You may think suitability is a single process.
This would involve obtaining details about the client’s financial circumstances, objectives and risk profile, creating the plan, undertaking research and due diligence and then making a recommendation.
But in practice, and certainly for most firms, there are two stages to suitability. First, designing and creating your firm’s proposition and advice services, and second, individual suitability. Let's take each of these in turn.
Stage one: Proposition design
This is a firm-level process, and spans your firm's centralised investment proposition (CIP), centralised retirement proposition (CRP), platform selection and advice services.
CIPs became popular in the run-up to the RDR. People often think of a CIP as an investment solution, yet in fact it is defined as having a centralised approach to giving investment advice.
The output is particular investment solutions such as model portfolios, multi-asset funds or using a discretionary fund manager. Having a CIP in place means every adviser has the same process or framework for giving advice, rather than each adviser doing their own thing.
In this light, I suspect that all or nearly all firms have a CIP. If you are a firm where the advisers still take their own approach to investment advice without a firm-level framework, then I really think you need to reconsider this.
The starting point for designing your CIP is a review of your client bank and a segmentation exercise. I don't recommend that this is done on the basis of assets under advice, as this is not client-centric, but rather on the basis of life stages.
You will need to sub-segment as well, for example small business owners, clients with inheritance tax issues, self-employed, farmers etc.
Some advisers say they have a very distinct client bank and don’t need to segment. I don’t agree. Even with these firms, I have never seen a firm which wouldn’t benefit from segmentation.
Your segmentation process is the starting point for the design of your CIP/CRP, platform selection and advisory services.
While CIPs have been around for years, you should also be thinking about CRPs as well.
In the main, a CRP is not about having different portfolios. It's about how you structure retirement income for clients, whether this is based on a sustainable withdrawal rate, having a bucket or pots approach, natural income or other means.
Where natural income is appropriate for the client, this may involve a different portfolio to your accumulation CIP, that is, one more focused on income-generating assets.
A good CRP will consider wider issues around approach to secure income, managing assets on review and dealing with clients with deteriorating mental capacity and other ageing issues.
Inherent within the design of the CIP and CRP will be the selection of the platform, where appropriate.
This should be done on a client segment basis. For example, you may use one platform which is straightforward and low cost for your accumulating clients with simple needs but another for your retirement clients where certain functionality to do with withdrawing income and hosting your CRP are key selection criteria.
You should also map your own advice services – initial and ongoing – to your client segments and sub-segments to ensure services are geared for the needs of your client groups and offer good value for money.
Again, start with the client bank. Avoid taking an approach that says: "We receive this level of fees so we can afford to provide this level of service," as this is firm-centric rather than a client-centric approach.
Stage two: Individual suitability
This is the bit you do day in, day out – dealing with clients and providing them with suitable advice.
But this needs to be considered in line with the investment and service proposition you have created in stage one.
Here, you need to be alert to ‘outlier’ clients that sit outside the normal framework. Clearly, in these cases you need to take a different approach, or adapt the centralised proposition accordingly. This ensures suitable advice is provided and the client is not shoe-horned into an unsuitable solution.
We have had rules around individual suitability for years, ever since the introduction of regulation in 1988. But we have never had any rules around designing a firm's proposition.
In January 2018, Mifid II introduced the ‘product intervention and product governance sourcebook’, or PROD for short.
This may sound like a handbook that applies to product providers, and indeed it does include many rules for these firms. But it also includes sections that are relevant to advice firms – or distributors, as the handbook inappropriately calls you.
The aim of the rules is to ensure firms have good product governance. In advisory terms, this is referring to stage one, the design of your CIP/CRP, platform selection and advice services.
So, the regulations have caught up with market practice around stage one and bring some formality and accountability to the process.
How should I document our PROD process?
The FCA does not prescribe any approach to record-keeping, but it does say you must keep a record of your process.
I suggest you create a matrix of client segments, sub-segments, investment solution, platform selection and advisory services where you are mapping the latter three to the first two, that is, the clients.
I would then take the investment solution and platform selection columns information and create separate research and due diligence (R&DD) documents for each.
The matrix could include a comments section at the beginning of your R&DD documents for context, and it is these client segment needs that will form the drivers for your investment and platform due diligence.
Similarly, for the advice services column, I suggest you create a separate document with the rationale for the design of your service proposition for the client segments, using the initial comments above as a starting point.