Compliance: File reviews – 12 things we see too often
ATEB Consulting’s Steve Bailey presents a few of the more common issues that the compliance firm discovers in adviser files.
One of the services we provide for many clients is reviewing client files, either as the primary reviewer or as an external check on reviews done in house.
As you can imagine, we are all really interesting and fun loving people here at ATEB and love nothing better than a good file review session! However, the feel good ambience can be easily ruined by some, regrettably not uncommon, issues. So here you have it, our top twelve list of file reviewer pet hates – in reverse order.
12 – Stakeholder discounted because of insufficient fund choice
Stakeholder pensions started in 2001! Advisers were obliged to consider them. It took advisers approximately15.5 seconds to come up with this reason for not recommending a Stakeholder pension. To be honest, even in 2001 it was a bit of a lame cop-out … no client ever needed access to 4000 funds, and the client was then usually advised to invest in only one or two funds anyway! So, you would think that in the intervening sixteen years somebody would have come up with a more credible reason. And here is a radical suggestion, why not just use the real reason! For example, “There are less expensive plans available.”
ATEB tip – if you have not reviewed, we mean really read, your report wordings in the last year (or sixteen!), now would be a good time!
11 – Poor client files – soft facts
You will readily understand that it makes the poor file reviewer’s job much more difficult if some key evidence is hard to find because a) the file is a mess or b) worse, the key evidence is not there.
We often see files with woefully inadequate soft facts. The hard facts without the soft facts are like … nigh on useless! Following such a file review, advisers often say something like, “Oh yes. I discussed that with the client and he confirmed that …” to which we say something like*, “so why the heck did you not write that down?”
(* ‘something like’ means – not exactly in those words but something like those words!)
10 – Questionable research
Grateful though we usually are to see any evidence of research, we do wince a little when the research is supplied by the provider being recommended.
9 – Provider recommended because they are big
We see this all the time – “I have recommended XYZ Provider plc because they are humungous and have billions of funds under management … and they give us great service too.”
We would suggest that every provider that firms would seriously consider recommending has lots of funds under management. Why would £500bn make one provider any more suitable for the client than another with £400bn? Answer – it doesn’t. Reasons for recommendation should be differentiating not just something that applies to many options. The client, and the file reviewer, need to know, “Why that one?”
8 – There’s a product for every problem
There is a saying that goes like this …
“To a man with a hammer, every problem looks like a nail!”
We often see recommendations for a product when a non-product solution would have been more suitable – or at least should have been considered.
7 – Generic, non-client specific rationale
In a similar vein, we also see lots of generic rationale given for recommending particular solutions – especially use of a platform. A bit like this –
• A platform is a popular way to invest (so what?
• You can keep all your investments in one place(not necessarily a benefit)
• The platform has competitive charges(but it doesn’t have the lowest charges otherwise I would have said that!
• You can access loads of funds through the platform(you can also access loads of funds without the platform – and maybe with lower overall charges)
You get the picture. Rationale should be client specific and differentiating. And remember that there is no rule requiring X number of reasons why. If there is only one reason for a recommendation, then one reason is enough!
6 – Self-fulfilling rationale
We really hate this one.
“You should switch from your existing plan because it does not offer access to the Superduper model portfolio number five that I am recommending.”
5 – Poor use of template
• Including lots of text because it is in the template rather than because it is relevant
• Not including relevant text because it is not in the templat
• And, of course, the ultimate cardinal sin is to not amend details relating to the previous client that the same report was used for
4 – Past performance
A chart or figures table copy/pasted in from a fund fact sheet. Usually the basis and source of the data is not stated. There is a reason why fund fact sheets have so much information. Most of it is a regulatory requirement both in terms of what is included and how it is presented. Copy/pasting a small section usually means that the ‘compliance’ of the data extracted is compromised. Much better to simply refer to an enclosed fund fact sheet instead of extracting little snippets here and there.
While we are mentioning past performance, we would point out that most fund performance data does not include all fund charges and, of course the performance data will not, indeed cannot, include plan or platform charges or adviser charges. That lot can significantly reduce the return actually available to the client so to quote the headline annual returns is actually misleading.
3 – Risk profiling
Most tools out there purport to assess the client’s attitude to risk, using volatility as a proxy for risk. But many of the tools do not address Capacity for Loss and/or the client’s experience adequately – or even at all. Sometimes, even when the risk profiling process seems to be fine, it is not obvious how a particular portfolio matches that risk profile.
2 – Client objectives that are adviser / product led
The most common of these by far are just a list of product features and not client objectives. For example,
“You want to take your PCLS at age 55, have flexible income and leave funds to your family in the event of death.”
Guess what the recommended plan was.
Sometimes the product feature is even more specific. Our biggest groan accompanies this one,
“You told me you wanted a ‘smoothed fund’.”
Guess the recommended provider.
Now, the man from the PRU does not knock on doors these days so it is a pretty safe bet that client had never heard of ‘smoothed funds’ before the adviser turned up!
1 – Reports being twice as long as they need to be
And finally, in the number one slot, need we say more. The longer the report the more likely it is that there is stuff in there that is irrelevant or repeated or simply not presented as concisely and understandably as it could be.
“I didn’t have time to write a short letter … so I wrote a long one instead!”
(Mark Twain in a letter to a friend.)