Whether you conduct product research yourself or use a panel or software research engine, you need to have in place a documented process to justify client-specific product selection.
This not only underlines your professional integrity but will help you meet the suitability of advice rules in the FSA's new Code of Business Sourcebook, outlined in my article last week.
The starting point is to decide which factors need to be considered in your research and the order and weighting to give to the relevant elements.
Research can be split into two areas. Qualitative research covers financial strength, commercial viability and investment expertise while quantitative research encompasses fund performance analysis, charging structures and product features.
Financial strength is often considered in terms of free-asset ratios but these do not tell the full story. Organisations such as AKG and AM Best offer company ratings built from in-depth research.
These tools need to be supplemented with knowledge of the impact of the 1 per cent world on product provider strength, DTI returns and with-profits guides, as well as discussions with company actuaries.
Research processes and weightings need to be documented at each stage.
A useful qualitative research model for life and pension business is shown in the table (top right).
The next stage is to look closely at the products available from providers making the cut and produce a research methodology document for each area. Areas to include are:
Unit-linked fund performance (with-profits can be taken into account during qualitative research). Performance can be measured either cumulatively or discretely. But, beware, the following shows the fallibility of cumulative data.
Two funds have achieved the same overall growth over a five-year term. The problem is that, for the last two years, the trend for one of the funds is down. Looking at data on a discrete year-by-year basis can identify this trend.
Growth figures for the two funds are the same (see graph below) but XYZ fund has achieved positive returns in the last three years. Looking at fund volatility, XYZ would also be preferred in terms of consistency of growth.
Some sectors are more volatile than others so fund performance and volatility scores should only be compared with funds in the same sector.
Charging structures and competitiveness. IFAs should look for product providers which have competitive charges across a range of premiums, sums assured and terms.
Charges are usually based on estimated values, not reduction-in-yield figures, as the latter are only calculated to one decimal place. So, for products like bonds, some providers' RIYs could be identical.
Product features and options should be reviewed to establish if they are likely to meet customer's changing needs.
Premiums and rates. Where rates are important, premiums must be competitive over a range of sums assured and terms.
IFAs must consider all these aspects to satisfy the FSA's requirements.
When is a panel not a panel?
The bedrock of the IFA proposition – its product or provider research – often comes under fire for extensive reliance on too few providers or selected groups of providers.
Here, I would like to dispel a few myths. Panels come in different forms. Recommended lists are panels by another name that typically list a wide range of providers but IFAs have the scope to consider a number of providers not on the panel. With true panels, IFAs cannot deviate from the restricted number of providers. This is where an off-panel process becomes fundamental to the research process.
Often quoted concerns about product provider panels include commission bias, loss of IFA independence, restictiveness and inflexibility. It is often said they are really multi-ties by another name.
Some years ago, the FSA's consumer panel recommended that panel research and commission negotiations must be kept completely separate. Robust and documented procedures, with a clear audit trail, are needed to meet regulatory requirements and demonstrate, as in my own network, that product recommendations to members take absolutely no account of commission payable.
An established off-panel process, which I will talk about later, addresses the misconception that panels are restrictive and inflexible.
A panel built using a consistent research methodology can be fully rationalised, is compliant and, as research parameters are set by the IFA, underlines rather than diminishes the IFA proposition of independence.
Are panels multi-ties by another name? As we do not yet know what a multi-tied world would look like, this is impossible to answer. But going on what we know now, it can be argued that use of panels is likely to be more beneficial to consumers than multi-ties would be.
Panels must be reviewed on an ongoing basis, with a formal analysis each year. If the performance of a provider represented on a number of panels falters, it is relatively easy to deselect this provider. In a multi-tied world, reining in providers is unlikely to be as simple.
Going off panel
Counter to the argument that operating via a panel process can be restrictive and inflexible is the FSA consumer panel's recommendation that a robust off-panel process can be to everyone's benefit. If you operate using panels, whether outsourced or not, it is important to have a process in place to monitor when you need to go off panel.
You must be sure a non-panel provider is selected via the appropriate research mechanisms and your rationale is fully documented in a manner consistent with your other product selections. This achieves consistency of approach and, if fully documented, should further satisfy forthcoming N2 requirements which ask firms to demonstrate management controls.
Next week, I shall consider product research software and the likely future for product research.