It goes without saying that when it comes to providing investment advice, every financial adviser is already trying to deliver 'good outcomes for clients'. Given that is the key principle of the consumer duty, many may be thinking that they do not have anything to worry about.
As with most regulation, however, it might not be quite that simple.
Recently the Financial Conduct Authority has been quite clear that the consumer duty provides a “new lens” through which to look at your investment proposition.
The consumer duty regulation is clear, and advisers will need to understand exactly what that means for their propositions and how they can ensure that they meet the new requirements.
The good news is there is practical guidance advisers can lean on to ensure that you meet the new requirements. The consumer duty has been built around three “cross-cutting rules” and four outcomes.
So, one approach you could take might be to consider each of the four outcomes and how you might meet them in relation to your investment proposition.
The aim of this outcome is for you to provide evidence that your investment proposition is appropriate for your target market. You may want to consider these areas:
This outcome requires you to demonstrate that investments represent good value. In considering this, focus on what the client is paying for. A cheap but poorly diversified income solution is equally likely to fail the value test as a more expensive active solution.
The information you provide to clients should be effective, timely and properly understood.
Provide support that meets your clients’ needs.
Looking at these outcomes, you may conclude that you are already meeting the new requirements, and that you do not need to conduct a major overhaul of your advice process. You are probably right, but there are some specific areas you may need to act on to ensure you meet the new rules.
Let us look at an example of where you may want to take some action.
There are investment propositions that require clients to accept regular, ongoing recommendations to change the shape of their investments.
For example, some advisers run advisory portfolios with a regular rebalance, perhaps every quarter, or every six months.
That is a great way to demonstrate value (outcome two – price and value) and a good process for ensuring clients are in your latest selection of funds (outcome one – products and services).
The challenge is a result of clients being required to accept a rebalance instruction (ideally in writing) before any changes can be made. Clients who respond are fine, but those who have not responded to rebalance advice are a problem.
Over time, this can create a group of clients who are sitting in old versions of advisory portfolios.
Your investment platforms should be able to provide technology that gives excellent visibility on what you are facing and exactly which 'old portfolios' your clients may still be exposed to.
There are two concerns. The first, most obviously, is based on the cross-cutting rules. A client in an 'old' portfolio does not “avoid foreseeable harm”, as the client is in a selection of investments you may no longer deem to be appropriate.
The second is that the client may be considered “vulnerable” – they may not be responding to rebalance advice requests because they do not understand the information being provided; or have developed a health condition that prevents their response. That may fall foul of the requirements under outcome four (consumer support).
This is a red flag – one that should prompt action. Work with your platform provider to identify who these clients are; and work to resolve this issue.
You may, for example, wish to consider an appropriate outsourced solution that meets these clients’ needs.
Also, review your communications and customer support to make sure you can confidently say that your clients understood the advice you were giving and the consequences of not responding.
Quality advisers are likely to be doing much, if not all, of this for your clients. However, doing it is not enough. The regulator is clearly going to want to see evidence for the steps you have taken.
Therefore it is vitally important that financial advisers carry out assessments based on these four outcomes, discover where any weaknesses may lie and seek to take appropriate action so you can demonstrate that you continue to deliver good outcomes to your clients.
David Tiller is commercial and propositions director at Quilter