders fund 1.34% Equity fund 1.42% Global equity fund 1.78% Small-cap equity fund 1.78% As well as offering a simple fee structure, Steadyhand also launched an innovative program whereby clients would receive a reduction in fees if either they have invested funds with Steadyhand beyond certain thresholds or if they are long-standing Steadyhand customers (see tables below). This encourages clients to invest with Steadyhand for the long-term and aligns its interests with that of its investors by encouraging long-term investment decisions with its clients funds. Table 2: Fee Reduction Program assets invested Asset invested Fee reduction Up to $100,000 0% $100,000 - $250,000 20% $250,000 - $500,000 30% Greater than $500,000 40% Table 3: Fee Reduction Program length of tenure Tenure with Steadyhand Additional reduction to your total fee 0-5 yesrs 0% 5-10 years 7% 10+ years 14% Sources 1 See Steadyhand corporate brochure Global Fund Investor Experience Report, Morningstar Fund Research, 15 May Idem

4 4 Unconstrained managers How Temenos is helping Steadyhand The majority of investment funds apply a constraint to the respective fund manager usually on a certain theme, often by geography (e.g. Global vs. Canadian vs. US, etc.), sector (e.g. technology vs. financials vs. diversified) or asset class (e.g. equity vs. fixed income). The constraints dictate the criteria as to where a fund manager can and cannot invest. While these constraints are meant to help reduce risk, Steadyhand strives to allow its fund managers to operate with as few constraints as possible. It feels that any constraints placed on its managers force them to behave in a certain way, such as forcing their portfolios to approximate that of a particular index. For example a manager for a Canadian equity fund may end up mimicking the S&P/TSX Composite Index. Steadyhand tries to remove the shackles from its managers as much as possible and allows them to pursue value wherever they can find it without being constrained by an index or benchmark. When Steadyhand was preparing to open for business, it knew that choosing the correct IT partners would be key to enabling its success. Its guiding principle when selecting its IT providers was the same one that underpins so much of its activity; one of specialization. It wanted to use specialist providers who could provide modern, integrated systems that would be hosted by them. In addition, Steadyhand wanted systems that would enable it to offer its customers a superior level of customer service. These criteria ultimately led Steadyhand to choose Temenos WealthManager product in December In early 2007, Steadyhand began the implementation of WealthManager in preparation for the company s launch. As a start-up firm there was no data to migrate from legacy systems but there were still a number of milestones that needed to be achieved before the firm could begin operations, for example, the platform needed to be integrated with the back office system and statements had to be customized and configured to Steadyhand s requirements. The implementation went very smoothly and was completed in time to allow the company to begin operations as planned in April High conviction investing Many mutual funds today contain several hundred stocks and some even contain thousands. Steadyhand believes that by focusing on a limited number of stocks (usually 20-30), its managers will know each of the businesses in which they invest in much greater detail and have a much higher level of confidence in investing in these firms. The greater the number of different stocks held in fund, the more likely the fund will simply be replicating an index, which will make superior investment performance far less likely. Steadyhand likes to quote legendary investor Warren Buffett to illustrate this point, who once said wide diversification is only required when investors do not understand what they are doing. The other way Steadyhand encourages its fund managers to show conviction is to minimise portfolio turnover and hold investments for the long-term. Steadyhand believes there are significant costs borne by investors of frequent trading and turnover within a portfolio. Co-founder Tom Bradley says we believe that frequent trading is costly for investors in several ways it demonstrates a lack of confidence from the fund manager, it shows indecisiveness and is ignorant of tax implications. We encourage our managers to show conviction in their investment decisions and to hold positions in companies for several years. Steadyhand has coined the term undexing. This is to reflect the firm s goal of beating the market over the long run and its strong belief that the best way of doing so is for its managers to build their funds as they best see fit using their highest conviction ideas rather than investing according to a benchmark or index. The ability to offer a superior customer experience, the completeness of the solution and the flexibility to run a hosted model led to our choosing Temenos WealthManager. Neil Jensen, COO Steadyhand

5 5 Seeing the complete picture - The Single Customer View One of the challenges facing many incumbent asset managers is that their systems and processes are built around products, as opposed to customers, making customer centricity nearly impossible to achieve. Many of their systems have been built over decades in response to tactical and strategic needs, such as new product launches. As such, the information is siloed and not organised in a way that allows advisors or management to gain a quick and complete view of an entire customer relationship. The same customer information is commonly duplicated across systems and there is no link between client relationships (for example between members of the same family). As a consequence, unless systems are replaced, becoming more responsive to customers is likely to be a slow and expensive endeavour. In contrast, Steadyhand s primary objective was to choose a wealth management platform that allowed it to provide the best possible customer service and having a single customer view from the outset was essential. The data model within the WealthManager product made having a single customer view achievable. The data model is very flexible and easily allows Steadyhand to track the relationship between the client and all his or her various holdings. The data model is also able to handle the complicated structure of many of the relationships that Steadyhand has. For example many clients have their own accounts, accounts for their spouses, accounts for their children as well as holding accounts. With WealthManager, Steadyhand has a single integrated view of all these holdings, the relationships between them and all the people involved. This is especially important for Steadyhand as they never meet many of their clients in person and the relationship is 100% carried out over the phone. When a client calls in to speak to an advisor, the advisor must be able to instantly have a single view of the entire client relationship and all their investments. We re not confined by legacy issues, dated technology platforms, archaic policies and procedures. Neil Jensen, COO Steadyhand The holy grail for any financial services firm is to have an all-encompassing view of their clients in a single place that both client advisors can access and management can use for internal reporting and business monitoring. Having that single, all-encompassing view that WealthManager provides is vital to our business. Tom Bradley, CEO Steadyhand

6 6 Sticking to your knitting outsourcing non-core activities Keeping it simple an integrated, scalable wealth management solution In the early stages of creating the business plan for Steadyhand, it was decided to outsource many of the functions required of an asset management firm. This would allow the company to focus on its core strength of providing investment advice to its customers. Furthermore, it allowed Steadyhand to rely on the expertise and scale of its chosen suppliers. This meant that when Steadyhand started operations in 2007 it outsourced essentially all of its IT operations 4. To this day, this allows Steadyhand to operate without a single dedicated IT employee despite the impressive growth the company has achieved since inception. The biggest challenge for Steadyhand is the need to be very diligent in monitoring its IT providers, and in particular, the various interactions between the various systems. That WealthManager was available on a Software-as-a-Service (SaaS) basis was a key criterion that led to the selection of the product as Steadyhand s wealth management platform. As a start-up firm with no dedicated IT employees, Steadyhand wanted to keep its IT infrastructure as simple as possible and limit the number of vendor relationships that it needed to maintain. As a result, when it came to choosing the wealth management platform that its client advisors would use on a daily basis, Steadyhand was looking for an integrated solution that included everything from financial data, client data, CRM capabilities, client portal, as well as statements and reporting. As well as the goal of keeping it simple and minimising the amount of time spent managing vendors, Steadyhand wanted to limit the number of software applications its employees needed to learn and understand. Scalability was also key having invested time in learning the system, it was critical that the chosen system could scale to meet the firm s ambitious growth plans. Steadyhand chose Temenos WealthManager product as it believed it was the only solution that offered the breadth of functionality in a single product while, as discussed above, also being available on a hosted basis and allowing the company to offer a superior level of service to its customers. We literally don t own a single server we rely on the expertise of our partners and as a result our internal operations are beautifully simple. Neil Jensen, COO Steadyhand Steadyhand pays for the WealthManager product on a monthly basis and the fee includes the software license, maintenance and software upgrades, the costs of running the software, monitoring batch imports and all of the processes that happen on a nightly basis when WealthManager is updated with data from the back-office system 5. This payment structure was especially desirable for a start-up such as Steadyhand as it avoided the significant upfront investment required in hardware and software to build its IT infrastructure, which typically accounts for two-thirds of the start-up costs for a new financial institution 6. 2 minutes Time it takes Steadyhand to set up a new client on WealthManager Zero The number of IT staff employed by Steadyhand We have big plans for growth and have no worries whatsoever about the scalability of WealthManager. Neil Jensen, COO Steadyhand Sources 4 As well as outsourcing its wealth management platform to Temenos, Steadyhand also outsources its custodial and settlement services and fund accounting and valuation services to RBC-IS; its investment managers use various trade order management systems to manage the funds; its recording keeping platform is provided by CGI PrimeBase, and it interacts with other brokers and dealers via FundSERV. 5 The monthly fee includes future software upgrades but does not include the services implementation cost of such upgrades. 6 Review of barriers to entry, expansion and exit in retail banking, Office of Fair Trading, November

7 7 Steadyhand s successful journey so far Given that one of Steadyhand s founding principles is to encourage investors to take a long-term view, it may seem premature to evaluate its own performance so early in its existence. However, now that it has been over 6 years since it opened for business, its early successes can indeed start to be measured. At the end of 2012, Steadyhand had assets under management of over CAD 245 million and more than 1,500 clients. The company is clearly gaining momentum as the 2012 net inflows were up 350% compared to 2011 and total assets under management grew 53%. These figures are especially impressive given that the global financial crisis impacted the firm s initial growth targets. Despite the crisis, Steadyhand has grown assets in each year of its existence. 53% Growth in Assets Under Management in 2012 A - rated Steadyhand s Stewardship rating given by Morningstar Looking beyond the client and assets figures, and perhaps more importantly, given the values on which the company was founded, Steadyhand has also succeeded in offering clients more transparent and fair investment products. This is illustrated by Steadyhand being one of only 2 firms to receive an A Stewardship Grade from Morningstar in Steadyhand also received the same grade in The purpose of this grade is to help investors evaluate whether fund companies are aligning their interests with those of their clients. It is clear, that with Temenos support, Steadyhand is succeeding in offering a fresh approach to asset management in Canada. Author Chris McGinnis is Head of Strategic Planning at Temenos, based in the UK, and can be contacted at cmcginnis@temenos.com

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