At a recent FCA conference, the regulator raised its fears about the renewed ascendancy of shoehorning, where firms adopt a ‘one-size fits all’ solution that is not suitable for the individual needs and objectives of all their clients, writes David Ogden head of compliance at Sparrows Capital.
The term ‘shoehorning’ will ring bells with followers of regulation, who will recall the FCA’s keen focus on it in the Retail Distribution Review (RDR) of 2012.
Back then, the concern was that as advice and investment firms developed centralised investment propositions (CIPs), there would be issues around client suitability and poor outcomes.
There were concerns that firms could ‘churn’ clients, moving them from their existing investments into CIPs, and that additional costs could be incurred by clients being put into these new investments.
Now, with barely a month going by without at least one wealth manager or advice firm being snapped up by an aggregator or consolidator, there’s a real likelihood that the regulator could turn its spotlight onto these expanding firms.
Renewed focus
Under Consumer Duty rules, shoehorning will now be viewed with even more disdain than in the past by a regulator looking to make sure it’s on the front foot.
Back in February, St James’s Place – probably the largest vertically integrated advice firm in the UK – stated that ahead of Consumer Duty coming into force, there would be “aspects of the way we operate which will need to change in order to meet regulatory expectations”.
The firm added that the FCA was “expecting action, and where we identify this is required, we will respond to improve [the] client experience and reduce any risk of poor client outcomes”.
In recent days, SJP has announced a fundamental overhaul of pricing, and is now looking to increase the role of passives in its proposition.
Even the biggest firms will need to ensure that they can demonstrate that they have not shoehorned any clients.
Evidencing this is the case becomes much more difficult in a vertically integrated organisation growing rapidly via M&A.
Acquisition frenzy
Recent data from research firm NextWealth found that acquisitions of advice firms almost doubled in 2022.
Last year saw 101 deals, nearly twice the 54 inked in 2021. Interestingly, the deals in 2022 accounted for £48bn in assets under management (AUM), up by 85% from the £26bn the prior year.
Perspective Financial Group and Fairstone Group made the most acquisitions, with 20 and 13 purchases, respectively, followed by Kingswood (9), Atomos (formerly Sanlam) (8), and Progeny (7).
With this kind of growth within some firms, it will be vital that these businesses ensure clients are not shoehorned into products amid the frenzy of expansion.
And where owners or majority shareholders are private equity firms, businesses need to ensure that their owners’ laser-like focus on profit doesn’t detract from client suitability efforts.
Strategic decisions
Among the many factors and processes that may need to be addressed to help reduce the risk of shoehorning, wealth managers may want to consider cost.
Outsourcing a centralized investment proposition benefits from economies of scale, particularly when the ‘agent as client’ approach, which is covered in the FCA Handbook (COBS), is used.
Such an approach means that a firm doesn’t have to fund expensive back-office functions, like custody and trading desks. At the same time it facilitates a genuine whole-of-market approach.
The more competitive a firm’s overall fees are, the less chance it can be viewed as not offering its clients value for money.
This doesn’t mean there has to be a race to the bottom – the prevailing rhetoric is keen to emphasise value over price – but ensuring that its proposition is keenly priced could act as a robust part of a firm’s defences when it comes to demonstrating its approach.
Attractive pricing and operational independence aren’t necessarily a panacea, though; the regulator will be looking for comprehensive evidence that shoehorning isn’t occurring, not some quick fixes that only pay lip service .
This article was written for International Adviser by David Ogden, head of compliance at Sparrows Capital.
