“In order to meet its responsibilities under the client’s best interests rule and Principle 6 (Customers’ interests), a firm should consider whether the personal recommendation or any other related service is likely to be of value to the retail client when the total charges the retail client is likely to be required to pay are taken into account.”
It’s a relatively small piece of guidance deep in the detail, but I believe it’s one of the most significant extracts of the entire handbook. It cuts to the heart of the question we all ask when investing: is this worth the risk I am taking?
The total cost of ownership (TCO) is the only accurate way of assessing the costs associated with an investment, combining the platform, investments and advice charges into one overall figure. This circumvents the deception of low headline rates for a platform, propped up by a lengthy charge sheet for most transactions that occur in the future.
The TCO figure is useful at the point of purchase, especially if comparing substitutable solutions and/or providers, but in order for the COBs guidance to be accurately considered, all ongoing costs must be included. The costs associated with ongoing management of the investment solution can make the difference between achieving the required outcome or not, so it’s critical they form part of the customer assessment and advice process.
As an intermediated business we don’t get to see this advice process in action. However, it has been fascinating to see how it has evolved. The requirement to consider the level of risk that the client is willing to tolerate as part of this advice process is almost universally adhered to, but there are also a number of other client characteristics that can affect whether a solution is suitable or not.
Their attitude to cost, their need for involvement, their investment knowledge and experience, their need for breadth of investment choice and their need for ongoing reviews are all key areas for consideration. This ‘checklist’ can help ensure the investment is suitable.
As well as the client’s capacity and tolerance for risk, the level of ‘risk required’ is a crucial consideration. Is the proposed solution at the required level of risk to achieve the required outcome? This is especially important when looking at the associated charges and potential returns. For example, a risk 3 portfolio on the Skandia platform is expected to deliver 5.05 per cent over one year gross of tax and charges (using return assumptions supplied by Towers Watson).
The combination of inflation and the total cost of (ongoing) ownership are likely to eat in to a large part of this return. Worse case, if these costs are not understood, the client could be investing in a solution that simply isn’t worth the risk or cost being incurred as the charges will outweigh the expected returns. The right decision regarding wrapper selection, taxation and investment solution can make the difference between success and failure.
Platforms need to develop the solutions to drive down costs. These must be outcome focused and aligned to the needs of customers and, in doing so, ensure the guidance set out in COBS 6.1A.16 is appropriately considered.
Peter Mann is vice chairman at Old Mutual Wealth
