Much like their clients, no two adviser firms are alike, and this influences how different intermediaries operate.
One increasingly prominent element of many advice businesses – the investment committee – is a prime example of this disparity. Advisers’ approaches to clients’ investments are growing increasingly sophisticated. But the committees overseeing these allocation decisions are far from homogeneous.
A paper by ratings firm Square Mile, “Managing an effective investment committee”, suggests some main areas of focus for running a committee, including ensuring suitability, monitoring charges and performance, as well as managing risk.
A committee may take various actions to achieve this according to the paper, as outlined in Box 1. But as Jamie Farquhar, Square Mile’s director of business development, notes, there is “nothing prescriptive” about running such a set-up.
“There are a million ways to skin a cat,” he says. “I think that’s a good thing: we don’t want this to become entirely black and white.”
The parent firms will differ in culture and approach – such as whether they prefer to run money themselves or outsource. Some investment committees will include external figures, while others will not. And investment committees can also vary significantly in what they are responsible for, because other parts of the business may deal with certain tasks instead.
None of this is contentious. But a set of newly introduced rules is likely to force greater uniformity, because they require many firms to check and upgrade their processes or risk the ire of the regulator.
The change has come in the form of the FCA’s Product Intervention and Product Governance sourcebook (Prod) requirements, which the watchdog introduced this year alongside the Mifid II rules. These cover “manufacturers” of products – including the likes of fund providers – but also “distributors” such as advisers.
The requirements, some of which are outlined in Box 2, call on intermediaries to identify the “target market for the respective financial instrument”. In plain English, this means they must make sure that, for example, a selected investment fund is suitable for their client’s needs. This process can consider factors such as how a product fits a client’s needs, risk appetite, the impact of charges on the individual, and even the financial strength of the provider.
The Prod document calls for detailed information, adding: “The target market identified by distributors for each financial market should be identified at a sufficiently granular level.”
Intermediaries have grown more familiar with the realities of life under Mifid II, including requirements for enhanced levels of disclosure around costs and charges.
But commentators worry that, more than half a year on from implementation, some firms have failed to fully comply with the Prod requirements. The FCA, which has codified the Mifid requirements, could well crack down on any laggards.
“There’s a bit of an alarm bell here: if there are rules out there and firms aren’t ready, that’s not the place to be,” says Mike Barrett, consulting director for the Lang Cat. “The fact those requirements are rules rather than good practice means if the regulator wants to do you for something, you are in trouble.”