Alasdair Wilson, investment techspert at The Verve Group, looks at how advice firms can structure their client banks to help them conform to the new Consumer Duty regulations and how the new rules link to addressing PROD, platform due diligence and CIP.
At the end of July, the FCA finally announced new rules on Consumer Duty with the main aim of improving how advice firms service their clients. The rules specify that firms must demonstrate fair value to their customers by recommending suitable (and understandable) products and provide advice services at a fair cost to the client. Here, we’ll take a look at the steps you can take to ensure your firm is compliant with Consumer Duty based on conversations we have with firms, and internally across our departments.
Product Governance (PROD)
First, we’ll address client segmentation. PROD is an FCA requirement, and although segmenting your client bank isn’t technically a necessity in order to comply (as some advisers still take great delight in dredging up in their resistance to PROD) doing so can streamline your business and boost profitability as well as benefitting the end client by ensuring they are recommended a suitable product at a service level that meets their needs; nothing more and nothing less.
I can also hear the chorus of “Well we’re an independent financial adviser and we will analyse the whole of market for every single client.” From the same advice firms, I often hear, “Well I need that high ongoing fee to pay for all the research I sit and do for my clients”; and when asked what providers their current clients are with, proceed to list just about every single platform and product under the sun.
This is exactly what PROD was designed to mitigate – by grouping clients of similar needs or characteristics, you could have a product and investment strategy in mind pretty much from the get-go. And because of the lack of, or drastically reduced, need for bespoke research per client, this means less time spent trawling through various research tools to see if you can get your recommendation in 0.01% cheaper.
Less time juggling the intricacies of all the different providers on the open market will, in turn, free up more time on the actual independent advice, which is sitting down with your client and discussing their unique financial goals and objectives, and how you are going to help them achieve it.
Following on from this, Consumer Duty aims to ensure clients are paying for a fair service. Again, by grouping clients of similar needs, you can tailor service packages. Not only will this enhance your business by explicitly stating what you will offer the client, and at what price point, this also ensures you are offering a fair service with a fair value. Another thing I see and hear with some regularity, again largely from the advisers who do bespoke research for every client and a high ongoing fee, is “I offer the same high level of service for all of my clients”, which I find a bit ridiculous; particularly when asked what they do differently for a 30 year old accumulation client compared to a 70 year old drawdown client, it always turns out they are serviced differently.
For instance, a young client in the early stages of their wealth accumulation might only need a very basic and cheap means of investing. They may also need a light touch advice service; or perhaps even no ongoing service at all. After all, what’s the point of hauling in a 30-year-old with £100,000 in a multi-asset fund in a pension for a one-hour in-person meeting? What are you going to talk about besides the plan growth in the last year? Their risk is not likely to have changed and they won’t even be able to touch the money for decades, so a quick annual suitability statement will more than suffice.
I appreciate this is broad and there will be scenarios where an ongoing service for said individual is warranted, but in general it is best to direct your time to the clients that actually need an in-person meeting to discuss their complex tax situation and strategy, bond surrenders, their drawdown sustainability or trust planning. These are the more intensive tasks that take a lot of time, so why should the clients receiving a lot less of your time prop up the clients with more time-consuming work? Is that fair? No, it is not. PROD will help you to not only articulate your business model, service levels and pre-approved strategies, but also help you to direct your attention towards the clients that need it and ensure that they are billed fairly for the time you give them.
Platform Due Diligence (PDD)
Carrying out your PDD following PROD highlights to the regulator that the products you are recommending have been considered in light of your clients’ needs (products and services AND price and value outcomes) without the necessity of having to do it on a case-by-case basis. Using the above examples, that young accumulator of relatively modest wealth, simple investment strategy and basic planning doesn’t need to be on a pricey full-featured platform that offers offshore bonds, full SIPPs capable of administering property assets or fancy portfolio building tools.
Another comment I hear a lot is “I use x platform just because it’s cheap / I get a big discount.” Just consider this comment for a moment when thinking about literally anything else in life – is there an instance when you want the cheapest product under any circumstance? Imagine a car dealer seeing a family of five walk through the door and then going on to recommend them their cheapest car – a tiny three door city car. Fair enough, it might be the lowest cost and will fit them all in, and thus covering off the very basic need, but will the big family likely see any value in it? Absolutely not! What about its tiny engine, lack of boot space, nowhere to anchor a child seat, a less than ideal crash test rating?
This is what pops into my head whenever I hear “I want a platform that is the lowest cost to keep my proposition under a certain percentage”. Cost means nothing if it means other areas of the proposition are severely compromised and limit the ability of your firm to deliver a fully suitable service. A high net worth business owner with their premises wrapped in a platform SIPP and a bespoke adviser portfolio will absolutely feel the value in those extra features even though they may be paying more for it; it is suitable.
Centralised Investment Proposition (CIP)
In a similar vein to the platform due diligence, the value and complexity of the investment strategy needs to be aligned to the clients’ needs and ability to understand (hello Consumer Duty outcome three – consumer understanding) the product they are being sold. An investor might not have the slightest interest in what portfolio of funds have been put together for them, or what specific investment philosophy their Managed Portfolio Service (MPS) follows. All they may want out of the process is to forget about their investment, only to check in on its growth every now and then, and not to see it lose 25% of its value in a year. Therefore it’s perhaps not the best idea to recommend a fancy and pricey MPS that bamboozles them with a passive core and active satellite strategy that utilises ETFs and investment trusts.
Coming back to my car analogy, when a salesperson is selling a car to your average young family they won’t be reeling off jargon like “the engine in this car has a camshaft with a combination of both high-lift and low-lift cams that shift into low-lift mode for better fuel consumption and high lift mode when the oil pressure is high enough under acceleration for a bit of extra performance.” Newsflash, 95% of car buyers don’t give a hoot, and just like most of you will have glazed over reading that, this is how many clients will feel when they’re being warbled at about the nuts and bolts of their investment strategy. Most car buyers only want to know if it is good on fuel compared to its peers, fits the family in comfortably and won’t break down. The same goes for the vast majority of investors and their investments too.
Of course, that’s not to say you won’t get clients that are very engaged with investments (just like I’d personally love to hear about the niche engineering in a car I’m looking at) and who will appreciate a market commentary every quarter with what the portfolio managers are doing in response. It’s also not about having one solution or the other either – a CIP can factor in different strategies that can be aligned to certain types of client that you deal with; in this case to cover off both engaged and non-engaged investors. This is again how you tailor your proposition to deliver value.
To summarise, Consumer Duty links in very nicely with addressing your PROD, PDD and CIP. It should give you the opportunity to sit back and take stock of your client bank and business to ensure you are offering fair value to your clients, both in your service provision, fees and the products and investments you are recommending to them. Instead of pushing back against measures like those discussed above and filling the comment section about how you disagree with this that and the other because “I’ve always done it that way”, think about how you can use the regulations to your advantage to boost your own firm’s proposition and how you can provide real, fair, value to your clients.
If you need to outsource the construction of your PROD, PDD or CIP, The Verve Group offer this service. Find out more at their website here.
