Following on from these, this final article in the series will look at how you can go about creating a CIP.
The first thing to say is with a CIP, there is no ‘right’ way or method to adopt. You generally need to achieve the following aims:
1) Outline the service proposition you intend to offer and how clients who require services are segmented
2) Identify the features and options you want your CIP to offer clients. This should be client-centric and focused on how positive outcomes can be delivered through your proposition.
3) Identify when the CIP will not be appropriate, and what type of process there will be to provide an appropriate solution for these clients.
We will consider each of the above in turn.
The service proposition and client segments
Doing this work doesn't just help with creating a CIP, or with fulfilling your obligations under the product governance rules.
It also gives your business more clarity and focus around who your clients are and what they need. You might find the service proposition develops from the process of segmentation, in turn driving benefits for both the firm and the client.
When thinking about the service proposition, the following aspects will influence the CIP process:
- Review periods – Will reviews be carried out annually or bi-annually? It's worth remembering this could impact on fund switch/rebalancing options.
- Client communication – In place of more frequent meetings, what level of portfolio update will be provided? Will advisers rely on portfolio managers to update clients on portfolios or returns, or will the advice firm look to provide this as part of an in-house arrangement? It's important to note client reporting will be impacted by the Mifid II 10 per cent drop rule regardless of the approach here.
- Cost – Inevitably cost will drive the level of service for both parties. The level of service offered/required should impact on how much of an ongoing relationship there will be. There could be a very light-touch process for some clients and the nature of this will influence what investments would be recommended.
After this exercise, you could have the following features of different levels of service:
Having formally identified the above, this should help with documenting the CIP. For the ‘low’ need client, there is clearly no rationale to justify the approach of, for example, an adviser managed portfolio created in-house and reviewed on a monthly or quarterly basis.
Likewise, you may identify that ‘high’ need clients require other areas of planning, such as tax planning, cashflow modelling, or inheritance tax (IHT) planning. Where these other areas will be the focus, something that relieves the time spent on the investment management side is a preferable solution.
Identify features and options that will be offered
Having considered what level of ongoing service will be offered to what type of client, you can use this to help determine what kind of investment approach you will consider.
Taking the example of a ‘high’ need client segment, we have determined that this type of client would benefit from an outsourced option, to give the adviser the time to deliver the level of financial planning review needed.
As a result, a discretionary fund manager (DFM) option would be the starting point here. This may be on a bespoke basis or a model basis depending on both the level of investable assets to deal with and/or considerations of cost.
You can then consider what criteria is important as part of this, for example:
- The importance of cost
- Where the DFM is based for reporting and meeting with the adviser/client
- The range of model portfolio service (MPS) options including risk levels, ethical options and active and passive options
- How the risk of an MPS is calculated. Does it align with the chosen risk profiling tool?
- Experience and financial standing of the DFM
- Performance reporting and accountability
- Range of services offered and platform availability.
There is a wide range of potential criteria that could be used here. You could use an independent research tool such as Defaqto or Synaptics to filter based on the selected criteria. You may then look to meet with potential DFMs or request due diligence packs to review.
Your segmentation might identify clients that would benefit from a simplified multi-asset investment available on or off platform. You could use tools like Defaqto, Synaptics or FE to filter based on the criteria you deem important. These could be such things as:
- Maximum cost
- Track record and past performance relative to sector/benchmark
- Independent ratings
- Risk levels and whether mapping to your preferred risk profiling tool is possible
- Insured or unit trust option
- Fund size
- Platform availability if appropriate.
You could then filter possible investments based on this kind of criteria and analyse the shortlisted options. This should hopefully give you an idea of what investment options suit what you are trying to offer.
You may find at this stage you have something that appears like this:
This can be continued to cover all the segments identified earlier.
When the CIP is not appropriate, and dealing with outliers
Naturally, there will be a number of clients who do not fit into the CIP. The obvious example here is investment recommendations related to IHT planning, but it may also be the case the service and needs of a client are considered on a bespoke basis.
Outlining how you deal with these clients can help complete the CIP, and it's important to consider the research methods you will potentially use.
For example, the MICAP tool can be used to research tax or IHT planning investments and a combination of independent tools can be used to research potential options which might cover the following:
- Offshore investments
- Specialist ethical requirements, for example, sharia- compliant investments
- Family investment planning such as junior Isas
- Trust planning and charitable trusts
Overall, a CIP should only ever be created and used as a means to support the investment approaches a number of potential clients could be offered, assuming they are aligned with the segment and service offering.
Having a CIP in place helps bring consistency to the investment advice process for your firm and can justify why one approach suits one client, compared to an alternative approach for a different client.
To sum up, the main points to consider in creating a CIP are:
- Clearly identifying client segments and what each segment should receive in terms of service and investment approach
- Detailing the process of selecting the investments that likely to be offered to a prospective client in each segment
- Defining the process in which outliers and those where the CIP is inappropriate are dealt with.