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The FSA recently released a paper entitled “Assessing Suitability: Replacement Business and Centralised Investment Propositions” which was the result of an investigation the regulator had conducted. It gave us some clear guidelines and “do’s & don’ts” with regards to recommendations where we are switching investments, re-broking business or in some way advising on existing monies and investments.

As for a centralised investment proposition (CIP), we have been operating a CIP in some form or another for well over 5 years partly as a response to the “Treating Customers Fairly” (TCF) guidelines that were brought out but also due to our own research that told us that doing business in this way this should result in better outcomes for our clients. It is gratifying to see that others are finally coming to this same revelation (at least to some degree) whether on their own or through pressure from the regulator.

A Centralised Investment Proposition (CIP) is a way of conducting business that can be applied to a large proportion of clients and runs through the heart of most business conducted within the firm. At the very bottom level (and I have found some fairly large organisations who do just this) this can be as simple as conducting a risk profile questionnaire then putting a client’s investment into Managed Fund 1 to Managed Fund 5 depending on the results of the risk questionnaire; at the other end of the scale you could have a range of solutions such as we have including Discretionary Managers providing bespoke portfolios, model portfolios run by professional fund managers and a panel of managed funds that can be blended according to your requirements.

There are obviously many combinations or levels of service between the extremes; the more solutions, the better the chance of being able to find the “best” solution for a client but also, the greater the burden of research and work that need to be done to maintain the proposition. This is one way we differentiate and promote our service above those of smaller companies; I have also found that the larger networks have a similar problem to the FSA; they need to legislate for the lowest common denominator and as a result, they end up offering a “safe” service (in the eyes of the compliance officer and the regulator) but not necessarily the “best” service. This is our whole company ethos, we aim to be the “best” not just “good enough”, “better than nothing”, “safe” (from a regulatory standpoint), or “uncontroversial” and we will go the extra mile to be able to give this service.

Outsourcing the day to day investment decisions to a full-time professional manager we believe will not only benefit clients directly in their investment returns but also leaves us more time to concentrate on the areas where we can add real value to you as a client, managing the relationship and providing a more holistic lifetime planning service looking far more at your long term objectives rather than just finding a way to get you better returns that you can get from the bank.

If we put aside any issues regarding the use and relevance of “Attitude to Risk” questionnaires (this was covered in another, fairly decent, FSA paper a while back) and the whole process of assessing risk, let’s assume the ATR Questionnaire is being used correctly as a tool and other investigative work is carried out and that the eventual risk profile settled on is good, accurate and relevant. Even if the risk assessment is correct, the CIP may not be right for an individual client, especially at the lower end of the scale where a very limited proposition is being used; this can be for a variety of reasons. What I found extremely pleasing was that our CIP was flexible enough to avoid any issues of shoe-horning clients into a very restricted range of investments while still being sufficiently robust to ensure the client’s objectives and risk boundaries were being adhered to.

Our proprietary portfolio blending tool can bespoke any combination of propositions into a suitable overall portfolio of investments that can be guided by the planner’s intimate knowledge of the client’s objectives, experience, time horizon and understanding of financial matters. Our panel of different investment solutions at each level is intentionally diverse including differing methods and approaches to investment, differing levels of complexity to suit different people’s understanding of finance and investments and differing levels of cost for those who are very cost sensitive or those who believe in value for money rather than simply looking at bottom line cost.

It is worth pointing out at this juncture that I was pleasantly surprised (on the whole) by this paper, it actually makes a lot of sense and it is clear that the FSA has the client’s best interests at heart. What was also pleasing is that our current investment process already covers off pretty much all of the points raised and highlighted by the FSA’s investigation. What we have to work on now is not just doing enough to satisfy the FSA (I am confident we are already some way clear of that particular marker) but that we are doing these things well enough to set the benchmark against which other firms can be measured.

We should always strive to be an example of “good practice” or better still “best practice” in the industry and not just taking the path of least resistance as can so easily happen especially in an industry so heavily regulated and policed. Many companies and organisations are finding it is far easier to select investments they believe will be uncontroversial in the eyes of the regulator rather than taking the time and making the effort to do what they believe is “best”. In the past, the regulator has been accused of producing great big lists of “don’ts” without telling us what to “do” but this paper was a pleasant departure from this giving plenty of ways to operate and conduct business that is not simply based around what is the cheapest.

The FSA paper explains how advisers should be justifying decisions and what evidence and points need to be covered off in order to transact replacement business and operate a CIP. While I personally think that both the FSA and the financial press/media focus far too much on cost as opposed to “value for money” both in relation to funds and the tax wrappers/products, this paper does give very concise guidelines on how to evidence and back-up recommendations for replacement business where the cost of the new solution may be higher than the client’s current solution.

I do understand the FSA’s problem, it is extremely difficult to legislate in an industry where every case and every client is different and every adviser and every company will have differing views and capabilities. As with a lot of FSA initiatives, these rulings / guidelines have to legislate for the lowest common denominator, that is to say they are making sure that advisers who perhaps do not have the experience or the research capabilities that firms such as FMB have, are not giving advice that could be detrimental to the client. Where this paper scores very well in my view is that it gives advisers the basic guidelines but then also goes on to give those who do have superior experience, knowledge, research and analysis capabilities the latitude to give recommendations accordingly and, more importantly perhaps, it also explains how to satisfy the regulator when doing so.

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