There is also the danger that customers purchase inappropriate products because they do not understand the features, terms or conditions of the product.
We believe if a firm does not have the expertise to deal with the client due to their personal situation, they should make every attempt to refer them to another firm or third party for the appropriate level of support to be provided.
All the above are considerations for firms that give investment advice, but additional regulatory requirements must be considered for discretionary wealth managers.
Discretionary management
If a firm operates an advised and discretionary service, they will need to ensure that advice to access their discretionary management service is genuinely in the best interests of the client.
The firm’s discretionary management service may generate greater charges for a client to pay for the greater level of expertise that may be required for that service, but it may also be the case that their service produces greater profit for the firm.
The firm will need to ensure that all advice to access their discretionary management service is suitable for each and every client, and not because it may generate more profit for their firm.
A firm with discretionary management permissions may have an advantage when it comes down to suitability because of the resources they are potentially able to deploy.
In past reviews the FCA has identified areas of good practice initiated by discretionary management firms. In one example the FCA cited the following instance:
“A medium-sized discretionary management firm identified internal experts in specific subject areas.
"The clear designation of responsibility meant that individuals took responsibility for ensuring they carried out robust research and due diligence for their subject area before feeding their analysis into the firm’s wider research work.
"Regular rotation of expert areas helped to maintain wider individual competency and supported robust internal challenge.”
Further guidance on good practice for discretionary management firms regarding suitability was given in the review when looking at the use of model portfolios and asset allocation tools.
Here the FCA noted that there was an increased reliance on asset-allocation tools and model portfolios.
It was its view that tools, and other structured approaches to selecting products and funds were a useful starting point for an investment selection, when used as part of a robust suitability process.
Although this was a good starting point the regulator considered there were a number of potential dangers to such an approach.
The FCA stated:
“However, if firms adopt such tools or structured approaches, they need to have robust systems and controls to ensure that any advice or discretionary transaction made using the tool or approach is suitable for customers.
