One of the nice things about RDR is that it’s accelerated the commoditisation of financial products to the point where there are few, if any, differences between many of them. I realise ‘commoditisation’ isn’t the sort of word you’re meant to use in the first sentence of your article, but there it is.
The old saw about products just being clear plastic bags to tote around investments is getting truer all the time. But even plastic bags can give you a nasty surprise - maybe the bottom falls out of one and your treasured bottle of tonic wine breaks; maybe you discover they’re not as watertight as you thought when using them to transport leftover soup - and so it’s best to know that someone’s got your back.
Tonic wine and soup aside, many seemingly vanilla or benign financial products can pack a punch, so it’s good to know that someone’s got your back when dealing with them.
Advisers know their stuff
If you use an adviser, it’s all good, of course. There is a whole industry devoted to making sure that the stuff an adviser recommends is suitable, and another industry dedicated to chasing down those who’ve given advice which turned out to be unsuitable. It strikes me that we might have forgotten how important this suitability responsibility is for investors - in all the talk about the value of financial planning, it’s easy to ignore the reassurance of that suitability check on the product, done by someone who really knows what they’re talking about.
However, not everyone can have financial advice, particularly post-RDR. More and more self-directed investors are turning up and doing it for themselves.
So who has the back of these investors? Not advisers, that’s for sure. But what about providers? Should they be there to pick up the pieces if an investor buys something unsuitable? Or is it caveat emptor?
We did a bit of research on suitability round the market for this piece, concentrating on the SIPP market (mainly because regulation on all things suitability-related is a bit of a hot topic just now).
Anyway, we found that relatively few providers were set up to do anything much about suitability. Some - mainly the larger lifecos - ripped themselves apart over this. Proposition teams spend fruitless hours with profiling systems such as Experian’s FiSS (Financial Strategy Segments), trying to decide what segments should like their new Thing, and then testing results against that.
The segments are quite broad, and have funny names, and the whole thing is a bit hit-and-miss where long-term savings and investment is concerned - “Yikes! We should only have 28.5 per cent Hairy-palmed Bottom Feeders according to our modelling, but it’s at 44 per cent! To the barricades!”
Others take a far more hands-off attitude. Even when it comes to famously tricky bits like managing clients close to the lifetime allowance (LTA) or those who are taking max GAD withdrawals in drawdown, we heard the same thing over and again: “our clients self-manage it pretty well”.
One company we talked to has a small-pot suitability check at the point of purchase; it has a high annual fee, which loses it six suitability points (on a scale I have just made up) but it gains eight suitability points for calling up investors with less than a given amount to check if they really understand what they’re letting themselves in for. The same provider has a control point for people who are investing heavily in alternatives or investments with a potential total loss - again, just a check to see if they really mean it.
Non-sustainable
But once you’re in, literally none of the companies we talked to had anything much to say about ongoing suitability. Some try to monitor it using a series of dashboards, balanced scorecards and other such management-consultant-driven malarkey, but for most it was ‘caveat emptor’.
Warnings about LTA and all that tend to be generic rather than specific, with one large provider trying to target people with a propensity to bust the cap, but without being so targeted as to be accused of giving advice.
This just in: buy through an adviser and someone’s got your back on an ongoing basis. Buy direct and you’re pretty much on your own.
So what has this got to do with advisers and technology? Well, it strikes me that those providers who were trying to monitor who was using their products were running (fairly) automated queries on massive databases, and pulling out trends therein.
Adviser businesses we talked to, on the other hand, had relatively few queries or alerts set up across their book. Some have started to pick up operational issues like managing cash on platforms, and some model portfolio systems ping up a warning once asset allocation variances are breached, but for the most part advisers seem to work on a client-by-client basis, usually at review time.
I’m interested in how advisers can use technology to meet the emerging demands of the FCA, and as suitability - of investment, of product and of platform - continues to be a focus, I wonder how many advisers have set up a documented bench of tests to make sure that the stuff their clients are using remains suitable?
Not static
We see segmentation strategies all the time now, but little recognition of the fact that clients don’t stay static; they move between segments. While advisers keep the model of high-touch, face-to-face personalised service, that’s probably fine; you can pick it up at the next review.
But for advisers trying to find ways to give service to many clients, perhaps of more varied socio-economic backgrounds, some degree of automation and alert-triggering must be desirable.
We haven’t seen any platforms, or back office systems that do that in a flexible enough way. Lots have parts of the answer, but at best advisers have to cobble together a bunch of different reports from different sources; driving further tech fragmentation and causing further admin inefficiency.
That duty of care is one of the holy grails of what makes advice unbeatable. Now we’re through the transition time of the RDR, it’s time to work out how to make it scalable.
It could be one of the keys to unlocking advice to those who’ve been frozen out.
Mark Polson is principal of platform and specialist consultancy the lang cat
