We are a relatively small firm serving a niche group of clients, and consider ourselves to be financial planning-led rather than product-led.
It’s our belief that we’ll generally reach the right solution for clients every time, matching the client’s needs to the most appropriate solution.
The product governance, or PROD, rules don’t change that for me. It’s been implied in every bit of regulation we’ve seen that you must know your client and provide suitable and appropriate advice.
We give our clients an annual financial planning review and look at what we’ve done. If it’s no longer right, we’ll make changes, and if it is right, clearly why would we change it?
That said, there may be firms who have given initial advice and may be in receipt of trail commission. They may feel a need to tighten up some of their processes and to evidence there is an ongoing service to justify this charge.
Our approach is to measure clients’ attitude to risk frequently, but feel that part of our job is also to downplay the importance of volatility and talk to people about risk in terms of more predictable and sustainable outcomes over an appropriate and relevant timescale.
Our approach to Mifid II
Away from PROD, we have the new wave of charges disclosure under Mifid II to contend with.
I suspect that in the first few years of this being rolled out, there will be an element of duplication and confusion. We are seeing it already – we are having to explain to clients these don’t represent additional costs they have incurred, but they are an additional reporting requirement. These are not new charges, just new disclosures.
Platforms have collated data on charges from fund groups as best they can, and we are waiting to see exactly what that looks like.
We will then add a covering letter essentially saying: “Here’s something that looks new, but isn’t.”
It will say something like: “You’ve been incurring all of these charges, with the investment returns. As you know, we always look to drive down costs wherever we can. But you may discover it costs more to invest your money than you previously thought.”
I am hoping not to get too much ‘pushback’ from clients on this.
Hopefully they will see that some of these costs are completely unavoidable, and that it costs money to look after money.
Some costs are fixed, but there are others we can control. Some costs are there for the client’s protection, for example, the asset manager not being the custodian, and clients are sacrificing a relatively small slice to make sure no one walks off with the whole pie.
Suitability and the financial plan
When considering making changes to our suitability report, the main driver is to make it simpler.
Because we take a financial planning and goals-led approach, the report is based around what the client’s money needs to do, and using the product wrapper or investment solution that achieves that. There’s a very clear link between the goals, the financial plan output and the solution.
We’ve created appendices to take the bulk of the technical content away, and keep the main body of the suitability report to two to three sides of A4. This covers a client’s objectives and why a particular wrapper or product is right for them.
The financial plan itself plays a very important role.
A client may have a list of stated objectives which they can then put an amount against. For example, an objective may be a desire to retire at age 60 with £40,000 a year. There’s a sum of money you need to be able to achieve that, taking into account other parameters like expected rates of inflation and the client’s risk profile.
By building a mathematical picture first, and understanding what is achievable, you can discuss with the client the best way of achieving those objectives through particular wrappers.
Then it’s about getting to those outcomes in the simplest, most efficient way, at the lowest acceptable cost. Cheapest isn’t always best.
Where we’re telling clients to stay put and maintain their current investments, this is recorded as part of our follow-up meeting notes. This is captured and sent to them, so both they and we have a permanent record.
Overall, the way I see it, it’s the adviser’s responsibility to reduce the negative impact of things like PROD and Mifid II on the client, and reassure them that it’s business as usual.