Intelliflo - Online adviser software

Establishing suitability, keeping up with the regulator

By Integration partner – FE
Find me on: LinkedIn 08-Oct-2015 12:31:00

Time and again, advisers seem to find themselves in hot water with the FCA (Financial Conduct Authority) over not demonstrating the suitability of their investment advice adequately. 

No adviser worth his salt should fail to align his investment process to suit his clients’ needs; however evidencing suitability in an adequate manner and justifying its value to the client is sometimes overlooked, especially so in today’s world where the use of a centralised investment proposition or process is common place.

blog-establishing-suitability

Firms build suitability reports that mainly cover the firm’s advice policy and are sometimes focused on the client’s specific investment needs. Although such reports are created with the best intentions, Rory Percival, Technical Specialist at the FCA believes that that such standardised reporting is a growing concern for the regulator.

Speaking at a conference held by Thesis Asset Management earlier this year, Rory Percival encouraged advisers to rely less on repetitive template reports and to create more 'personalised reports based on the client'.

To the regulator a good suitability report should contain the client’s objectives, demonstrate why a recommendation is suitable for that individual client, outline any potential disadvantages and is to be communicated to the client in an effective manner.

It’s a risky business

Building a ‘suitable’ suitability report would then have to start with a detailed understanding of the client’s attitude to risk and time bound objectives. But does your client understand the importance of articulating his risk levels?

The regulator suggests that best practice in this area is to provide clients with a reasonably good idea of what risk they are signing up to, prior to assigning a score or level. By using a good risk profiler tool aligned with investment forecasting capabilities advisers can easily map client risk levels to sample asset allocations or models that can then be charted.

This will give your client a visual aid to understand the consequence of risk on possible future returns and will also provide a realistic view of the scope of their objectives.

Building your investment proposition

The FCA has warned that firms should beware of ‘retro-fitting’ whilst choosing a Centralised Investment Proposition (CIP). This is when an advice firm goes through the selection process for a proposition but is geared towards what the firm wants to use or is already using.

In other words, whether you outsource your process or rely on good old self-selection, it is essential not just to establish a verified audit trail but also indicate the impact of your recommendations on the client’s specific objectives.

By using an independent data resource and conducting extensive due-diligence on solutions, you can build your proposition in a sophisticated manner to prove to the regulator that you are not shoe-horning clients into a pre-determined solution.

Communicate effectively

A good client service proposition will empower the investor by giving them a good understanding of their financial situation. But more often than not explaining complex financial terms to inexperienced clients can be challenging and in some serious cases lead to misinterpretation of advice.

Care should be taken to provide clients with timely reports that are clear, concise and jargon free.
Advisers can stay ahead of the curve by the intelligent use of KIID documents, glossaries, charts and interactive graphs. Below are some golden rules for communication that can improve the effectiveness of your client literature.

Keep it real: Try your best to avoid abstract concepts. Include examples that clients can relate to.

Tell it like it is: Present the facts and avoid 'spin' - people want to make up their own minds.

Give clients control: Tell clients about their choices so they don't feel that everything is decided for them.

Take people as you find them: Give people access to information that matches their knowledge and interest levels.

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