The latest Nucleus census makes for interesting reading, especially the decline in the average number of advised clients from 163 to 130.
At face value, this sounds like a worrying trend.
However, as Nucleus chief customer officer Barry Neilson told Money Marketing:
“I think it’s partly PROD requirements kicking in – they [advisers] are having to think harder about exactly what their target market is, what does that mean in terms of underlying market segments and how do they make sure they are operating in a manner where their client bank is consistent with their target market.
"That has probably had a material impact on how advisers think about the referrals they receive and how they deal with them.”
The Product Intervention and Product Governance Sourcebook – known as PROD – has been around since 2018.
It's worth stressing these are rules rather than guidance, and yet many advisers are only now starting to get to grips with becoming PROD-compliant.
To help advisers navigate the regulations, we recently produced a white paper and toolkit called A ‘PROD’ in the right direction, which covers the process from start to finish.
The white paper aims to help advisers implement PROD efficiently and effectively.
What the regulatory experts say
We spoke with a number of regulatory experts on a best practice approach to PROD from firms such as Diminimis, The Timebank, Threesixty and Compliancy Services.
These were the key takeaways from our discussions:
1. Documenting every step of your PROD process is critical because the FCA will expect to see a full audit trail.
2. Don't treat PROD as a tick-box exercise - your job isn't done just because you've produced a PROD policy.
Outsourcing your PROD responsibilities to a compliance consultant is also not an option, as you need to evidence your firm is complying for each client on a daily basis.
3. You'll need multiple client segments in place given the FCA's guidance that the “target market should be identified at a sufficiently granular level”.
Yet we don’t think it has to be the 50+ segments being talked about by some industry commentators.
4. Understand how many fund groups and platforms you need to cover the breadth of your client requirements.
It's possible this may require starting new relationships, or you may even need to consider terminating some existing ones if there is too much overlap between the propositions.
5. It's worth making sure there's a consistency of approach across all your advisers.
Following the rollout of the senior managers and certification regime (SMCR), responsibility for firm-wide compliance with PROD sits with the directors.
Now more than ever, firms can no longer afford to let advisers ‘do their own thing’.
6. Try not to create too complex a system. Simplicity is your friend.
A suggested approach
Segmenting clients may seem like a daunting task, but it doesn’t have to be complicated.
It also doesn’t necessarily mean advisers need to stop working with certain types of clients because they don't fit into their current service model.
Arguably, approaching PROD in that way could be considered a case of the PROD tail wagging the client service dog.
In our white paper we cover our proposed approach in detail but to summarise:
- Start at the advice service level: consider all the different types of clients that exist and assess if there are other service levels that could be offered by your firm
- The next stage is to look at all the different investment solutions that would fit comfortably within the adviser’s business and consider if alternatives might work better for some clients. This may also require new platforms to be added.
Follow this process as many times as is required to make sure there are sufficient service levels, investment and platform options to cover the needs of any client likely to seek advice.
Once complete, advisers can then work through their list of clients and group them together according to what's suitable, which avoids the complication of too many segments.
Being able to demonstrate this process to the FCA will provide good evidence that clients have been thoughtfully segmented and provided with appropriate recommendations.
It will also mean advisers are well placed to service clients of all types, and may reduce the need to turn business away to their competitors.