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Investment advice Compliance expert Adam Samuel assesses the findings of the FSA’s mystery shopping which revealed deep problems

This summer was not good for investment advice, with the FSA’s report into standards making depressing reading. Thirty-six out of 50 firms mystery-shopped needed to improve and 21 firms had “to eradicate non-TCF elements from their advice process”.

The report showed that 46 per cent of firms advised before doing in-depth fact-finding, with 26 per cent having an ambiguous attitude to risk and 8 per cent had no attitude. Only 32 per cent produced an adequate recommendation following a reasonable sales process and 54 per cent had an inadequate sales process, with a further 10 per cent making a cursory or insufficient assessment of the clients’ needs or attitude to risk.

Know your customer

Limited fact-finding, poor risk profiling and an inability to note down objectives, timescale and needs all let down advisers.

The adviser must develop a full written picture of the customer. It is unsafe to advise purely on investments held without looking at pensions, mortgages, health and other aspects of the client’s life.

Some consultants know their customers but fail to write down the knowledge. Others update fact-finds by writing on them. This makes it difficult to identify the customer’s position at different times. It can mask a failure to review the information noted originally.

The major problems with savings and investments surround risk. First, the customer may want an overall average level of risk. Second, they may not want to expose any of their money to an asset type or extent of risk. Third, consumers have different attitudes depending on the area of their finances. Fourth, one finds investors who cannot tolerate certain outcomes, however unlikely.

Fact-finds must note the objectives, intended timescale and income needs involved. Part of risk assessment involves identifying the customer’s ability to tolerate the failure to achieve the objective concerned. Overall, though, advisers must abandon the use of tick-box forms and number schemes to assess risk.

Fact-finding must be done without regard to any proposed recommendation. Any trace of content added for this purpose should invalidate the fact-find.


Giving advice compliantly is about matching what is objectively sensible with the clients’ needs and aspirations. The adviser who recommended an equity fund requested by a client who was seeking a property to buy in the near future lost his FOS case. If what the client wants is not sensible, the adviser must decline to act.

Mystery shopping found significant commission bias. Here, the various rulebooks create a problem for advisers with limited ranges. Good advisers do not work for firms with investment limitations that eliminate basic investment products.

The use of life insurance as a means of savings was heavily criticised in the CII’s FPC2 manual as far back as 1995. The deduction of tax from the fund makes this far less attractive than its unit trust equivalent because of the effects of taper relief and individual CGT allowances. The same applies to investment bonds. The effect of top-slicing increases the reduction of value even more for customers who are higher- rate taxpayers at maturity. The only way to justify a unit-linked investment bond is through the rarely used switching facility.

The key to manage inves- tor risk is to profile the product and match it to the customer’s needs. A precipice bond should only be recommended to someone who wants to pay for a guarantee but is content for it to fail if the market drops below a certain level.

The fact-finding must be done without regard to the product that is being recommended. If you find a customer like that, a precipice bond may be appropriate.

Structured products generally must be tested against simpler alternatives. Such an investment should be compared against buying a tracker fund offering a near-full participation in the relevant index.

Financial planners have discussed diversification of risk through balanced portfolios for years. This can be done through asset allocation and by not using excessive concentrations in single funds.

Finally, with-profits funds increasingly look like managed funds with smoothing. They no longer offer guarantees, which needs to be made clear. The adviser has the problem of assessing the content of a fund through the PPFM and bear in mind the risks of market value reductions along the way.

There is a problem for providers and advisers in assessing these funds and finding an appropriate home for them. There is a gap between unit trust funds and bank deposits which such products could fill. It is unclear as to whether they meet this objective.

Advisers may have to review existing holdings. Where they spot something that fails to meet objectives, they must compare the costs of switching with the risks of retention. Above all, the consultant must explain the problem to the client.


The rulebook requires full disclosure of the risks and disadvantages, typically through a full suitability letter. This must set out the key facts found, the advice given, the reasons for it and the risks involved. To avoid complaints, advisers should explain all charges and deductions clearly.


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