Making sure your CIP evolves with your firm

Flexibility is key to avoiding conflicts of interest between business efficiency and client outcome

Suitability remains at the very top of the tree with the regulator, and there is an ever-present concern around centralised investment propositions. Anything which may lead to business efficiency for advisers tends to raise the spectre of a conflict of interest.

Many column inches have been written about the efficacy of attitude to risk tools and their linkage via asset allocation to risk profiled solutions. The real focus here has been on vertically integrated solutions, which tend to be the preserve of the wholesalers or aggregated distributors.

However, there are numbers of advice firms for whom a CIP is instigated in a truly open architecture environment, maintains the clients’ best interests and delivers efficiency and de-risking as a by-product of the construct.

How to build a centralised investment proposition

These advisers have become the prime targets for a whole host of providers and the phenomenon has created an industry within an industry. Outsourcing has become big business for fund of fund players, DFMs, model portfolio providers, back office systems, ATR tools and platforms alike.

So who are these advisers? What do their businesses look like? And how will they evolve, ensuring that, through outsourcing, they are not limiting their options in the future?

There tends to be a quasi-evolutionary chain in the adviser market, which is defined in very simple terms by assets under management.

Smaller, single practitioner businesses with up to £25m from circa 100 clients tend to operate advisory portfolios. These are usually internally managed and have the operational headache of writing to clients for every alteration. But this is manageable with the relatively small number of clients involved and brings the advantage of regular contact.

From £25m to £50m and circa 200 clients, the operational headache grows. Some may deal with this by rebalancing on annual review but this is a sub-optimal approach from an investment perspective and would seem to be disadvantaging the client for the sake of the operational process – just what the FCA is concerned about. Others seek to create time by insourcing the investment piece via a third party advisory portfolio service.

Four in five advisers use centralised investment propositions

From £50m to £250m the client numbers further increase and the business shape often alters to multi-adviser. At this point, many move to managed portfolio services or insourced model portfolios.

Of course, this comes at a price, which either impacts the client or eats away at the margins of the advice business. The trick is to ensure operational efficiencies and the resultant increased capacity for new clients and improved outcomes more than makes up the difference.

North of £250m and the revenues that come off the assets start to make self-managing the investment piece attractive from a commercial perspective. This often precipitates a discussion around discretionary permissions, with all it entails for headcount, capital adequacy and regulation.

There are a number of different options available, from assembling one’s own investment and operational team, to insourcing the investment piece on a sub-advisory basis. The latter can be sourced on a fixed fee basis, driving value back to the business or end client.

CIPs scrutinised: Networks reject conflict of interest concerns

Of course, this picture is very over-simplified and there are a great many variables involved in the decision making process. But it does beg an obvious question: as firms evolve over time, how can they migrate from one shape to the next without disadvantaging their clients?

If the growth of CIP is set to continue apace, it would make sense for providers to offer a suite of complementary products and services that cater for each stage of the journey.

If the insourced investment proposition mandated to the advice business can remain the same, there is no reason why it cannot be captured within an advisory portfolio service, a managed portfolio service or a sub-advisory mandate.

The operational structure and commercials would evolve as the business grows but the portfolio management and its outcome for the client can remain a constant.

This leaves the client at the heart of the proposition and the adviser in absolute control. Most importantly, it delivers the flexibility to evolve without the conflicts of interest between business efficiency and client outcome.

Jamie Farquhar is business development director at Square Mile Investment Consulting and Research


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