When it comes to having a robust investment strategy in place, most advisers will feel that their existing approach works well and delivers sound long term results for clients – and all in keeping with their risk profile too.
However, when it comes to the matter of proving compliance with the regulatory requirements, being able to evidence that your investment strategy meets clients’ needs is a wholly different matter. It might be great – but if you can’t prove it, you are likely to face the kind of scrutiny you would prefer to avoid.
We’ve asked Melony Holman (pictured above) of Compliance and Training Solutions Ltd. (CATS) to give us some pointers and questions you can ask yourself to find out whether your investment strategy really does tick all the boxes.
Investment strategy review checklist
“As compliance consultants”, says Holman, “we are very used to carrying out annual audits with advisers, and an important part of this process is to discuss the firm’s investment approach. The ten questions which we are asking our adviser clients are as follows”:-
- What is the firm’s investment approach? Is it documented? How often is it reviewed and who is responsible?
- Is everyone following the process? (This sounds like an obvious thing but there are occasions when an adviser is joining a new firm and wants to stick with their preferred approach and the new firm is willing to accept this).
- Do all the advisers present the firm’s investment approach in the same way to clients? Do all advisers understand the investment strategy and what inherent risks the portfolio has? This could be evidenced by use of observing live client calls or role plays.
- How do the results of the risk profiler used by the firm (if they use one) correspond to the investment approach used?
- When due diligence is conducted on platforms, is there a consistent process followed? Can the firm be accused of ‘status quo bias’ i.e. they want to continue the same platform that they currently use as they do not want to move clients away? Is using a platform in the client’s best interests? Has the firm documented when a platform would not be used?
- Is there an investment committee in place within the firm? If yes, how often does it meet, who attends and what do they bring to the party? Are the meetings minuted?
- What is the asset allocation? How was it derived and is this documented? – note the FCA do not determine what the asset allocation should be but do say that firms should have some kind of asset allocation in place. Interestingly, if FOS recommend that redress should be paid to a client due to incorrect investment in line with the client’s attitude to risk, they tend to use the asset allocation recommended by the Wealth Management Association (WMA).
- How are funds selected? What tools are used? What filters are used? Are the filters used consistently? If not, why not? Is the process documented?
- Does the adviser know when they do not have to follow the firm’s investment approach i.e. the firm can demonstrate that shoehorning is not taking place?
- Does the firm have a documented due diligence process when considering new products?
As Holman summarises, “These questions help to guide the firms to the areas which they might not necessarily have considered. I’m pleased to say that most of the firms that we see do have an investment approach which is backed up with evidence of due diligence. Where the shortfalls tend to lie, is in firms not having an overall defined process and having the end conclusions documented.”
Melony Holman has been working in compliance for the last 20 years. Melony established Compliance & Training Solutions Ltd in 2005. The firm now works with over 145 firms nationwide, helping them to meet their regulatory requirements. Melony is a Certified financial planner and Chartered Financial Planner.
