'Is simplified advice a realistic venture?'

Having been involved in the subject for well over a decade, both in my day roles and for various industry working groups, it’s hard to be confident that the latest update on the subject will provide absolute clarity. 

The latest discussion paper was published last week and focuses, rightly in my view, on simplified advice and the possibility for individuals to get one-off advice without them and advisers having to go through the whole suitability process. 

This may allay perceived reluctance on the part of consumers to hand over details of almost every aspect of their financial lives and to enter a long relationship with an adviser. 

For advisers this could remove the very onerous ongoing suitability obligations that must limit capacity to acquire new clients.

Guidance is an area that the Financial Conduct Authority seems keen to encourage, but is that realistic?

Part of the regulator’s dilemma is understanding how any firm can make a viable business from guidance that is low level, low priced and, quite possibly, low demand. 

It seems a little like giving the investor stabilisers at the beginning, but then removing them once they can get to the end the drive.

Most basic financial guidance won’t get as far as investment. Before auto-enrolment perhaps the best basic advice was not to opt out of pension contributions, but now it will be about achieving the best interest rates available, not borrowing at high rates, paying down credit card debts promptly and basic budgeting.  

Good luck to anyone seeking to turn that into a profitable business with an appropriate risk/reward ratio – it feels more like the potential syllabus for the prime minister’s wish to encourage some form of maths at sixth form level.

In the meantime, firms have attempted to devise services that are light on customer interaction. Under consumer duty, there’s one particular offering that could potentially come unstuck.

Re-model required?

Financial services companies with extensive customer bases will naturally seek means of engaging more widely with those individuals. 

To use a phrase that I really dislike, they will seek to maximise their ‘share of wallet' – that always sounds to me like Fagin’s gang splitting up the booty from a night of pickpocketing.

One such attempt has been the development of so-called D2C model portfolios that leave the rebalancing and asset allocation adjustments to the client.  

Typically, these will offer an investor the opportunity to determine their own risk profile and to select a model portfolio consistent with that profile, but will then rely on the investor to carry out any rebalancing and, more concerningly allow them to make changes that may result in a very differently structured portfolio.

It seems a little like giving the investor stabilisers at the beginning, but then removing them once they can get to the end the drive.

Under the consumer duty, never mind under any new advice/guidance ecosystem, this seems particularly tricky. There are plenty of poor outcomes and foreseeable harms in that mix and it doesn’t feel like the sort of one-off advice that the latest proposals envisage.

The consumer duty essentially insists that in most circumstances someone ultimately needs to be responsible if things go wrong. And in that context, offering an investor the chance to assess their own risk appetite but to then take action that is inconsistent with that profile sounds like a recipe for trouble.

This type of approach, essentially a template, with investors copying an allocation rather than investing in a legal vehicle such as a Ucits fund, arguably puts an onus on the distributor, perhaps an investment platform, to perform a full suitability assessment, both initial and ongoing.

As the whole raison d’etre of the platform sector is scalability, it is difficult to see that as an attractive business proposition. 

Whose responsibility is it anyway?

Unlike with a fund, where an authorised corporate director or depositary carries out risk assessments and shoulder responsibility in a crisis, it’s unclear who is responsible for the oversight of such offerings.

Helping a retail investor populate a model portfolio via your approved or recommended funds list and then leaving them to it could be a problematic approach going forward. 

The bottom line is that all firms need to consider the possibility, and likelihood, that their products will end up in a retail investor’s hands and must ensure that the entire approach and documentation is suitable for that person.

The consumer duty rules enhance this, meaning that firms now need to carefully assess which types of products they’re selling to which types of clients.

A not entirely illogical extension of the regulator’s direction of travel would be to bar all execution-only investment activity – much of that is undoubtedly speculative, ill-informed and likely to lead to foreseeable harm. We don’t want to go there in a free society, do we?

David Ogden is head of compliance at Sparrows Capital