The key to producing a client friendly and compliant suitability report is keeping in mind what the regulator is looking for. It needs to be simple and direct but, crucially, it must:
- Specify the client’s demands and needs (i.e. their goals and objectives).
- Explain why you have concluded the recommended transaction to be suitable for the client, based on the information they have provided.
- Explain any possible disadvantage of the transaction for the client.
The report should give the client such details as are appropriate according to the complexity of the transaction. You should consider whether what you are putting in – or what you are omitting to put in – to the report achieves the above three points.
Having these three aims firmly in your mind will make writing suitability reports much easier. Here are my top tips to achieving them.
Number 1: Start with the end in mind
Everything in a suitability report hangs on the quality of your fact find. Get the quality and content of your discussions right. Record all of the relevant hard and soft facts on your factfind document and the suitability report becomes far easier. Soft facts can be as significant as the hard facts, so do not scrimp on them. Remember that weak input leads to a weak output.
Most of the remaining tips rest on a good in-depth know-your-client process. Ask yourself: “do you know enough to evidence suitability?” For example, understanding your client’s discretionary and non-discretionary expenditure is a major factor to identify affordability and capacity for loss, and to justify a client’s income need.
Number 2: Would you take your own advice?
When it comes to the recommendation you are making, ask yourself whether you would be happy to proceed if you were the client. Be honest with yourself.
Number 3: Establishing the client’s real aims and objectives
Too many advisers do not understand what objectives are. Remind yourself of its definition: a thing aimed or sought; a goal.
Cobs 9.4.7 states: “Specify client’s demands and needs”. Early on in your suitability report, you should be stating your client’s goal and what they are aiming for. Quantify and specify where you can. Listing your client’s current situation is not listing their objectives, nor is stating a product they want.
When establishing objectives, drill right down. “I want to transfer my Isa” is not the objective. Why do they want to transfer it? For what purpose? What they are trying to achieve and for when is more like it.
Number 4: Replay how your recommendations match your client’s goals
Replay how your recommendation matches the client’s goals and objectives in the suitability letter. Make it clear how they achieve the client’s desired outcome.
Numbers 5, 6, 7 and 8: Attitude to risk, knowledge and experience, and capacity for loss
Each of the above should be discussed, explored and recorded. Though linked, these are three different subjects in their own right. You are trying to establish a client’s willingness to take risk, their need to take any risk and their ability to understand what risk is being taken and how it will affect them.
When using questionnaires and profilers, always ensure you check what the client has done. Have they fully completed the document? Are there any areas that conflict with the overall picture or any other part of your file? If so, explore the contradictions with the client and make sure the content of the conversation is recorded.
Capacity for loss is linked to how much risk your client’s financial situation can tolerate. If you establish and evidence assets and liabilities, as well as income and expenditure, your ability to identify how much loss they can actually suffer becomes far easier to ascertain.
Remember: content, content, content. It is not enough to refer to a conversation that has occurred. Nor is it enough to use profilers as a tick box exercise. A conversation covering the client’s attitude to risk, knowledge and experience of investments and risk, and an analysis of their capacity for loss is imperative. The fact finding document and the suitability report should contain the content of those discussions, not just confirm that a conversation has occurred.
Number 9: Keep consistent and accurate
Always double check calculations and ensure that information within the fact finding document and suitability report is correct and does not differ from one part of your file to another. Never use the suitability report to introduce new information.
Number 10: Last but by no means least…
When dealing with replacement business, have you considered (and evidenced as much) the following?
- The client’s objectives
- The charges of the ceding and receiving plan (in percentage and monetary terms)
Russell Facer is managing director of Threesixty