In the first part of our series on centralised investment propositions (CIPs), we looked at the regulatory need to consider a CIP as part of your business.
We also covered the role of the product intervention and product governance rules (PROD) when thinking about CIPs - you can catch up on that article here.
There does however need to be more of a benefit for a firm to have a CIP in place beyond mere box ticking. Here, we consider some of the benefits, along with a couple of potential disadvantages, of having a CIP.
The positive aspects of a CIP relate to consistency, risk, time and process. Let's take each of these in turn.
Having a CIP provides advisers within a firm with a set process they can consider with clients, and so reduces the likelihood of one adviser using a considerably different approach to another.
A consistent process also helps with oversight where firms and advisers are based in different locations, and means that annual reporting to clients and the review process can be streamlined.
This is particularly relevant as the FCA has previously highlighted inconsistencies among adviser recommendations at the same firm as a cause for concern.
Looking at it from a risk perspective, a CIP should mean there is a demonstrable process for investment selection, and so can avoid the appearance of ‘shoehorning’ clients. There is a caveat to this though, which I'll come back to later.
Having a formalised assessment of a particular investment can help if issues arise years later. Without a CIP it might be difficult to show how the investment was researched and selected.
Similarly, if future problems arise, effective due diligence on an investment can show the selection was based on good faith and on the publicly available/reported information.
There are also advantages when it comes to advisers' time and capacity. A CIP should reduce the need to fund pick for every client, thus freeing up time for other elements of the advice process.
A recommendation to use an investment within the CIP will arguably not need to be researched to the same level for a particular client as it would without a CIP in place.
There are further benefits associated with processes in your firm. As mentioned, a CIP can pave the way for streamlined client reporting, but this has the added benefit of helping to set the depth and extent of the overall ongoing proposition.
It also means a way of reviewing and keeping track of the investments used can be established internally, stripping out the need for this to be carried out as a separate day-to-day task.
In the long term, a CIP can save time for your business, and for in particular if you have a growing number of advisers.
So far, so positive. However there are some potential disadvantages to be aware of. The main two are:
- Advisers attempting to fit clients to segments or investments, and potentially being blinkered into thinking a certain client and segment fit better than they do.
- Using the CIP as a way to avoid any consideration of suitability to the client in particular. If a client falls within a segment and has a particular risk profile, it should not be an automatic conclusion that they use that investment.
While creating a CIP can demonstrate clients are not being shoehorned, there is also a danger of it having the opposite effect, and feeding into this very issue.
By carrying out a detailed client segmentation exercise, then having a CIP in place which covers various types of client categories, along with processes for using a bespoke solution if necessary, can be a way to avoid this.
In the next article in this series, we will look at the steps you might take to create your own CIP.