Last month saw the FCA publish the results of its first thematic review following the RDR – TR13/5. Personally I think these interim updates are a really useful sense-check for advisers. Setting out the good and bad practice examples allow us to get a feel for what the regulator is looking for.
Adviser charging – The big message here is be clear about the cost to clients. Why would a client want to work out what a 3 per cent charge means to them? One bad practice example illustrates an adviser firm who told clients “we will charge you somewhere between £1,500 and £5,000.”
Independent and Restricted – The FCA is worried about definitions here. No surprises by the findings – everyone has been confused for ages about just what independent and restricted means!
The examples have therefore made things a little clearer. One poor practice example was of a firm that placed 99 per cent of their business into managed funds, yet stated their independence, because they would create bespoke portfolios if necessary. What the FCA is trying to draw attention to here is this firm’s actions did not “look like” they were acting independently. The point I am taking from this is what I say over and over again to firms simply looking at platforms: before you make any decisions, look at the business and needs of your clients and the outcome will be obvious.
Restricted firms must declare what their restrictions are. In a good practice example, if a client’s needs could not be met, the adviser firm acknowledged it would not be able to offer advice.
Ongoing service – Again the message coming from this part of the review was be clear in any declaration so clients easily understand what they are getting and how much it costs. From my days as an IFA I remember the services and costs menu being wordy documents which certainly were not clear.
The term “sunset clause” given to the two-year period platform providers have to move investments into clear and explicit pricing environment has been causing confusion for some time. Advisers will have their trail commission on these investments “switched off” and should have plans in place to replace this income. With the FCA sharing some good practice examples, now might be a really good time for advisers to revisit this and tie up any areas which are not perhaps as clear as they could be in client communications.
Well, onto platforms. I am so encouraged by the increasing number of advisers rethinking existing platform choices and making platform use much more relevant to individual businesses. As usual I have been racing around the country helping lots of people through this process and here is an example of one adviser firm doing exactly that. If the FCA can share best practice so can I…
Have been using platforms on and off for the past five years – with assets spread across five different providers with the majority of assets on platform X. The firm wants to review its platform strategy and do a review of the current market players.
To kick off the review the firm gave me some really interesting feedback on their experience of using platforms in their business: what they do well (and not so well), what the website is like (when it works well and when it doesn’t), what their administrators say about usability, what the fund range is like and so on. Not only a useful exercise, the firm found its platform criteria and client needs had changed over time – what was important five years ago wasn’t today.
Once we had a good strong list of “must haves” and “nice to haves” we set about reviewing the players – the firm ended up with a shortlist of providers and some of those were not on the list first time around. Provider propositions change!
From the shortlist this enabled the firm to have a good look under the bonnet – what were the costs for a typical client? What is a typical client? This firm thought about the service they offered their clients. They asked the shortlisted providers the TER cost of a client investing £20k and £100k into three of their model portfolio arrangements.
For larger clients the firm uses discretionary management – their platform selection criteria and choice for these clients was different than the more general clients.
Advisers have this idea that a platform review takes weeks but it doesn’t need to. The process is easy once you have gone through those first few steps of determining what is important. Don’t forget to document everything, but keep it simple and to the point, with a few paragraphs outlining the process you went through and the conclusion.