We recently finished a tour with the Sense Network and, after travelling 2,000 miles to see 200 advisers across eight venues, one overriding theme came through loud and clear (though admittedly we asked some leading questions): suitability.
It is abundantly clear that, while there is a drive towards the de-risking and operational efficiency that a combined attitude to risk (ATR) and centralised investment proposition (CIP) strategy affords, there is also a strong sense of unease over where the regulator will go next on suitability. Benjamin Franklin said nothing was certain except death and taxes. I'd add regulation.
The regulator is not here to protect advisers; it is here, quite rightly, to champion the needs of the consumer. That is its ultimate raison d'etre and should be the industry's guide for interpreting the principles-based regime.
Any area of practice that alters our relationship with the consumer will come under regulatory scrutiny. The Retail Distribution Review has driven adviser businesses to segment their client bases and define their service and fee structures for their varying client propositions. This has also led to a greater level of commoditisation and the growth of the CIP. In fact, it was the FCA that coined the phrase, and you can be sure that it will precipitate a laser focus from their inspectors.
The concept behind ATR tools is fundamentally sound - if they are used as an aid to the process of defining suitability, rather than the de faqto solution. Through a series of questions and answers a client is led to a quantified definition of their ATR and appetite for loss. Marry this with a time horizon and, bingo, you have a magic formula for advice. If the tool provider also creates a corresponding asset allocation via a stochastic modelling system, this quantified output can be matched to a product and suitability is defined.
Or is it?
This appears to be manna from heaven for your average compliance officer, and adoption of such a process appears to significantly de-risk a business from two angles: suitability and fund selection.
But we believe there is a significant piece missing in this chain: client outcomes.
Products that are designed specifically to work with ATR tool outputs do so without exception, to match a defined volatility range. Standard deviation is, after all, the industry's only way of defining risk (and a poor one at that!). However, if we asked a client to define suitability, I would hazard they'd give a different answer, and one that is qualified rather than quantified.
"How suited is your product to my needs?" might be the layman's approach.
As much as we might like to think suitability is about product, the key here for the regulator is the word 'needs'. For 'needs', read 'outcomes' and these can be defined in a number of ways. We believe the vast majority can be met under four basic banners: accumulation; inflation protection; income provision; and capital preservation.
Taking this approach encourages a level of discussion with clients that really gets to the nub of the suitability question, and, when they are designing products, manufacturers would do well to understand that this is how IFAs now work.
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