There has been a steady increase in the number of firms offering centralised investment propositions to their clients.
The FSA undertook some thematic work in this area last year and scrutiny is likely to continue.
Concerns to date include the potential for firms to shoehorn all clients into something that is not entirely suitable for their needs and circumstances; churning without sufficient consideration that it is in the client’s best interests; and the higher cost and potentially less transparent charges with little or few actual benefits for the client.
If your firm is considering the Cip route, there are a number of high-level factors to consider. The most obvious being whether a Cip is right for your clients and, if so, what type and should it be outsourced?
Analysing the typical needs and objectives of clients and recognising that Cips are not appropriate for all is vital. Next, consider whether to design your own offering or adopt one created by a third party. Before adopting a third party solution, relevant due diligence should be carried out such on areas such as:
- Terms and conditions of use
- The provider’s reputation and financial standing
- The range of tax wrappers that can invest in the Cip
- The type of underlying assets invested in
- Flexibility to be adapted to meet individual client needs and objectives
- The Cip provider’s approach to undertaking due diligence on underlying investments
Several Cips are available, ranging from a preferred fund panel for transactional clients to discretionary management for clients who require bespoke investment management solutions. However, the selected portfolios must align accurately with risk descriptions and outputs from any risk profiling tools that the firm uses.
Once you have selected the Cip that best meets your clients’ profiles and before making a recommendation you need to gather know your customer information, including details of existing arrangements, pensions, savings, investments and other factors that could be relevant such as expected inheritance, occupation, prospects and health.
Next ask yourself if the client has sufficient knowledge and experience to understand the risks of the underlying investments held in the Cip. Knowing how to explain risk in a way clients will understand is an important part of the process, particularly where the Cip uses non-traditional investments.
The FCA expects firms to maintain robust systems and controls to mitigate the risk of unsuitable advice. Potential conflicts must be addressed and file checking should be robust, which might mean that checkers are trained on Cips and competent in identifying when a Cip recommendation is and is not suitable for a client. The ongoing competency of advisers goes without saying – if an adviser does not understand how the Cip works, how can he or she explain it to clients?
Clients can benefit from a more structured and better researched investment and firms benefit from efficiencies in the management of risks associated with investment selection.
But on the other hand there may be disadvantages with increased costs to clients and less transparency around who is charging what.
Linda Smith is senior technical adviser at APFA