Hardwiring suitability into your business DNA
Financial advice firms should be hardwiring suitability into the DNA of their businesses, says Ben Goss, CEO Distribution Technology, including three key elements that they need to get right to achieve a robust suitability process
Distribution Technology CEO Ben Goss likens having less than 100% accurate suitability as akin to a car manufacturer producing a car with an air bag that worked nine out of 10 times. “As a customer, you simply wouldn’t be confident using it,” he said.
Speaking at the Distribution Technology annual adviser conference, Goss said that car manufacturers ensure the infallibility of the airbag by building the necessary quality into the manufacturing process, and likewise, he argued, adviser firms need to hardwire accurate suitability into the DNA of their business or risk damage to the business years down the line.
Citing the 2014 Budget as one that had “touched people in a way that a Budget hasn’t done for decades”, alongside data from Hymans Robertson that showed there are circa 300,000 retirees in DC pensions schemes who from April will be able to access their pensions capital and £6bn in pensions assets currently sitting on the side lines waiting to be invested post April, “this is a massive opportunity for the financial services industry,” he said. “But preceding all that money will come a tsunami of questions and what we need to ensure is that we don’t look back in five years time and see April as the next pensions misselling crisis or indeed the next pensions misbuying crisis,” he said.
“Firms need to build a strong core DNA of suitability into the advice process so that 100% of the time they’re delivering suitable advice, sustainably with a business model that’s also sustainable.”
That process starts he said, “by thinking about risk profiling and having an accurate and robust conversation with the client around Attitude to Risk, looking at the client’s personality and how they feel about risk.” Using a psychometric questionnaire was a good starting place, he suggested, “but it is only a starting place and other tools that one might consider using are ‘what if’ scenarios and market collapse scenarios, for example.
“Capacity for Loss is the next step – including the client’s circumstance and how much risk the client can afford to take, with subsequent issues around time horizons, liquidity, ability to withstand losses, future cashflows and financial and lifetime goals.”
Setting a client mandate
Combining Attitude to Risk and Capacity for Loss creates the Risk Profile, he said, which was in effect, a mandate with the client. “Just as in the institutional world pensions funds will set a mandate via their investment consultants so advisers should be setting mandates with clients around the risk and return that is acceptable to them.”
Risk profiling is the initial stage of the journey but the goal is to match the investor with the investment, he added. “Then the job is to turn that into proven asset allocation, which is going to deliver the mandate and once we have that investment strategy we need to turn that into the portfolio or rebalance the portfolio.”
Yet, all of this is just half the discussion, he emphasised. “The other half is understanding the risk of the investment. And that means taking a view on the risks of the underlying assets.
“If you can do all of those things then you are on the way to ensuring suitability in your business DNA.”
Three key elements in a robust suitability process
Goss highlighted three key elements that he believes firms have “to get right” to achieve a robust suitability process.
1. A consistent set of risk profile definitions and boundaries.
2. A consistent set of asset class descriptions and assumptions.
3. A consistent set of data definitions and language.
“This is what the best firms are doing,” he said. “Using different tools, different techniques, different data and languages across a business and across the firm’s software lends itself to disruption between those three elements,” he warned. “But if you have all those three together then you have what we term Asset Model Integrity – when you know that the way in which you are profiling your investors is consistent with the way in which you are profiling your investments.”
Distribution Technology announced the launch of three new services and solutions for advisers at its annual conference
Risk Profiler App. According to an independent review by the Finance & Technology Research Centre, in combination with Dynamic Planner® the App can dramatically reduce the time for a typical client suitability review from five hours to 49 minutes.
Risk Target Managed® service. The service provides a clear and objective distinction between those funds or portfolios hosted in Dynamic Planner which are committed to risk targeting to DT’s asset model assumptions and those which adopt a different approach.
Life Planner financial forecasting module for Dynamic Planner. Currently in beta mode but will be available to user later in the year.