The Financial Conduct Authority (FCA) and its predecessor have always advocated on behalf of consumers to improve transparency, and to build confidence in the financial services industry. Consumer Duty is the latest example of how financial regulations will drive another paradigm shift.
Through it all, the adviser community has adapted to new ways of working. For example, the Retail Distribution Review led to some advice firms adopting new centralised or outsourced strategies for investment selection to free up their advisers’ time. With less time spent on product picking and due diligence on multiple providers, advisers could focus on client-facing activities where they could add most value.
But advice firms have been telling us about the challenges this outsourcing review and selection process can bring. There are many propositions on the market to choose from, and partnering with the right investment house for their clients and their business is a big decision.
With this in mind, Charles Stanley partnered with NextWealth to conduct a piece of research to help uncover some of the experiences financial advisers have had over the past couple of years. We wanted to better understand the reasons for working with external investment partners to look at how we can support them in facing some of these important considerations when reviewing potential partners.
What impact is the Consumer Duty having on IFA investment practices?
In the course of our research, we found five key ways in which the new Consumer Duty principles will impact advisers and investment managers.
The role of the adviser will have a renewed focus
Financial planners are often time-poor. Talking to clients, understanding their needs, and designing strategies to meet those needs can be where they add the most value. Administrating and rebalancing client portfolios, and monitoring income flows, are not central to delivering the financial plan and may not be a good use of an adviser’s valuable time.
Advisers will increasingly explore ways to outsource these and other back-office functions in the most cost-effective way, freeing up the time needed to focus on their primary skills and offer other value-adding services.
Fair value will dominate
Although the FCA has said it is not a ‘price-setting’ regulator, its focus on fair value for clients will be strengthened. This is not a totally new concept as fund managers’ annual assessments of value have led to funds closing or being merged with others where they have failed on one or more ‘fair value’ criteria.
But it will draw further attention to the benefits that clients receive from the products they invest in relative to the fees and charges they are paying. This will lead to advisers seeking more proof points from selected solutions to evidence this value.
IFAs will become more selective in their partnerships
The search for better value, however, will not be allowed to override the need to deliver the best client outcomes. The research from NextWealth showed that the number of DFMs each IFA practice worked with reached a peak in 2020 at an average of 2.5 and has slowly declined during the past couple of years.
We think Consumer Duty is likely to accelerate this trend, as advisers seek out investment managers who can deliver specific rather than generic portfolios. Ones that meet the needs of defined target markets more closely, and who can provide the MI and reporting needed to demonstrate how clients have received appropriate outcomes.
Due diligence will be heightened
Existing DFM relationships may be reconsidered if the firm feels they can find better value and better targeted solutions elsewhere. Annual reviews of existing managers will have to focus not so much on “are we confident we’ve made the right choice” but pivot towards “is this still the most appropriate solution available in the current environment?”.
Processes for assuring quality and cost must be robust, repeatable, and demonstrable. IFAs will need to demonstrate higher levels of scrutiny.
Data will be king
This leads us to our final impact: the need for efficient and effective record keeping whenever the business makes a decision that affects client outcomes. That means increased compliance files, additional document checking, and auditable evidenced decision making.
The right partnerships will be the key to success
To demonstrate continuing best practice, advisers will need to be more selective in their partners, seeking out those that can help deliver appropriate solutions and who have the MI and reporting capabilities that help evidence client-focused outcomes.
Our research identified 12 key factors on which advice firms are evaluating potential investment partners, from flexible yet targeted investment solutions, through platform availability, reporting and cultural fit. Increasingly, all aspects of the process that have a bearing on quality and cost will be put under the microscope.
This article was written for International Adviser by Tom Hawkins, head of strategic partnerships at Charles Stanley.
