PROD requires attention from advice firms under MiFiD II. Apricity’s Kim Binks looks at what is PROD (or Product Governance as it’s formally known) and what it means in a practical sense for advice firms.
We chose to focus on PROD as we’re still finding that quite often firms either haven’t done it, or just haven’t got round to fully documenting it. Many a time we’ve heard “I know what it looks like, I just haven’t written it down”. It is of course a regulatory requirement, introduced with the 2018 MiFiD II regulatory updates, but for many, it inevitably got pushed to the side whilst the focus was on understanding the new rules around annual reviews and cost disclosure. This, plus the fact that it was a little confusing to understand how it applied to financial advisers. So, it does require some attention by many firms and, in our opinion, when done correctly can bring a huge amount of value to you and your business.
The compliance-y bit
Product governance ensures that products, and who were they designed for, are actually being ‘sold’ to the correct target audience. So from a compliance point of view, while segmentation isn’t a regulatory requirement, we typically find that the clearest way to assess product governance is to have effectively segmented your clients. This enables you to ensure you have the right client, in the right service, for the right price.
Take a step back
Large or small, every firm needs a business model, and that’s effectively what we are trying to define by creating a firm-specific PROD piece. Essentially, we recommend that you take a step back and have a look at your client bank to ensure that you think it’s representative of the type of firm you want to be. When we are working with firms to put this in place one of the first questions that we ask is ‘if you were starting your business tomorrow, would it look like it does right now?’ – Big question, isn’t it?
If you’ve been trading a while, PROD is the perfect chance to reflect on your current clients and proposition to ensure it’s still suitable – benefitting both you and them. If you are a new firm, it’s the core framework of the business you are trying to build and the clients you are trying to attract. We often find that the platform due diligence and centralised investment proposition are done, but how did we identify the clients that those products are suitable for in the first place? Your PROD should be the glue holding it all together. Client needs and regulatory obligations change, so it makes sense that our target markets, service propositions and pricing frameworks may need to change too.
By going through this process, you can ensure that you have your ideal type of clients and an appropriate proposition for them. Also, it can ensure that you as a firm are proactively reviewing service propositions to ensure you have healthy profit margins.
Where to start
You’ll need to take a look at your client bank, and assess the type of clients you may potentially want to attract in future. There are different ways to start segmenting your client bank, but it shouldn’t just be based on wealth. You should also be looking at age to retirement, the client’s life stage and perhaps any specific niches (such as business owners, or young accumulators).
When you have your ideal client segments, we can then look at the service to match – how many reviews per year, whether cashflow modelling is to be included, IHT calculations etc. This then should all be documented, in a clear and easy to follow format. I’ve included a sample PROD and some action points below.
- Watch our ‘A Nod to PROD‘ webinar.
- Have a read of this handy guide from Royal London.
- Click here to see a sample of how your PROD document could look.