With all the discussion around due diligence, much of it has centred on products, platforms and providers, with the client sitting firmly to one side. But just as important as due diligence on providers is making sure there is a robust process in place to determine a client’s risk profile. There needs to be more than just a form; there needs to be a conversation.
Far too many advisers are still not recognising risk profiling as anything other than a tick box exercise that, once completed, simply lets you move on to the next step. It is a bit like certain online terms and conditions check boxes you must complete to proceed. Many of us just check the box without reading the reams of text in front of us.
For me, the risk conversation is even more vital if your default is tracker funds. I have to say this does not mean I am advocating a more active approach, it is just that, minus the conversation, some clients may find accurate tracking hard to take in a volatile market.
It is fair to say that using certain passive funds where there is reduced volatility (that is, not pure trackers) may be attractive to some clients seeking low costs but not so low they have to endure volatility at a level they would be uncomfortable with. This is not a process that is easily explained and carried out on paper or on a website, so a face-to-face meeting is needed to arrive at a suitable recommendation.
Taking clients to the point at which they can confirm they are agreeing to a recommendation from the position of feeling fully informed is essential in delivering advice that can stand the test of time, irrespective of who reviews it later. In short, all advisers need to ensure their clients have reached the state of informed consent.
To get to that position clients need to understand any products being used and the strategy that is being deployed, and be comfortable with the investment risk they are taking while remaining under their maximum capacity for loss.
Relying on third party assessments are fine provided you understand how they arrived at their conclusion. Taking things on trust in the current and developing regulatory environment is far from sensible. Some may go further and suggest it borders on recklessness. It is important to state that the principle of informed consent extends to the adviser in their discussions with the providers and platforms involved.
Conversations are the glue that holds a robust and reliable investment process together. Without them, there is a real danger that everyone involved is not on the same page.
Talking of the need for a conversation, the last few weeks have seen Standard Life’s 1825 busy on the acquisition trail and those bought out prompted to tell us a restricted proposition is not necessarily inferior to an independent one.
The best protection any client can hope for is an absence of conflict of interest and it is fair to say that being restricted does not prevent that. However, it does make it more difficult, especially if something does not align with the new parent’s objective to move product.
I would be interested to know if any of those who sold canvassed their clients to determine their views with regards to their adviser becoming restricted. I suspect they did not and now the marketing will need to step up a gear to prevent any clients looking, then going, elsewhere.
Robert Reid is director at The Ideas Lab