Experts have sounded warning bells over advisers using “push” questions during their suitability assessment for clients, raising fears that “tick box” exercises could lead to inappropriate portfolios.
Speaking on the FTAdviser webinar today, Rebecca Robertson, director at Evolution Financial Planning, said advisers should not approach environmental, social and governance suitability as a list of questions.
She said: “You can’t ask questions like a tick-box scenario such as ‘do you want gambling? Do you want animal testing? Do you want fossil fuels? Do you want tobacco?’ because you list them all out and they say ‘I don’t want those’.
“You need open questions and conversations to find out more. Is governance their issue? Or if you have an environmental lawyer, that may be a different scenario.”
Robertson added that the situation should be more of a “fact find” about the client, where the adviser could ask if there were elements of the world that were important or impactful to them.
Keith Balmer, director and product specialist at BMO Global Asset Management, agreed, noting that animal testing was a good example of this.
He said: “Advisers need to be very careful about the questions they ask in terms of suitability. If you blankly ask someone, ‘do you want to invest in a company that tests their products on animals?’, the natural instinct is no, absolutely not.
“However, if you then go, do you want the Covid vaccine? I will go, yes please. But the law dictates that has to be tested on animals."
Balmer said advisers “absolutely” had to be careful on the ‘push’ questions in the suitability process.
ESG investing has boomed in popularity in recent years as fears over climate change have led investors to consider the impact of their money and as a growing number of millennials have begun investing.
2020 saw a record year for ESG inflows, and fund houses have been quick to capitalise on the growing interest with numerous portfolio launches.
But it has brought with it a potential maze for advisers, who are tasked with navigating a world of greenwashing, confusing terminology and conflicting client preferences.
Robertson said: “I came to the end of the conversation with a client once, we had got the portfolio lined up, and the ESG or ethical side of things had not come up, and the client said she only wanted it to be ethical if I could ensure there was no performance effect.
“I left the ethical side alone because how can I dictate that it will not affect performance? We open up to compliance issues because we don’t know this.”
Balmer also warned advisers over different fund houses and investment products taking different views on ESG boundaries, noting that ESG exchange-traded funds which run off the MSCI database did not exclude fossil fuels.
Cost tail wagging the dog
The panel also urged advisers to ensure the “cost tail” did not “wag the dog” when it came to fund selection.
Balmer said one example of this happening was the last decade’s shift towards passive funds, primarily driven by costs pressures as advisers wished to keep total cost of advice and investing down for their clients.
Robertson added: “We need to ensure we’re not picking funds because it’s cheaper, just to ensure we’re getting paid [as advisers].
“But it’s good to be conscious of costs. I’ve swayed more towards multi-asset funds because they are cheaper, and if I go with a DFM I need to make sure there is a right reason for that.”
Dominic James Murray, chief executive at Cameron James, agreed, saying that it could be a “dangerous way to go” if advisers chose funds at low costs to ensure the advice firm could still be paid an ongoing charge.
He said: “If you’re going head to head with other advice firms you need to think about costs. But sometimes, it can be a dangerous way to go, especially if you opt for passive when there are lots of inflows going into certain sectors.”
imogen.tew@ft.com
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