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Suitability, due diligence and kicking the retro-fitting habit

Continuing her series of articles for ABR, Kim Bendall, director of The Paraplanners, says the FCA is right, suitability and due diligence should start with the client’s objectives – but how often do we get neat, clear and actionable client objectives with which to work?

The FCA’s latest thematic review on research and due diligence has raised several interesting questions regarding the processes adopted by advisory firms to demonstrate the suitability of a particular platform or wrap account that the adviser is recommending.

One of its main findings was that the process for most firms seemed to be starting with the end point – i.e. where the firm already knows which provider or platform they want to recommend – so the research undertaken is specifically designed to substantiate why that particular company was deemed suitable for the client. This practice is known as ‘retro-fitting’.

The FCA’s conclusion from the thematic review is that the research and due diligence process needs to be turned on its head and – quite rightly – that the client and their personal objectives are the initial starting point to any provider research. If the research does not follow this pattern then the firm could potentially be viewed as ‘shoe-horning‘ clients into a platform with which it has already chosen to partner.

I have no issues with the FCA’s recommendations in theory; it is right that we look at each client on their own merits and recommend solutions that are suitable for them according to their personal needs. However, in order to turn the due diligence process on its head in this way, you need to have a very clear picture of the starting point – i.e. what the client actually wants.
And therein lies a significant issue for many of us: What if you don’t have neat, clear and actionable client objectives with which to work?

It can happen, of course. Most often it’s because clients can’t be sure of exactly what they need and, even if they did, they find it hard to translate those needs into ‘financial services-speak’.

By helping clients translate their concerns into objective ‘financial services-speak, it’s inevitable that a motive like ‘If I can, I’d like to get a better return on my long-terms savings’ turns into something like ‘would like to seek capital growth in excess of cash account deposit interest rates and inflation over the longer term’.

Worse still, some fact-find templates produced by automated back-office systems have built-in client objectives along the above lines that the adviser simply ticks against, where appropriate. This leaves very little room for a deep and honest discussion with the client, so their needs and priorities can be put across in their own words.

Instead, it relies heavily on the adviser or paraplanner being skilled at asking searching questions and adding these notes manually to their fact-finding system. Unfortunately, this isn’t something that all of us are naturally good at.

So where can you start?

So how do you undertake due diligence on a suitable product provider if your client comes to you with no easily identifiable or succinct objectives?

Most clients that I have dealt with over the years have only one or two very basic objectives. Many of them simply don’t understand what they have but want to know if what they’ve got is ‘sufficient’ or ’appropriate’. In addition, they mostly just want peace of mind that their lifestyle won’t change in the future unless they choose that it should.

Personally I think these are actually very strong objectives and are a perfectly good starting point when it comes to the research and due diligence process.

The skill for a paraplanner is, therefore, how to turn very broad and wide ranging objectives such as these into something more succinct that can then be applied to the process for selecting a provider.

Clearly in order to confirm to the client that what they have is ‘sufficient’, ’appropriate‘ and regularly monitored to ensure there are no significant unforeseen surprises, advisory firms need to have a clearly defined process for being able to deliver ongoing reviews and a repeatable, cost efficient and administratively slick service behind the scenes. This is one of the main reasons why most firms choose to use one, or some, platform providers to help them deliver this.

When it comes to meeting the client’s objectives, the firm has to balance the needs of the client with whatever resources and tools the firm needs in order to deliver the required services to the client.

How we tackle the process

Once we know what services will need to be delivered to the client in order to meet their needs, and we have researched and created a suitable investment strategy to help them get there, we adopt a three-stage process to the product/platform due diligence:

1. Filtering out the noise. This is the starting point, where we filter the market using research tools – such as Synaptics, Adviser Asset, Defaqto etc. – to help us drill down the whole of the market into a shortlist of potentially suitable providers that will enable the firm to deliver the services that are required to meet the clients’ objectives. I suggest selecting between three and seven companies for your shortlist, as you’ll need to do quite a lot more research on them and any more than that will create lots of additional and unnecessary work.

2. Cost comparisons. When it comes to platforms, it’s true to say that you get what you pay for in most cases. The client, and indeed the FCA, is not necessarily looking for the cheapest option to be recommended, but simply one that is best suited to meet that particular client’s needs. However, it is still important to keep an eye on costs and make sure that what you’re recommending is still good value and, after charges, has the potential to meet the client’s income and growth expectations.

This part of the process can be quite challenging and time-consuming because platforms all tend to charge in different ways for different things. Therefore, we complete this part of the process by using a comparison tool such as Capita Comparator or Adviser Asset. We may also refer to charging comparisons produced by The Lang Cat and Platforum, which both do quite a lot of the leg-work as well.

If the research we’re doing is not client-specific (i.e. the firm requires a due diligence report that relates to a wide range of its clients, rather than just one individual client) then we run cost comparisons on a sample of the firm’s investment strategies, split between various tax wrappers and fund sizes. This gives a very good idea of which providers are generally more competitive at different portfolio sizes and tax wrapper types. Therefore, you can use this information to filter down your shortlist even further.

3. Practical Test. The third stage in the process is to take the shortlist and apply a final experience-based ‘can we work with them’ test. This is often the advisory firm’s own practical experience of dealing with that particular provider (where relevant). This can include things like their experience of the provider’s administrative systems and quotation facilities, the assistance and willingness of their business development team to help out when things go wrong, any special deals or reduced charges that have been negotiated by the firm to make it a more cost efficient option for the firm’s clients, and so on.

On its own, this third and final test is unlikely to meet the FCA’s requirements for demonstrating suitability as you are possibly dismissing the option of engaging with any company that you have never worked with in the past. This could be a cause of anxiety for firms that, understandably, may be reluctant to place significant amounts of client money with companies with which they have no prior working experience.

But it is this point, in particular, that the FCA argues has resulted in ‘retro-fitting’ in the past. And besides, how do you gain experience of working with a provider if you don’t place any client assets with them?

With the FCA’s guidance now firmly in place, it remains to be seen whether ‘retro-fitting’ is stamped out altogether. But are there good examples of how financial advice practices are applying the new guidance in practise.

One thing that works quite well for many firms is to have a panel of preferred platforms and products. As mentioned above, different providers are competitive at different levels of investment and tax wrapper – so marrying up your clients with whichever platform in your panel meets their needs at the most competitive level should be relatively easy.

This could be a simple case of obtaining illustrations from each provider on the panel and selecting whichever one has the lowest Reduction In Yield (RIY) figure over the client’s investment time horizon.

A multi-provider panel approach as described above is, in my mind, an ideal way to ensure you’re giving the right advice to the client in terms of platforms.

However, some advisory firms are keen to restrict all client monies under management to a single platform. This makes life pretty tricky as you have to try very hard to demonstrate that the client isn’t being shoe-horned.

Some firms are demonstrating this by being exceptionally choosy in which clients they take on. In effect, they only engage with clients that the firm’s centralised investment process and platform proposition are suitable for. Therefore, if the client doesn’t fit the firm’s process, the firm doesn’t take them on.

For other firms with a less restrictive service proposition, it will simply be a case of trying their best to make the research fit the client’s needs, rather than making the client fit the research.

To achieve this, we should be working with our clients and advisers to nail down exactly what the client is looking for and what product features are genuinely going to be used and valued by them.

This may require some clever questioning techniques, but if good quality objectives are still unlikely to be forthcoming, then the advisory firm may need to think very carefully about how its initial and ongoing review services are structured, so that it only takes on clients for whom its proposition is clearly suitable and beneficial.

From experience and many thousands of fact-finds, meeting notes, mind-maps and paraplanning requests that I’ve seen over the years it has been starkly evident to me that clients are either not as clear and succinct on their objectives as the industry would like to believe, or that we – financial planners – are collectively struggling to extract this information from them.

A useful tip that works really well in this respect is to ask the client to write down their objectives in their own words – prior to any planning meeting with their adviser. This gives them time and space to think in depth about their needs and priorities, and time for the financial planner to really consider those points before any advice is given.

One thing is for sure though, without a clearly identified start point and end point for the client’s financial journey, firms could fall into the trap of articulating their clients’ objectives for them. The result, unfortunately, being that the industry will continue to struggle with kicking the shoe-horning and retro-fitting habit.

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