TaxApr 19 2017

Designing service agreements for value

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Designing service agreements for value

The coffee is being served in the first break of the conference and I have just come off stage from my presentation on risk targeted multi-asset funds.

An adviser approaches me with a somewhat quizzical look and asks: “But if multi-asset funds, especially risk-targeted, do not need regularly reviewing and rebalancing, how can I recommend an ongoing service to my customers? What would they be paying for?”

This is not the first time I have been asked this question and with more and more advisers moving towards using multi-asset funds, and the regulator also having its eye on the value and delivery of ongoing services, this is a query worth exploring.

An ongoing service agreement is a contract between the adviser and the customer to provide ongoing support. What is in that contract depends entirely on what the adviser wants to offer as part of their ongoing service and what the customer will benefit from and value. This is the crux of the issue, so let us look at a couple of examples.

Simple agreements

Firstly, below is a simple example of an ongoing service agreement that is very specific to a particular investment solution: 

•    Annual review of your circumstances, including risk profiling.

•    Rebalancing your investment portfolio on a quarterly basis.

•    Telephone support from your adviser throughout the year.

This type of ongoing service will only be suitable for those customers with a portfolio that needs to be regularly rebalanced by their adviser, such as a model portfolio. Any customer whose investment does not need to be rebalanced quarterly (that is, those invested in multi-asset funds) would not be able to gain the full benefit from the ongoing service, bringing into question its suitability. By tying the ongoing service to a specific investment solution, the adviser significantly limits the type of clients it would be potentially appropriate for. If my adviser friend at the conference had similar wording in his ongoing service agreement, it would explain his confusion.

This issue is not only restricted to multi-asset funds; it applies to any and all types of products. As soon as you have a product/investment-specific element in your ongoing service agreement, it limits the potentially suitable customer base to those with the specific product.

While this may not be an issue if you run multiple levels of ongoing service for different types of customers; for example different segments within a centralised investment proposition (CIP); those advisers who have a single ongoing service option for all customers could come unstuck if questioned by the regulator. How do you justify the value a customer is deriving from an ongoing service they cannot fully benefit from?

Let us now look at a much more generic ongoing service agreement:

•    Annual review of your circumstances, including risk profiling.

•    A review of progress towards your investment goals and if any changes are necessary.

•    Telephone support from your adviser throughout the year.

By altering the second service point, this has suddenly changed to an ongoing service proposition that is potentially appropriate for a customer with a multi-asset investment and the potential audience has widened accordingly.

Key points

If in doubt, remember three key points:

•   The customer must be able to benefit from the ongoing service and the fees charged should be proportionate to the level of effort required by the adviser to deliver it.

•   Think of products and advice services as two distinctly separate things.

•   Make sure your ongoing service proposition is focussed on service, not products.

There has been a substantial rise in the number of advisers using multi-asset funds over the past few years and a move away from advisers creating and running their own portfolios. While suitability will depend on the individual customer’s needs and circumstances, the concept of a maintaining a set risk level and achieving diversity within a single fund can be very appealing, especially for light-touch customers.

For anyone not familiar with multi-asset funds, they are a collective investments that invest in a broad range of asset classes and sectors, therefore providing a much greater degree of diversification than single asset class funds (such as a UK equity fund). 

In addition, a number of multi-asset funds are risk-targeted, meaning they are continually managed to target risk level, usually defined by volatility ranges, rather than just having a risk level assessed at outset. So, while some risk-rated funds will occasionally be more volatile than expected or even potentially change risk levels throughout their lifetime, by using a risk-targeted fund, you know that fund should stay at its target risk profile indefinitely. Let us not forget though that multi-asset funds are an investment that will still need to be reviewed regularly to ensure they remain appropriate for each customer’s needs.

If there are no changes to their circumstances or goals, it is always worth keeping an eye on performance and charges of the customer’s multi-asset fund versus its peers.

If the customer’s circumstances, risk profiles or goals have changed at an annual review, this could mean the present investment is no longer suitable and may need to be changed to a different type of solution. Just because it is a multi-asset fund does not mean it will always be the right thing for every customer all the time.

So, to avoid getting caught out, remember to make a clear distinction between financial advice and the arranging/maintenance of products, ensure your ongoing service proposition is not product/investment solution specific (unless you are going to have multiple ongoing service propositions or tiers) and even if a customer has a multi-asset fund, they still need a regular check-up to ensure it is the right thing to help them hit their financial goals. The key point is to ensure the ongoing service delivers value for money and the best way to achieve that is to focus on those aspects of the relationship most valued by the customer.

Ben Wright is managing director of Sinfonia Asset Management

Key points

Advisers are challenged by the need for ongoing reviews of risk-targeted multi-asset funds.

Tying the ongoing service to a specific investment solution, the adviser limits the type of clients it would be appropriate for.

There has been a move away from advisers creating and running their own portfolios.