Consumer duty could change the adviser/platform relationship

It was from his platform provider and contained the precise sort of request that causes advisers to threaten to remove their clients from the platform.

As it turned out, the platform was in the right and was complying with obligations under the consumer duty, one consequence of which is that the relationship between advisers and their platform has been altered forever. 

The email that provoked the adviser was from a representative of Abrdn's Wrap platform, and – as seen by FTAdviser – contained an attachment showing all the adviser’s clients with more than 50 per cent of their portfolio in cash. 

The platform wanted an explanation for this and set the adviser a deadline of March 3 to provide it; furthermore, if the deadline were not met, the platform said it platform would contact the adviser’s clients directly, which prompted the adviser to immediately consider moving his business elsewhere.   

Changing the relationship

However, Mike Barrett, consulting director at The Lang Cat, says that under the consumer duty the adviser is obliged to meet the platform's request, saying this process "fundamentally alters the relationship between the adviser and the platform.” 

Barrett adds: “The Financial Conduct Authority has been very clear with its expectations under consumer duty. All firms must act to deliver good outcomes to customers and to comply with the cross-cutting rules. In particular, all firms have a role to play to avoid foreseeable harms.”

Platforms will need to ensure these communications to advisers are clearly explaining their concerns and rationale.Mike Barrett, The Lang Cat

From the adviser's perspective, his response was that there is a variety of valid reasons why clients may have a large holding in cash at any one time, including: “Perhaps it’s a small fund that is going to be entirely withdrawn shortly; perhaps a client is ultra-cautious, sometimes it is a trading strategy (seeking to profit on a FTSE that stands at an all-time high); perhaps a client has recently been widowed or suffered ill-health and needs time to adjust, without concerns about investment performance.

"In short, when our clients do hold cash, it is deliberate and there are myriad reasons for doing so.” 

However, Barrett adds that while the financial adviser will have the highest level of responsibility for a client outcome and suitability, “providers (platforms, asset managers etc) are also required to take steps to avoid foreseeable harms where they believe they might occur.

"If the platform believes, for example, clients investing in cash for the long term might not be getting a good outcome, consumer duty requires them to take action. Platforms will need to ensure these communications to advisers are clearly explaining their concerns and rationale.”

A representative of Abrdn says the consumer duty requires it to take this action, as do the responsibilities of providers and distributors for the fair treatment of customers, known as the FCA's treating customers fairly regulation.

The spokesperson says the obligation is to “check that clients on our platform are in the correct target market. We have carried out these checks and contacted advisers for some years.

The consumer duty gives us an opportunity to challenge the status quo.Roddy Munro, Quilter

"One of the checks that we carry out is to identify advisers with clients who have significant holdings in cash for an extended period as our platform is designed for long-term investing.

"We recognise that we do not know individual client suitability and we do not need to or want to know specific client investment instructions, which is why we write to advisers seeking assurance that their clients are still suitable for our platform.” 

The representative adds that the platform “would always” prefer to engage with the adviser directly rather than go to the client. 

New opportunity

Rival platform Quilter says it views the new regulatory obligations as an opportunity to better work with clients and advisers.

Roddy Munro, head of proposition specialists at Quilter, says: “The consumer duty gives us an opportunity to challenge the status quo brought about by layers of historic regulatory disclosure and focus instead on tailored communications designed to help customers make better and informed decisions.”

He adds: “Consumer duty requires all firms in the value chain to work together to deliver good outcomes and introduces new requirements to avoid foreseeable harm.

"It’s about understanding the risk of poor outcomes for different groups of customers and then taking reasonable steps to mitigate these risks through good product design, clear communications both with customers and between firms and the right support model that customers can access when needed.    

“Well balanced and timely communications that complement existing regulatory requirements and help customers understand and avoid actions that could be detrimental are a must. We are developing rigorous testing approaches to measure comprehension and ensure we can adapt and structure our communications accordingly.”

In reality, it has never been the case that platforms let advisers do what they want.Ben Hammond, Altus

Ben Hammond, director of platforms at Altus, says: “Platforms should always have been contacting advisers if they noticed something usual on a client's account. I think the significance of consumer duty to this is that platforms want to show they have acted, rather than just spotted something like high cash levels.

"If the adviser has a valid reason for keeping clients in cash, then that shouldn’t be a problem for them. In reality, it has never been the case that platforms let advisers do what they want.

"But at the same time, I think, contacting the client directly should always be the last resort for the platform. Lots of platforms are owned by companies that sell other products, so advisers are wary of that.”  

Philip Milton, founder of advice firm Philip J Milton and Co, says there are limited circumstances where he would have clients with more than 50 per cent cash in their portfolio, but such circumstances do exist.

He adds that in circumstances where he has made a strategic decision to have client portfolios in a position where they have more than 50 per cent in cash, he would inform the clients individually that he had done this, regardless of any regulatory requirement. 

Advisers have become used to a relationship with platforms based on the adviser hiring a provider that most closely aligns with their own priorities; the consumer duty may impact that in a way that changes how advisers do business forever.

David Thorpe is investment editor of FTAdviser