'Target markets focus is crucial to better outcomes across the value chain'

In 1987, in my summer break from university, I got a job at an asset management firm selling funds over the phone.

People who had seen adverts for the firm’s smaller companies fund or south-east Asia ex Japan fund would ring up and I would read them a set of sales points from a script. On this basis, many people – a lot of them in retirement – invested four, five and even six-figure sums. 

I was back at university by the time Black Monday hit. Over the following days and weeks, many people lost up to 40 per cent of the value of their investments. 

Tthe FCA is establishing a set of railway tracks that should formalise the process of matching product to investor. 

Was it wrong to invest in UK smaller companies or Asia Pacific ex Japan back in 1987? Of course not. With a suitably long horizon, you could have done very well out of those investments: if you had held on for 10 years, you would have made an annualised 7 per cent from the former and 14 per cent from the latter, based on sector averages.

The damage came from selling these products to people who simply could not afford the losses they might experience along the way.  

Of course, so much has changed in the intervening years, and there are already so many checks and balances in place that mean clients today are better protected.

Getting your market right

But with the emphasis the new consumer duty places on target markets, the Financial Conduct Authority is establishing a set of railway tracks from manufacturer, to distributor, to client that should formalise and clarify the process of matching product to investor. 

Under consumer duty, everyone in the value chain must ensure products meet the "needs, characteristics and objectives" of the identified target market, and that they are distributed appropriately.

Some advice firms feel the work all lies with the manufacturer.

That means manufacturers must identify target markets for their products – and distributors must ensure the right products end up with the right target markets.

Some advice firms feel the work all lies with the manufacturer – ‘it doesn’t apply to us’, one adviser told me.

But many firms recognise that understanding the target markets in their client base will not only be vital to complying with the new regulation, but invaluable for their businesses and the whole value chain. 

Designing products

Consider product design. When advice firms group their clients into target markets, they create a data set that can be shared with the investment manager – particularly useful for identifying gaps in product ranges, or client needs that are not currently being met.

For managers, this data-driven understanding of the end client enhances the ability to design, build and review products.  

For advice firms themselves, target markets also provide clarity of proposition, allowing them to really focus on their core clients – not only from an investment point of view, but also from a business point of view.

By working hard to define and understand their clients (their challenges, their opportunities, their strengths, the risks they face) firms can ensure that their investment solutions are aligned and can also harness other benefits of client segmentation – tailoring marketing and communication styles accordingly, for example. 

By embedding target markets in their systems, firms will be able to link client groups to product criteria and even specific product groups.

Leaning on technology makes this even more powerful. By embedding target markets in their systems, firms will be able to link client groups to desired outcomes, product criteria and even specific product groups.

They will be able to add justifications for recommending certain products to this target market, streamlining the suitability process and saving huge amounts of back-office time. They will be able to monitor portfolios against desired outcomes and evidence all of this work to the regulator. 

With implementation now just a few months away, advice firms that are onboard with the shift are starting to identify and build their target markets.

Target markets that are too broad – ‘clients in retirement’ – fail to capture important nuances.

In my company’s software, some 300 firms have already set up around 500 target markets, as they think about how to group their clients most effectively and how to define those groups.

To create their initial target markets, firms are using factors such as demographics, wealth bracket, attitude to risk, attitude to sustainability, client need, investment experience and desired outcomes. 

Ironing out the details

As with any change, getting this right will take time.

Target markets that are too broad – ‘clients in retirement’ – fail to capture important nuances and mean the firm will not be able to identify products that are suitable for everyone in the group.

Those that are too narrow, for example ‘risk level five farmers 10 years from retirement with two children and a high emphasis on sustainability’, may be similarly unhelpful. 

There is a lot of work to be done as the July deadline approaches. But it is valuable work.

As the regulator notes, any target market is likely to include some customers with characteristics of vulnerability, given that people move in and out of vulnerable circumstances throughout their lives. Firms must ensure they consider the needs and objectives of these customers within the group. 

There is a lot of work to be done as the July deadline approaches. But it is valuable work.

By embedding target markets up and down the value chain, manufacturers and distributors deepen their understanding of client needs, improve their ability to share information with each other and with the regulator, and ensure clients are sold suitable products aligned with desired outcomes.

Ben Goss is chief executive of Dynamic Planner