The Sandler review has raised a few pertinent questions of the financial services industry. Of the many questions raised in the review two of the most controversial are:
Is the current standard of advisers' knowledge about investment issues sufficient?
How much attention is paid to investment strategy as opposed to selection of product and provider?
Perhaps I can approach the questions slightly differently. How many financial advi-sers do you know that you would like to manage your widow's investments?
It is not surprising that questions are being asked at Government level about personal savings, recognising that the state is looking to the individual to take much personal financial responsibility for their own health and well-being, particularly in retirement.
According to the Review of Medium and Long Term Savings, there is a need to understand whether the current practices in the savings market lead to “efficient investment decision-making and to optimal outcomes for consumer interests more broadly”.
However, the nature of the UK financial services industry has evolved as a result of innovation in product and service development, competition in distribution and the effects of regulation on the way clients are advised.
In Europe, regulation has controlled product design, ensuring that product features and investment strategies are very similar so there has not been a need to regulate distribution to the same extent.
In the UK, the current position with distribution is a diverse and vast array of talents and businesses all subject to their own commercial constraints. With Catmarking, we felt that the first aspect of product development controls and confirmation of increasing downward pressure on costs.
An example of one of the most demanding investment scenarios facing financial advisers at present is in drawdown cases.
In the CII research document, Retirement Planning in the Current Legislative Framework, they looked at pension fund withdrawal and these industry practitioners felt it was an area that most advisers are ill prepared for, particularly in the area of investment.
As part of the best practice model, this report suggested that drawdown requires an ongoing and high level of investment advice. Where that advice is not available, advisers should seek appropriate advice from a suitably qualified source.
From a regulatory point of view, a recent article stated that if G60 and G70 were required to conduct Sipp and drawdown business, only 2 per cent of the IFA community would be authorised.
At a recent discussion with a group of financial planners, the question was asked “What do they provide for their clients?” Clearly, they provide financial planning advice but they provide much more to their clients in terms of problem-solving, organisation of clients' affairs and providing peace of mind. No wonder the relationship between the client and adviser is strong.
However, one significant recognition in the discussion was that the skill sets of each of the financial planners, while all highly qualified, were different and they were comfortable in recognising that they worked with other professionals where they felt their level of competence was not sufficient.
This is no different from other professions such as medicine, law and accountancy. Some professionals work as general practitioners but have no hesitation in using the skills of accredited specialists to support their work.
In the area of investment management a growing number of financial advisers are working with discretionary fund managers as their accredited specialists. Because the interests of the client, the financial adviser and the private client fund manager are all in line, this is a win-win situation for all parties.
Regulatory requirements are becoming more demanding for the financial adviser, with more qualifications likely to be required in the area of investment management to prove competence. We are all working under pressure from increasing costs, reducing income, more demanding clients – all this in a time-starved society.
Utilising a service from specialist private client fund managers that addresses time and cost savings while enhancing the overall service offered to clients should be considered by financial advisers.
Unbundling the financial planning advice from investment and sometimes admin – for example, Sipps – it is possible for the accredited specialists to do the work in a more cost-effective manner. If one party does not perform to the required level, the financial adviser can replace them, normally at minimal cost.
How does it work?
From an initial brief from the financial adviser and production of supporting documentation if available, such as a list of current investments, the discretionary fund manager can produce an analysis of the existing portfolio and an initial report will be prepared for consideration by the financial adviser.
The report is then sent to the client in advance of a meeting with the financial adviser and a private client fund manager. The meeting gives an opportunity to ensure the client's objectives and attitude to risk are fully understood.
In the course of the discussion, it is essential to manage the expectations of the client in terms of investment performance and the selection of an appropriate benchmark. It is also essential to show they benefit from the combined services of the two professionals.
The fund manager will then attend to the paperwork to establish the portfolio. The service will include a minimum of half-yearly reports, a fiscal-year-end pack which includes an income schedule, a CGT schedule, a valuation and a consolidated tax certificate.
The fund manager will also be available for an annual review with the financial adviser and the client.
Not only is the financial adviser saved a considerable amount of time but also the compliance responsibility for the investment is with the discretionary fund manager.
What should the financial adviser look for?
When choosing an investment partner, the first step is to consider one with a dedicated financial adviser division, as they are more likely to recognise the financial adviser as the client's primary relationship manager in their working practice. They are also likely to have a greater understanding of the product wrappers the adviser is recommending and understand the application of the investment process to the overall plan.
This should be backed up with an investment process that is clear and offers a bespoke investment solution in a number of the key investment operating areas for financial advisers such as Sipps and drawdown, Pep and Isa transfers, trust fund management and offshore bonds.
The opportunities for financial advisers and private client fund managers to work together is already a powerful medicine to address the investment competence concerns raised in the Sandler review.