By now most firms will have a centralised investment proposition (CIP) in place.
A survey in 2016 by Money Marketing found that 82 per cent of the firms asked were using a CIP. Yet there is no consensus around what a CIP should look like, how it might be constructed and what to consider in order to avoid shoehorning clients.
Taking the last point first, the FCA has continued to raise concerns about the risks of shoehorning, and has focused on two key aspects in particular:
- Firms shoehorning clients into a CIP to benefit the firm, rather than the client. This also relates to moving clients away from potentially suitable investments to the firm’s CIP with no ‘justifiable reason’ for doing so.
- Firms conducting CIP research in a way to 'retrofit' their current approach.
More recently, risk mapping and a reliance on risk graded funds has come under the spotlight. The concerns are that a risk profile score, which in isolation does not tell anyone much at best, is being used to determine what fund(s) the client’s money will be invested in.
A case in point: a 25-year-old investing £500 a month is going to have markedly different considerations to a 65-year-old needing income of £500 a month from their investment, even if their risk scores come out the same.
A firm's CIP can be found wanting where there hasn't been sufficient thought as to whether the proposition is suitable to particular client segments, as well as individual client circumstances.
The role of PROD
The next natural thing for advisers to consider on CIPs is the product intervention and product governance rules, or PROD for short.
The PROD rules came in under Mifid II and are inextricably linked with CIPs. The FCA position on PROD is:
"Products should meet the needs of one or more identifiable target markets and be sold to clients in the target markets by the appropriate distribution channels."
When the regulator talks about 'distribution' in this sense, it means advice firms. Essentially, this places a requirement on firms to divide current and potential clients into identifiable segments. A number of firms will already have their own ways of segmenting potential clients based on certain common criteria, and PROD makes having a formal process in place a requirement.
While sounding like an extra burden, an effective CIP should already be based on segmentation. In theory, the firms with CIPs in place should already have a formalised approach to segmentation – although it’s doubtful whether this is actually the case.
We can consider how segmentation allows the firm to focus on the CIP offered to typical clients within a segment.
You could then use the information above to create characteristics of the segment, such as:
- Able to invest for the long-term (over 10 years) and accept up to 50 per cent in capital losses
- Invests under a ‘growth’ mandate with an agreed risk tolerance score between three and eight out of 10.
These characteristics should broadly match the target market, the products and investments being recommended listed in their prospectus.
This may seem obvious and, to a lot of advisers, something they are already doing. The PROD rules however require this to be formalised and easily demonstrated. On the one hand, assessing target markets allows a firm to meet its PROD obligations while, on the other, it can help streamline the process of putting a CIP in place.
Depending on how the firm is set up, in terms of target clients there is a whole range of segmentation that can be done. The following are further examples that might be added to the table above to create a full suite of segmented clients:
- Young accumulator: Employed and relatively low net worth with 25+ years of working life expected. A light touch annual review service required initially.
- Young accumulator: Self-employed business owner with plans to work in some capacity for 15+ years. A different ongoing service to reflect tax management needs may be appropriate here.
- Focused retirement planning with 15 or less years to retirement: Likely to be focused on growth and maximising tax opportunities. A more developed service to monitor and review pensions/ investments prior to retirement and establish goals.
- Retirement in the next one to three years and need for income from pension assets. A review process to reflect the need for and the products and investment strategies available to assist with income generation.
Identifying clients in this way can help avoid the appearance of shoehorning. Where a similar investment or product is used across clearly different segments or target markets it can be difficult to prove the process has the required level of flexibility and level of personalisation.
Some of the main benefits of carrying out this process include:
- Compliance with regulations (clearly)
- A more formal process for the firm and their advisers to follow
- Help with creating a more robust CIP for the types of client the firm attracts
- Providing additional ideas on the service the firm offers to different clients
This initial list could be very short or long, depending on how restrictive or open a firm is to different types of clients. But the creation of that initial list of client types will provide the foundation for thinking about a CIP and what that looks like.
In our next article in this series, we'll consider the specific pros and cons of having a CIP within your firm.