Is DFMs Consumer Duty material up to scratch?

2 April 2024

Are DFMs giving advice firms enough of the materials they need to help them conform to Consumer Duty? Latest research suggests this may not be the case, says Adele Gray, director, Research in Finance.

Eight months on since the implementation deadline, the investment industry has dedicated huge amounts of time and effort getting to grips with and complying with Consumer Duty, particularly from a communications perspective. But our latest Consumer Interests Study reveals there could be gaps in this area, particularly at the discretionary fund manager (DFM) level.

Let’s recap on the Financial Conduct Authority (FCA)’s new rule: the overarching principle is for firms to “deliver good outcomes for retail clients” and a clear focus the regulator has highlighted is around communications and marketing.

Firms must:

  • Support consumer understanding by ensuring that their communications meet the information needs of retail customers.
  • Ensure communication is clear, fair and not misleading.
  • Communications are tailored to take account of the characteristics of the customer (including vulnerability).
  • Ensure that information is accurate, relevant and provided on a timely basis.
  • Communications should be checked for customer understanding.
  • Communications are tested monitored and adapted to support good outcomes for retail clients.

Since the deadline for all open products and services on 31 July last year (closed products’ deadline is the same date this year), financial market participants across the value chain have been striving to ensure they fully comply. Many have reported there were few gaps to fill as they had already embedded the ‘spirit of Consumer Duty’ into the heart of their businesses.

But ensuring the end client is regularly updated and is clearly educated around their investments and market behaviour has never been more important; communications is a huge part of Consumer Duty and the FCA has emphasised this isn’t simply a ‘tick the box and move on’ exercise, it needs to be regularly monitored and they will deal with firms seriously who do not comply.

The manufacturers

So far, much of the focus has been on asset managers’ and advisers’ communication – do they have enough support to communicate effectively at every stage of the policy’s lifetime? Can they “support consumer understanding” in a way that “equips consumers to make effective, timely and properly informed decisions”?

But what about that tier in between…the wealth managers and DFMs who run model portfolio solutions (MPS) or bespoke portfolios on an outsourced basis for advisers?

Our research shows advisers now group DFMs in the same bucket as asset managers – as ‘manufacturers’ of product. This is not surprising when you consider MPS are a go-to product for many advisers – risk-rated, managed solutions created and managed by DFMs. RiF’s Consumer Interest Study, carried out at the end of 2023, shows 41% of advisers consider DFMs as a manufacturer – this is not far behind the figure for asset managers at 78%. Furthermore, the same perception of role can be applied to advisory networks, where 16% of advisers said they perceived their role to also be manufacturers.

Educational support

Advisers, unsurprisingly, reported an increase in the amount of time Consumer Duty is taking up of their working hours, with more regular meetings with clients and time taken to ensure education and understanding. Generally, they are already using asset manager materials quite extensively in client conversations – 62% said they use support materials from providers ‘frequently’ or ‘sometimes’.

However, they said they would like to see more support from manufacturers, including DFMs, with these firms providing client-facing educational materials with clear messaging on funds and market behaviour. This, advisers said, saves them time getting their own materials ready.

Specifically, from DFMs, advisers said they need information on entire portfolios – particularly amid the current market volatility – as this is often requested by clients, alongside the information on the individual underlying funds. They told us they want clear information on how a client’s overall goals are being met with an overview of fund updates in a concise, client-friendly way.

Additionally, educational materials are key, with 81% of advisers requesting simple explanatory guides for use with clients, while 66% indicated client facing brochures/educational pieces would provide further support. On the underlying vehicles, 63% said they needed simplified fund documentation. Almost half of respondents (46%) said some useful materials do exist – but more could be provided.

One adviser said: “[We need them to] improve the quality of information they have available to advisers and increase the depth of information that we can access. Some providers are excellent, some not so.”

As we now know, communication is a huge part of Consumer Duty and it is an ongoing factor for businesses. The regulator requires firms to track their work and evidence improvements. As mentioned, the FCA has reinforced that they it be checking up on firms.

Ensuring clear communications isn’t just an asset manager and adviser issue – it is something DFMs really need to ensure they are on top of.

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Professional Paraplanner