Advisers play an important and valued role in the retail financial services ecosystem.
This was evidenced by a recent survey carried out by Hymans Robertson Investment Services of 1,500 investors, who said the main reasons they use an adviser are for "peace of mind" (54 per cent) and because "my affairs are complex and I feel I need advice from a professional" (39 per cent).
The importance of an adviser's trusted role will become even more significant as we see prolonged inflation, ongoing market volatility and a maturing cohort of individuals that have not been fortunate enough to be members of a defined benefit pension scheme, thereby needing retirement support.
However, like all businesses, to be successful advisers need to continually evolve to meet their changing client needs, technology developments and, of course, regulatory change.
It is the impact of this final aspect, namely the Financial Conduct Authority's consumer duty, that will have been high on advisers’ priority list, particularly when it comes to their approach to investments and the structuring of their centralised investment proposition.
The first impact of the duty relates to whether advisers are classified as a manufacturer by the regulator. The corresponding obligations (such as product testing, target market definition, value for money assessments and so on) could have an impact on advisers’ business models.
Consistent key themes do exist, most notably the need for robust processes, data collection and evidence to be in place. As might be expected of new regulations, there is currently some market uncertainty and interpretation as to what constitutes an investment product and when someone is (or is not) that product’s manufacturer.
Some possible examples of advisers potentially being inadvertently classified as manufacturers, perhaps outside of their intention, include the running of advisory model portfolios and blending of investment solutions, for example allocating to multiple multi-asset funds in combination.
Timing around changing CIPs is also creating some challenges. For example, advisers who are outsourcing investments to a third party may be clear that they are not a manufacturer of their primary CIP moving forward.
However, an adviser firm may still be seen as the manufacturer of the historic solutions (for example, blended multi-asset funds, or advisory model portfolios) that have yet to move to the new CIP, because a client’s next review is several months away.
Some of the fog will lift around this uncertainty over the coming months. For those advisers that are comfortable in the manufacturer role, they are likely to have many of processes in place (or if not should be putting them in place).
However, for others that are less comfortable, they will most likely want to move to a position where there is no ambiguity, for example putting in place providers (following a robust evidence-based selection process) that clearly assume the manufacturer’s role and responsibilities.
For many, there will also be a desire to carry out some form of accelerated transfer to move all their assets into their CIP (that is, outside an underlying client's typical review period) to avoid having to take on manufacturing responsibilities on legacy client assets.
What does the FCA consider 'good'?
Fair value is also likely to continue to dominate adviser discussions, partly because of its obvious importance, but also given the FCA’s lack of prescription in this area. This has resulted in 'fair value' being interpreted in different ways by different people.
In terms of getting an understanding of what is 'good' from the FCA’s perspective, there are two recent points of reference:
1. The FCA’s 2021 review of asset managers' responses to the FCA’s 2019 regulation, which requires UK authorised managers to carry out an annual value assessment of their funds.
The findings to this review included the comment, “even when firms had good (value) frameworks, we often saw a gap between the data being provided by the frameworks and the value conclusions reached”.
2. The FCA’s May 2023 findings on 14 advisers' fair value frameworks, which set out several points, including a general theme of there being a lack of sufficient evidence to justify the conclusions being made and an over reliance on looking at average outcomes, rather than understanding the full range of outcomes that might be achieved.
In addressing the first of the above points, advisers will want to focus on building a bank of evidence and establish a link between ongoing data being collected (including some relating to their CIP) and the assessment of value for money.
For this to be possible advisers will need to be supported with more data and form closer relationships with their investment providers.
The need to demonstrate the fuller range of outcomes as opposed to looking at ‘the average’ will further support use of technology. It will also call on advisers drawing information from specialist data sources (for example longevity), all of which can support evidence-based targeted advice.
Such focus on technology and specialist data will sit naturally with the FCA’s current thematic review into retirement income advice.
Advisers should demand more from their providers to help advisers meet their clients’ communication needs.Client communications relating to investments is a further area where the advisory profession will evolve quickly in response. In part, this is because consumer duty’s “consumer understanding and support outcomes” places considerable emphasis on advisers' approaches to communicating with retail customers.
It is also because the quality of communications is one of the main ways that customers assess if their adviser/provider has done a good job.
For example, in a recent survey, retail investors voted “quality of communications” second only to investment returns, when it came to assessing if their adviser and manager had done a good job.
Again, this is an area where both technology and data have a part to play – for example, it is already well trailed how artificial intelligence has the potential to support here.
Advisers should demand more from their providers to help advisers meet their clients’ communication needs.
In summary, the precise impact of consumer duty on advisers is likely to vary on a case-by-case basis, depending on factors such as (but not limited to) their approach to investment, the services they provide and the nature of their underlying clients.
Nevertheless, consistent key themes do exist, most notably the need for robust processes, data collection and evidence to be in place.
Over the coming months we expect advisers’ focus to be reflection on their implementation of the consumer duty as they work with their investment partners as examples of best practice (for example value for money frameworks and findings) are shared around the profession.
William Marshall is chief investment officer of Hymans Robertson Investment Services
