Making sure that investment recommendations do not just meet client requirements but also keep the regulator on side are both key requirements for financial advisers and planners, says compliance specialist Tony Catt.
Investment due diligence is a subject close to the heart of any investment adviser. IFAs are proud of the fact that they can consider and subsequently use any provider/product in the market, where they deem it appropriate. The big question is in the decision-making process to identify the products which will be most suitable to recommend for an individual client’s circumstances.
The FCA is keen to see that advisers’ decision-making process on this important matter is robust, complete and repeatable on a consistent basis. Normal proof of this would be documentary evidence.
The FCA wants the adviser’s research for each client to be undertaken and evidence retained in the client file. However, the production of sufficient detail is an ongoing problem. How much detail is needed? Should it be client friendly? Or simply held on file to satisfy a would-be regulator at some point? For many, this conundrum is settled by the simple need to appease the regulator; to have something on file that looks complete. For many advisers, this will be sufficient. For some advisers, there will be academic curiosity and the acquisition and maintenance of knowledge.
Research – how far do you go?
So that leads us to ask, just how much information is required? Investment information and research will be obtained on various levels:-
- Provider
- Product
- Range of funds.
- Underlying investments
When looking at funds, the following information is available.
- investment mandate
- content – asset allocation
- past performance
- management charges
So how much of this would be considered useful? The answer is that it is all useful, but there must be some limit to the depth of information which is researched, otherwise, you could spend all your time researching investments and not advising clients.
What about the detail?
Whilst many of us are information anoraks, we need to be careful how much information is shared with the client. The worst thing for an adviser is to see your client’s eyes glaze over with information overload during a meeting. Whether this reaction occurs or not will depend upon how interested the client is in the information they receive and also upon their investment experience. At one end of the scale will be the client who is expert and will share in the decision-making process. At the other end, the client simply wants to give you £1,000 and get back £1,100 without being too bothered about how it is achieved.
Every time we arrange an investment for a client, we seem to want to provide all the background information. Even for repeat investors. If we look at an analogy with the car industry, it would be for the car salesman to run through the workings of the combustion engine and an inventory showing where all the car parts are sourced. All we want is a car that runs well, looks quite nice and has a few fancy controls to make it more fun.
The FCA is keen that we gauge the level of information which is suitable to the individual client to enable them to be in an informed position to make their investment decision.
Independent research
It is impossible for any adviser to be aware of all the investment providers and all of their products that would be suitable for a client’s needs at any one time. So, various companies have set up portals to enable access to information to enable a choice to be made. In the consumer retail world, there are portals such as MoneySupermarket or GoCompare, among others. In the professional world we have Defacto, Synaptics, AdviserAsset, Iress, Assureweb, Trigold, O&M and Selectapension amongst others. Each of these aims to provide information about various providers/products so that they can be compared to other products within that market.
Theoretically, use of such research will enable the adviser to choose the most suitable product and approach for their client and their particular needs at that time. The system is reliant upon the data collected by the software provider being kept up to date with information from all the providers. This is fine in principle. The snag is that some providers are reticent to provide their information to portals, particularly in the mortgage and general insurance fields eg banks that deal with their own clients or companies such as Direct Line that makes the point that it is not on comparison sites as a positive thing. Platforms such as the SEI based platforms eg True Potential, Fusion do not provide information about assets under management or profitability, although they will confirm charging structures. So by definition, the search will not be entirely whole of market. Whilst, this is not perfect, it is the best that an adviser can be expected to do for their research.
Most advisers will complete the search criteria when they first use the system based on their system requirements. Then for each new search, they will only need to change the name, amount and type of investment and the funds to be used (which can be preset). Thus after the first search which takes quite a long time to set the criteria, further reports can be produced very quickly. This is good news for busy advisers.
Once advisers have selected the products for their Centralised Investment Proposition (CIP), they would rather have the research prove the choices that have been confirmed, rather than receive information that their CIP is no longer competitively priced. If this were to become the case, they would then be tempted to use subjective criteria, such as service received from the provider to justify their choice.
The results we want
The research portal systems that filter product features do an excellent research job, but they are fairly easy to manipulate to get certain results. There is anecdotal evidence of advisers who have asked whether the system can identify their favoured provider for new business. Due to the binary nature of these systems, the software will identify whether a product offers a certain feature or not. So if you want a certain result, simply put in a feature that you know is unique or a combination of particular features – hey presto, the system will identify your favoured provider/product.
So it is possible for an adviser to obtain the required results from the portals to confirm that their CIP continues to be most suitable to their clients. This would not be the intention of the FCA or indeed the portal providers, as they would expect the searches to offer genuine whole of market research. But in the real world, advisers simply do not have the time (or often, the inclination) to undertake a generic, unfiltered search for each client.
Problems in practice
The FCA guidance is that it considers it unlikely that a single platform would be suitable for all the clients of an IFA practice. On the other hand, IFAs use their CIP to make their service more efficient and help them to work with more clients, more regularly. The CIP enables the adviser to access all of the investments of their client and to administer their portfolios all in one place.
Once an adviser has opted for particular product providers and the client accepts the recommendation to proceed with that advice, it is then quite difficult to change such providers. The temptation would be to try to make a bulk transfer, transferring all clients from one provider to the next. However, bulk transfers would not satisfy the Treating Customers Fairly principle of the FCA as it would expect each client to be considered on an individual basis.
We are where we are
The FCA requires IFAs to prove their independence by carrying out and evidencing good quality research to back up the investment recommendations being made to clients. Advisers want to show as far as possible, that they are undertaking the research, as they want to be seen to be compliant. The portal providers supply a very efficient way of undertaking a more complete analysis than individual advisers would be able to do without them.
Once we understand the limitations and malleability of the portals, we realise that although they are not perfect, they are as good as we can reasonably expect. Like any computer, the principle of garbage in, garbage out applies. The search will only be as complete as the user wants it to be.
Computers, as ever, are the victims of human nature.
About Tony Catt
Tony is a freelance compliance consultant. He undertakes a whole range of compliance duties for both IFA and restricted adviser clients. He was previously an adviser himself with a directly affiliated firm, an experience which helps with his current compliance duties.
Email info@tonycatt.co.uk or call Tony on 07899 847338
