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Conflicts of interest and suitability failings: How wealth managers are failing their clients

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Serious concerns about high portfolio turnover and conflicts of interests, as well as “significant” suitability failings, are putting wealth management firms’ customers at risk, the FCA has found.

The FCA’s thematic review of 15 firms, published this morning, found two-third are falling short of the regulator’s expectations and five reviewed may be subject to enforcement action as they need to undertake “significant remediation programmes to raise standards”.

Poor record keeping and lax suitability checks are at the heart of the problems uncovered during the review.

One firm reviewed by the FCA had portfolio turnover of up to 196 per cent, with the firm earning revenues on the switches. The FCA says it is “unclear why the frequency of transactions was necessary and whether these were executed in the best interests of customers”.

The regulator contrasts this with a firm that had annual turnover of up to 35 per cent where conflicts of interest were properly managed. Transaction costs were not charged and commissions from third parties were rebated to customer accounts.

The FCA says: “This helped the firm to show how it managed the conflict of interest that can arise when firms generate income from transaction charges.”

The regulator’s review also cites a lack of transparency on costs and charges “across a number of firms”.

It says one periodic report stated the investment management charge upfront under fees and charges, but did not include a total of all transaction charges.

“Numerous transaction charges were detailed individually within the acquisitions and disposals section of the periodic report, but were not aggregated and stated as a total figure,” the FCA says.

“As a result, the total amount of fees and charges did not appear clear, fair and not misleading.”

Other failings the FCA identified include a firm with elderly clients, including one who was over 90 years’ old, were identified as having a medium risk appetite and a 20-year investment horizon.

“These customers’ investment portfolios consisted mainly of direct holdings in equities, which may not have been suitable,” says the FCA.

The FCA raises concerns about risk profiling in the review, with several firms showing inconsistencies in how they documented clients’ attitude to risk.

One firm had little detailed information on the customer’s risk attitude, with the information not having been updated for almost five years.

The customer’s risk appetite as of March 2015 was low-medium, which was difficult to reconcile with a portfolio containing over 90 per cent equities and in the absence of any agreed investment strategy with the customer,” says the FCA.

Other issues identified included one client having a high proportion of cash holdings, with no explanation in client files as to why this was the case. The client’s attitude to risk had been categorised as “aggressive”.

In another wealth manager, the FCA found it appeared to be changing its clients’ risk appetites to match the risk profile of the existing investment portfolios. The investment manager told clients that costs would be incurred if the portfolio was switched to the client’s preference of low-risk.

Failure to update client information was another area of deficiency identified by the FCA in a number of firms. Wealth managers should have a process of regularly updating client information to ensure investment portfolios remain suitable, it says.

The FCA says: “Some firms had not regularly updated customer information, and in some instances the information had not been updated for several years and appeared out of date. Customer information that is significantly out of date may create a risk of portfolios becoming inconsistent with a customer’s risk appetite and or objectives and resulting in an unsuitable portfolio.”


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