The hotly anticipated TR16/01 (at least in some industry circles…) has just been published and in some ways it’s a bit of a damp squib. Platform due diligence practices by advisers are singled out and the FCA is ‘disappointed to identify issues relating to platform research and due diligence,’ But there is little in TR16/01 on the investment research process or investment due diligence.
I have to question the size of the FCA’s sample of adviser firms. 13 seems too small to uncover any evidence of endemic problems with the due diligence process. But if we do see this exercise as an indicator of typical practice, then the FCA’s point that due diligence that lacks structure leads to poor outcomes is one that advisers must take on board.
The approach that we advocate is that advisers use the due diligence process to achieve better investment outcomes for their clients. We don’t think that due diligence should be a tick box exercise. This does require advisory firms to put in place robust systems and processes.
If we take platform due diligence. If the aim of the due diligence process is to determine what platform/ platforms an advisory firm should be using for its clients, then there are a number of questions that advisers should be thinking about up front:
- How do the requirements of different client segments relate to the type of platform that will best serve the clients’ needs? How important is the cost of the platform vs for example the range of securities, collectives and model portfolios
- Who is paying for the platform? The client, the advisory firm or a combination of the two?
- What is the right balance between the needs of the client and the needs of the advisory firm when selecting a platform?
The FCA tells us that for some firms there is a clear imbalance between the needs of the adviser and the needs of the client calling out an ‘if it ain’t broke, don’t fix it’ mentality at some firms. More concerning is the FCA’s evidence of ‘retro-fitting’ to justify the outcome that the firm had already decided upon.
However, whilst the Regulator is not going to comment on market dynamics, we will have a stab. An adviser participating in a vertically integrated wealth management business is unlikely to have the same room for manoeuvre. This is the essence of vertical integration.
And then there is the question of the cost to the client of moving client assets across to a new platform. This process is a challenge and expensive. An adviser needs an extremely robust business case to the client to do this.
The FCA makes it clear that the size of the firm is not an indicator of the strength of the due diligence process. There is, however, much reference in this paper to an advisory firm’s culture. The FCA feels that a client-centric culture leads to robust due diligence processes.
This is an interesting point. We also hear from advisers that there has been significant investment in support services over the past year, over and above frontline advisers. Putting the right resource in place to take on these processes is key. Due diligence shouldn’t come at the expense of time spent on the business of providing financial advice to clients – advisers’ bread and butter.
I would question whether the interests of the adviser and interests of the client are wholly separate. The FCA talks about service levels for clients being a consideration. Good platform service levels for an advisory firm should ultimately benefit the client. In our recent consumer research, we found that advised clients were not particularly interested or engaged in their investments. They trusted the adviser to take care of their investments and this was a driver for choosing an adviser in the first place.
Perhaps more fundamental is an in-depth knowledge of what the client really needs. This is Platforum’s year of the customer. Accurate customer segmentation, a good starting point for assessing clients’ platform needs, is an exercise that we would encourage all advisers to undertake. This would seem a bit of a no brainer but our Quarter 4 Adviser survey showed that 40% of advisers we surveyed were undertaking no customer segmentation at all!
But we mustn’t ignore investment due diligence (TR16/01 largely does). Research on products will be a key part of MiFID II. ESMA’s draft technical standard – referenced in TR 16/01 – came out in December 2014 but elements of it haven’t received endorsement from the Commission. MiFID II’s implementation date has again drifted to January 2018. And if we use the Solvency II parallel where a 4 year delay occurred, it is likely to drift even further.
Talk might be cheap but Platforum will be holding roundtables to try to unpack these topics and to take the pulse of the industry. As always, we welcome your views. Let us know if you would like to join us.