Ticking all the right boxes

One consequence of RDR that has not received much press coverage or focus with advisers is that of product, fund and investment solutions research. Whether operating a restricted, independent or hybrid model, justification and recording any output on the client file to meet suitability and research requirements will remain a key aspect of meeting the increasing regulatory scrutiny. This article considers the regulatory expectations for research, the importance of research tools post-RDR and aspects advisers should consider when selecting a tool.

There will be a need for research to be conducted if operating as independent, with or without any centralised investment proposition, and potentially in a restricted model.

The FSA finalised guidance paper issued in June 2012, Retail Distribution Review: Independent and Restricted Advice, clarified the advice requirements for meeting the standard for independent advice after 31 December 2012. The requirements of the rule on independent advice are that the personal recommendation is:

– Based on a comprehensive and fair analysis of the relevant market.

– Unbiased and unrestricted.

So how will advisers ensure that they can demonstrate suitable due diligence?

How will advisers identify client needs and conduct research across more specialist retail investment products, such as investment trusts or structured products, post-RDR?

I think we should now expect more regulatory focus on the appropriateness of independent research.

Many advisers may well consider that the need to conduct research will no longer apply in a restricted proposition model. Unfortunately, depending on the model, this is not the case. Where the model offers a range of solutions, with a number of products or funds, advisers will still need to conduct appropriate research to select the product that best meets their clients’ specific needs.

Finally, due diligence is required to conduct market research to identify appropriate centralised investment proposition solutions to meet client needs. Such research should be reviewed regularly. How do you conduct research for platforms or discretionary fund managers? Can research tools help here?

The changes being brought about by RDR mean that advisers’ business models will have to adapt and it is most likely that many businesses will need help to achieve this. Outsourcing aspects of the advisory business to third parties has been a theme of the past few years. This can help cut costs, improve efficiency and improve client outcomes through the use of third-party tools and specialist services. Research is a key example of this outsourcing trend.

Increasingly research tools can help advisers and paraplanners to conduct client specific research and, importantly, through the ability to download a full audit trail from the tool, demonstrate strong systems and controls.

One aspect I expect to be scrutinised more post-RDR is the methods applied by advisers to conduct research using tools. It is important advisers design and review regularly methodologies that identify the key criteria for each product or investment solution. Clearly the research tool adopted must be capable of applying the key criteria you have identified.

Core product research tools have been around for years but these are having to adapt and improve to meet the more modern market and RDR implications. This includes as adviser charging, the ability to conduct client specific pricing analysis across the whole of market both on and off platform, the move to commoditisation of the wrappers and greater emphasis on the underlying investment solution, and centralised investment propositions. Tools need to be capable of supporting advisers to deliver this based on appropriate criteria or integrate with a range of tools that can deliver a ‘packaged’ solution for advisers.

How advisers conduct appropriate due diligence on centralised investment propositions, including platforms, and then ensure that clients are not ‘shoe-horned’ into the centralised investment proposition is a key regulatory concern. Where an advisory firm’s investment process has divided the client bank based on client segmentation a research tool can support advisers to conduct due diligence to support the investment process and centralised investment proposition selection, and the client specific recommendation.

The research tool can apply criteria suitable for each segment of the client bank, as defined by the adviser to support the centralised investment proposition selection, and then also for each adviser considering their client specific needs both on and off platform, whether that is a risk targeted fund or discretionary fund manager.

A further outcome from RDR will be the move to a number of advisers adopting panels to achieve efficiencies and greater systems and controls across all product, investment fund and solutions, such as platforms. The FSA has confirmed in its finalised guidance paper that it is possible to use panels and offer independent advice providing the panel is sufficiently broad in composition to enable the firm to make a recommendation based on a comprehensive and fair analysis of the relevant market. Thus research tools can help advisers create and indeed operate both full whole of market panels or restricted models.

Jackie Ison is head of financial planning services for Tenet Group

Questionnaire: Key components

Advisers should create a due diligence questionnaire with some key components as follows:

• The nature of the firm – size, resources, financial standing and reputation. Are the researchers validating and updating the data in the tool experienced and qualified appropriately?

• From your relevant market, identify whether it conducts research in all areas.

• How robust are its systems and controls? A key aspect is how reliable its data input and validation of such data is.

• How often is the data reviewed and updated?

• Does it offer support and training to advisers?

• Does the tool conduct research across the whole of market, on and off platform?

• Does the tool offer research that considers the price competitiveness of all propositions, again on and off platform?

• If you work with panels or a restricted proposition, can the tool be configured to either display only a limited range of products and funds?

• Can the tool facilitate your chosen research criteria documented in your methodologies? If you have identified a key product feature but the tool does not capture this data, then clearly this tool can be ruled out from your due diligence selection process.

• How much emphasis is placed on researching qualitative rather than just quantitative (fund performance data) factors? This is important when researching investment funds.