For the first time at our 2019 Annual Manchester Conference, we brought together leading industry figures in compliance to drill down into the big issues affecting, perplexing and occupying advice firms up and down the UK currently.
Journalist and broadcaster Gavin Esler chaired our inaugural Compliance Panel debate, titled ‘How to Thrive in a Post-MiFID II World’ – and what followed was 45 minutes of compelling discussion and opinion, encompassing RDR, MiFID II of course, Brexit (of course), best advice practice today and what does best advice practice look like tomorrow?
Gavin Esler: Clearly the pendulum swings backwards and forwards regards compliance, with ripples dating back to 2008 and the financial crisis. Where do you think we are broadly today?
Carl Wallis (Head of Compliance, Sesame Bankhall Group): Standards in the industry generally have improved massively I think post-RDR, which had benefits for end customers but also had residual benefits too for advisers as well. The FCA said in June 2018 that, since the inception of RDR (the Retail Distribution Review in 2012), adviser income, as a whole, has grown by 52 per cent. There was also a 14 per cent premium for advisers who had chartered financial planning status. I think that’s because RDR really made advice firms think about their proposition, many for the first time. It broke that link between remuneration relying upon a contract between the adviser and the provider – and put it fully on the relationship between the adviser and the customer.
MiFID II, in many ways, is a continuation of RDR – if you think in terms of transparency and disclosure, for example. I don’t think benefits for advice firms will be as strong as RDR. But this is something the FCA wanted to see, I think.
Gavin Esler: Do you think that increased sense of expertise within financial services is perceived now by the public and investors?
Carl Wallis: I think customers who engage with their advisers will notice that improvement.
Gary Crossley (Compliance Director, threesixty Services): For me here, you can talk about MiFID II all day long, but greater standards within the industry will only be recognised with good communication between advisers and customers. The danger here with greater regulation is the customer getting forgotten in all of this. Advisers naturally can focus on completing that and this part of their process correctly and compliantly.
For me, if you deal with the customer correctly and keep them appraised of everything you are doing, you will meet a lot of that compliance. If markets dip, for example, in times of uncertainty you will have a test as an adviser of whether you understood your customer’s risk profile correctly. Again, if you had done that and communicated it correctly in the first instance, you should have no issues.
Gavin Esler: In what sense do advisers see all of this as an inevitable burden on them and a box-ticking exercise – something they have to do, but don’t necessarily want to do?
Gary Crossley: Businesses are naturally run for profit and there are commercial aspects to that, of course. My advice would be to firms: outsource where possible; don’t try and overengineer an issue – keep it simple.
Carl Wallis: I agree with Gary. All of this ‘new’ compliance framework is only supposed to overlay what has long made good business sense within the industry.
Cathi Harrison (Founder & Director, Apricity): I agree with everything which has already been said. I would say that the industry has changed hugely over the last 10 years. Whether the public perceive financial services as a true profession yet – I’m not sure. Is MiFID II helping? Again, I’m not sure. I think RDR did a huge job in changing public perception of financial advice. But MiFID II, in one sense, just seems to overcomplicate things. As the guys have said, a lot of it is simply good business practice: for example, this is what we expect this will cost – and this is what this did cost.
I think the industry, as a whole, is in a good place – and I think the intention with all new regulation is always right, because it is always to benefit the end customer. But things can get lost in the implementation.
Chris Jones (Proposition Director, Dynamic Planner): Advisers often used to be life insurance salesmen, which is something you might not have necessarily volunteered at a dinner party. The bottom line today is you should be proud to be a financial planner.
Ultimately, everybody today in this room is employed by the end customer – and everything we do is geared towards good customer outcomes. For example, if producing complicated documentation is not helping the end customer, then don’t do it.
Gavin Esler: If I can ask all panellists now, what is your key message for 2019 and the year ahead?
Chris Jones: I think many of the risk controls – be they investment risk or compliance risk – have effectively been theoretical previously. But now they are going to be tested just because markets are more difficult. Would a customer, who never previously would have, now complain because he has lost a lot of money? They may do. That will be the big test. Following that thread, this is absolutely the time when advisers can demonstrate their professionalism to customers.
Cathi Harrison: I think my big message for 2019 would be to have effective, real-time risk controls in action in every business – kicking in as soon as problems arise and even before they arise – in comparison to the past when perhaps problems where always solved very retrospectively.
Gary Crossley: My message to firms would be, ‘Make sure you have good business plans and processes in place’.
Carl Wallis: I think in terms of something like Brexit, customers are asking their advisers quite naturally, ‘What does this mean for me?’ But, in another sense, Brexit is just a big risk event in terms of volatility and uncertainty. Be prepared for it, of course, but it is nothing new in that sense. Holding your customers’ hands through times like this is one of the big benefits and reasons behind why people seek professional financial advice.
Going back to what has already been talked about – I agree with the guys that MiFID II just appears to add additional complexity to processes and business models, and I’m not entirely convinced currently that it is beneficial to firms like RDR was.
Gavin Esler: Cathi, your nodding your head in agreement with Carl.
Cathi Harrison: Absolutely – advice firms are feeling they are at the mercy of this and the consistency of information they are receiving from one manager or provider to another. With the best will in the end, you are sat there thinking, ‘How is this useful to my client? How can I convert it into something useful to them?’ In short and as we have said, MiFID II does currently feel messy. You just don’t want it to detract you from the customer and giving them a reasonable amount of information based on what you’ve got.
Chris Jones: I think RDR and MiFID dovetail reasonably well. RDR was fundamentally top-down: making all advisers qualified and removing any financial bias from solutions recommended to customers. MiFID, however, is bottom-down and as a result I think the impact can be far greater, because it involves and influences things happening to customers – real people – right now at a ground level.
I think the requirement for ongoing suitability is very achievable because it’s something you have been doing correctly already. Is it achievable year-in, year-out? That’s not easy, but it can be with technology, which is the way you can both mitigate and then deliver on MiFID obligations.
Gavin Esler: What does suitability mean, briefly for each of you – and how does it differ from ongoing suitability, which Chris has just mentioned?
Carl Wallis: Suitability is the appropriateness of a recommendation to a customer, taking into account investment experience, objectives and attitude to risk… that’s straight out of the handbook (Laughter). Suitability is looking at a customer’s circumstances, while ongoing suitability is obviously regulatory and has to be done annually and making sure a recommendation continues to be appropriate for the customer.
Gavin Esler: Okay. That said, what does that mean in practice?
Gary Crossley: In practice – how does the customer see their objectives; how do they understand the journey they need to go on to reach them? From an adviser’s perspective, I would say don’t be afraid to test a customer’s objectives and how the customer is realistically going to get there.
Carl Wallis: Gary makes a good point: a customer’s objectives have to be realistic and achievable.
Cathi Harrison: I would define suitability as helping a customer identify their objectives, making a plan to achieve them and selecting a solution which is going to do that. Don’t tie yourself up into knots picking that product, because there isn’t one single, right answer. If there was, it would be a very simple process.
Thank you to our panellists linked below.
Dynamic Planner Proposition Director Chris Jones has been busy out on the road, engaging with paraplanners about the importance of clear and accurate suitability reports.
Chris was presenting at two Personal Finance Society (PFS) ‘Purely Paraplanning’ events in Birmingham and in London this autumn.
He engaged with audiences on key issues in this area, discussing and questioning:
- What have we learned from the 2017 FCA Suitability Review?
- How MiFID II and other regulation has changed the nature of suitability letters
- How paraplanners can help ensure client understanding – and why this is increasingly important
- How to ensure the client is not surprised by the risk of the solution recommended
Hear more from Chris and how Dynamic Planner can help you and your firm ensure your clients’ investment suitability by registering for the seventh Dynamic Planner Annual Conference in early 2019.
At the Dynamic Planner Annual Conference at the end of January, reviewing clients’ portfolios to ensure ongoing suitability was high on the agenda. In a poll of delegates, 42% said they spent half a day or more preparing for a client’s annual investment review.
It’s probably true to say that most firms were still assessing the implications of MIFID II at that point. However, these new regulations, introduced at the beginning of January, bring in additional requirements regarding the breadth and frequency of the review. As such, the suitability review must consider, among other things:
- Changes to the client’s circumstances (either personal or financial)
- The client’s knowledge and experience in the investment field relevant to the specific type of product or service
- That person’s financial situation including their ability to bear losses
- Investment objectives including risk tolerance
Of even greater concern was the quality of the output to the client and how well, or otherwise, it helped the firm demonstrate the value they bring. 87% of respondents answered ‘Adequate’ or ‘Could do better’ in answer to the question; ‘How do your reports make you look in your clients’ eyes?
Finally, we asked whether firms used the same definition of risk throughout the investment review process. While the majority did, 29% said they did not.
So why is the annual review so challenging and what can you do to ensure you meet MIFID II’s requirements?
The following table shows the steps a review process needs to go through in order to ensure a portfolio remains suitable and the potential sources of error. Down the side are the list of sources or providers of information from which data or analysis has to be gathered.
- Client investment experience and attitude to risk, including their attitude towards risk-reward trade-offs
- Client capacity to take risk. Assessing the losses a client can withstand including changes in their financial situation. Best undertaken through cashflow with risk definitions aligned with the ATR
- Risk, return & correlation assumptions. These provide a consistent framework for the risk-reward trade-offs from investor to an investment
- Asset allocation, including asset class definitions. Here the risk the client is willing and able to take is translated into an asset allocation strategy which stands a high probability of delivering an acceptable range of returns for a given level of risk
- Classification of investments into asset classes. Information on individual holdings and their value needs to be gathered from the client’s portfolio, perhaps from a back office and/or across multiple platforms and translated into the right asset classes
- Investment risk profiling. Assessing the likely forward-looking risk that the portfolio represents against the client risk profile and asset allocation strategy. Assessing whether the investment is targeted at the risk profile and likely to stay suitable
- Investment performance rating versus risk benchmark. Whether the investment is delivering good risk-adjusted returns and likely to continue to do so
You can see that unless a consistent definition of risk is used throughout the investment process there is a high likelihood that suitability can get lost in translation.
Dynamic Planner has a 12-year track record of ensuring investment suitability using a consistent definition of risk throughout the review process that many thousands of firms now rely on. We gather data from back offices and the leading platforms and deep dive analysis on more than 1,200 multi-asset funds and portfolios in a joined-up process that’s simple and easy-to-use.
Our newly designed suite of reports helps you demonstrate the value you and your firm’s proposition are adding.
Please download our white paper on MIFID II or get in touch if you would like to know more.