Prove that you are independent
With the FCA challenging firms to demonstrate their independence, you need to think process, process, process, writes Steve Bailey of ATEB Consulting
Independence has been a core ethos in the adviser market for decades and despite the many regulatory changes over the years, in truth independence has remained largely the same. However, the advent of platform solutions and the desire to build value through recurring income to some extent has blurred the vision of independence.
Subconsciously, over time, pre-determined, default solutions have emerged within adviser businesses. In most cases, these are perfectly legitimate, well thought through and constructed. However, the process and audit trail that gets the adviser from initial disclosure through to recommendation is under scrutiny. The FCA position will be ‘guilty’ (i.e. not independent) unless you can prove otherwise. Hence, this has now become and area of priority for all firms wishing to retain their independent status.
Think about it. What is a financial adviser’s modus operandi? No prizes for coming up with the ‘sales process’. So if this is the core of the business and key to demonstrating independence, logic dictates that it should be carefully designed, clearly defined, consistently applied, transparently explained and finally, well documented.
Yet, while advisers know all about the component parts, putting them all together into a coherent and compliant process is not always as easy. The old Morecambe and Wise joke – ‘I’m playing all the right notes, but not necessarily in the right order’ – comes to mind.
We believe that firms need to address some key considerations in order to help demonstrate independence to the Regulator.
Documented investment process
Write it down, both in summary (diagrammatically if possible) and in detail. Define standards (how often is risk re-assessed, what constitutes a review, etc). Train it. Monitor it.
Don’t confuse the investment process with any centralised investment proposition (CIP). The CIP, if available, will be a potential solution and hence forms part of the investment process.
Define how clients get from fact finding through to the solution. While financial planning is not a science or an equation, advisers should be provided with a clear A to B track.
In this respect, ATEB has developed the concept of trigger questions to help advisers determine the most suitable client solution (e.g. does the client want/need ongoing reviews?).
Needs and product analysis
Ensure this as a clearly defined part of the sales process. Document your analysis and how the recommended product, over and above any other available solution, best suits the needs of the client.
Don’t default into vanilla solutions. Independence requires you to demonstrate an unbiased and unrestricted analysis.
Research and due diligence
Define the process for all product ranges. Decide whether it will be bespoke, per recommendation, or centralised. Provide the tools and training in their use. If centralised, define frequency and parameters.
Think about your investment philosophy, e.g. what will you do if you’re current centralised investment proposition’s provider is no longer the most suitable?
Define your required outcomes. If you brainstorm potential management information (MI), you’ll be surprised how much you’ll come up with.
As a starter for ten, can you easily ascertain the client splits across different propositions, or client splits across ATR, or the percentage of clients opting for reviews, and how these vary across advisers?
Remember, the FCA will expect business owners to have sufficient MI at hand, to have analysed the information and to have acted accordingly.
How can advisers provide an independent, comprehensive and fair analysis, which is unbiased and unrestricted, without the technical knowledge to do so?
T&C has taken on added significance post RDR with independent advisers needing documented proof of ongoing technical competence.
Throughout the process, transparency is key, particularly fee disclosure. Where there is a predominance of clients signed-up for ongoing reviews is there a clear audit trail of clients understanding and accepting the associated charges?
Finally, if you have good quality processes, compliance will be an inevitable by-product.
For more on ATEB Consulting