Richard Leeson: RDR poses pitfalls for asset gatherers

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One of the outcomes of the RDR has been the emergence of ‘asset-gathering’ behaviours by some advice firms.

Previously, ‘asset-gatherer’ was used to describe an asset management company that focused on acquisition of funds under management.

Advisers who have become asset-gatherers  need to balance their business behaviours, especially in light of the business model threshold condition introduced last year. This statutory instrument requires authorised firms to ensure clients’ interests are served by the business model. Many advisers are unaware of this.

Asset gathering leads advice firms to focus on client segments determined by wealth or volume of liquid investable assets. The business model is fairly straightforward: offer prospective clients an appropriate investment management solution and then retain them with a personal, bespoke service proposition.

Investment management is a key part of the proposition for such firms. Generally, the higher the level of personal investable assets, the higher the need for capital preservation.

Rich clients who have acquired wealth may have done so by inheritance, sale of a business, accumulation over a working lifetime or possibly in a divorce settlement, and none of these clients will have a high likelihood of repeating their wealth acquisition. These clients will be risk-averse, desiring cautious investment strategies and being less concerned with opportunities for outperformance.

Investment solutions tend to be based on how bespoke the client’s needs are. Passive portfolios and low-risk mixed/managed fund solutions may appeal to clients who are largely disinterested in the detail of their investment. Other clients with greater involvement in the management of their assets may have requirements based on emotional or ethical views on underlying holdings; this may require outsourced solutions to specialist wealth management companies.

Service solutions tend to be a matter of  ‘you get what you pay for’, with higher levels of investment gaining more personal levels of service. Private banking was almost built on the principle of personalised service of a level far above what retail banks could offer.

The asset-gathering business model is largely agnostic over product selection unless it results in an increase in assets for the firm. This is a potential cause for concern in establishing a suitable business model, based on a business strategy that serves the clients’ interest in keeping with the threshold conditions.

Pre-RDR ‘sales ideas’  are in danger of metamorphosing in the post-RDR world, where sales behaviours have not given way to adviser behaviours. The temptation to promote products which attract higher levels of assets to the adviser firm will represent a conflict of interest that must be addressed. The abolition of commission may have removed an incentive towards product bias, but that does not mean product bias has been eliminated.

If a client’s interest requires that an adviser select an appropriate product then it behoves the firm to ensure it has assessed the suitability of that product. Many advisers are defaulting to placing assets in the general investment account on their platform and wrap solution(s) as a result of product agnosticism. This assumes that the Oeic/mutual fund product solution is the correct one. Wealthier investors tend towards lower risk funds, which in turn produce returns that are largely income and may make them more suited to tax-deferred products.

Advice firms that have a business model based on the interests of their clients will have processes in place to assess product suitability, and this may involve separating a portfolio of assets between those suited to CGT treatment and those suited to other tax regimes. This might require more work, but the additional fees that might be charged will be offset by potentially higher post-tax returns for the client. 

With the third thematic review of RDR under way, it will be interesting to see how the FCA reports back on these issues.

Richard Leeson is chief executive of Adviser Associate 

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Richard; I have read this twice now, and both times, come to the end asking the same question ?

    Whose interests do we serve the clients ? or the regulators ?

    A simple one or the other answer will do !

  2. DH I agree with the sentiment and so, seemingly, do the regulators! FCA confirmed recently that it welcomed an adviser ignoring regulatory tick boxes in favour of client interest.

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