Challenging status quo bias

He says firms who are finding their recommendations are concentrated among a small number of products and providers should seek to understand and challenge the basis for those recommendations.

Mr Heffron says firms with a high concentration of recommendations should consider actively researching alternatives as part of a “culture of challenge”.

But other experts FTAdviser spoke to say if the clients have a very high degree of commonality in terms of objectives and associated requirements and your research and due diligence has identified a very good solution, why would there be a need to spread business among a greater number of providers?

Keith Richards, chief executive of the Personal Finance Society, says: “By implication you would be spreading your business utilising sub-optimal solutions.

“However, you must be sure on a client-by-client basis and not simply generalise because they fit a ‘segmentation’ exercise.

“In simple terms, if you are providing the most suitable solution, there is no need for change or concern.”

Ben Wright, head of technical services and research for Tenet, agrees with Mr Richards.

Mr Wright says it is more important to demonstrate why you have selected the providers you are using.

If you set your stall out to get clients that fall into a certain bracket, this will be reflected in the spread of providers you use

He says quality rather than quantity is probably the biggest factor here and research and due diligence is all about having confidence in the quality of the product to meet the client needs.

Mr Wright says: “The extent of research may be depend on whether the adviser is operating a restricted or independent model – either way the recommended product/fund must be suitable.

“Research is only the first stage, suitability for the individual client is the key issue.

“It is never appropriate for a firm to base their needs ahead of the client needs. Firms should take steps to manage these conflicts of interest as evidence of their customer focussed culture.”

Ultimately as a firm’s recommendations should be suitable for individual clients, Richard Nuttall, head of compliance policy at Simplybiz, says the spread of the firm’s recommendations would depend on the make up of their client bank.

If in any doubt Mr Nuttall says the firm should carry out relevant due diligence and research on each provider and, if it appears that a few providers are getting the bulk of the business, this should be challenged to ensure it meets individual clients’ needs.

Sheriar Bradbury, managing director of Bradbury Hamilton, says clients of a different size and with different objectives will not always be suited to the same platforms as these all have their own ideal clients and have been priced accordingly.

Mr Bradbury says: “Some platforms want clients with more than £250,000 who want to trade shares on a regular basis, whereas other platforms want clients with £50,000 so set the costs of trading and the costs of their platform to reflect this.

“If you set your stall out to get clients that fall into a certain bracket then this will be reflected in the spread of providers that you use.”

Aileen Lynch, head of technical for SimplyBiz, says ultimately it is vital for all advice firms to understand when a conflict of interest arises.

Where a solution is chosen for the sole purpose it suits the firm, Ms Lynch says then it could cause a conflict if it doesn’t achieve the right consumer outcome.

She says challenging each stage of the processes through thorough research and due diligence should eliminate these risks.

Pinsent Mason’s Mr Heffron says firms must also be careful to not place the level of service they receive as a key factor ahead of the level of service received by their client.

He says they must also ensure they do not cease to adequately review the options available to the client purely because the firm is happy with the service from the providers they were using, and should always be looking to secure best value for their clients.

In order to have the client’s best interests at heart, Mr Heffron says firms should have research and due diligence as a central function of the advice process.

Practical steps which Mr Heffron says firms can take to achieve this include:

1) setting out clear criteria for assessing the suitability of the products and services the firm recommends;

2) encouraging a corporate “culture of challenge” to overcome any bias firms might have towards particular products, services or providers; and

3) carrying out effective file reviews, which involve a genuine assessment of the recommendation (as opposed to simply checking the presence of research and due diligence, irrespective of its quality or relevance to the client).

Criteria that Mr Heffron says firms may wish to consider when assessing products and services include:

1) Whether the firm has a sufficient understanding of the product or service (including any underlying assets) to make an independent assessment of risk, and whether the firm understands how that product or service might behave under different market conditions;

2) Whether the product or service genuinely meets a client’s risk appetite and investment objectives.

For example, firms should not assume that a particular ‘balanced’ fund meets the risk appetite of a client assessed as having a ‘balanced’ attitude to risk without first understanding whether the underlying asset selection meets the firm’s definition of balance;

3) Whether the fees and charges for the product or service compare favourably or unfavourably with similar products;

4) Whether the product or service genuinely diversifies a client’s portfolio, or whether the underlying assets or instruments serve to concentrate risk; and

5) Whether the product or service contains embedded leverage.