Advisers warned to not segment clients by assets

Advisers warned to not segment clients by assets

Advisers who segment their clients by assets will find it ‘impossible’ to act within the City-watchdog’s regulations, according to an adviser guide.

Clever Adviser’s new “An Adviser’s Guide to Prod” states the “temptation” for advisers to use assets under management to segment their client base “might seem logical” but would “make it almost impossible to undertake Prod correctly”.

The Financial Conduct Authority introduced Prod in January 2018 in a bid to improve the industry’s product oversight and governance processes.

Article continues after advert

Prod aimed to tighten the rules around the design and sale of products to ensure they clearly meet the needs of their identifiable target markets, are only sold to those target markets and deliver appropriate outcomes.

But the guide, which was published last week (October 17), stated advisers who segmented their clients by assets under management would fall short of such expectations because assets were not “uniting qualities” that led to appropriate investment solutions for a particular investor group.

For example, two clients with £250,000 of investable assets could have very different needs whereas two clients both facing retirement could have different levels of assets but similar requirements.

The guide told advisers to segment their client base by more 'uniting qualities', such as life stage, and stated profiling personalities such as risk-averse or more ‘gungho’ rather than pursestrings could also help reveal product suitability.

Mike Barrett, a director at the Lang Cat, agreed that Prod was “absolutely” saying advisers needed to group their clients by need rather than something like assets.

The consultancy believes too many advisers are still segmenting by assets, which it stated was fine for the "business side of things" but not a good indicator of client requirements.

He said: “It’s the requirement for advisers to build services on the needs of their target clients and provide products and solutions that best meet those needs.

“Prod requires you to reflect that two clients both with £250,000 of assets may not have the same needs.”

Mr Barrett said most advisers were already acting like this but stressed Prod was more about recording those needs.

He said: “Advisers need to make sure it’s written down and if the FCA comes knocking you can show why it’s suitable.”

Martin Bamford, managing director at Informed Choice, said: “Regulation aside, it’s important for all businesses to identify their target market and design services which are well suited. 

“In my experience, financial advisers tend to deal with fairly homogenous groups of clients.”

Despite this, Mr Bamford thought Prod was an example of regulation which was designed to tackle issues with product manufacturers and distributors but had trickled down into the financial planning sector where a very different approach is often followed. 

He added: “Pros is no doubt a regulatory consultant’s dream rulebook, but not the most pressing issue for financial planners in delivering high service standard to their clients.”