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For many years, it has been accepted industry practice for life companies to provide specialist technical resources to advisers. There could now be serious implications, with the High Court ordering Scottish Equitable to compensate a client because its repre-sentative was present at the time when advice was given.

This must have sent a shiver down the spines of life company compliance staff members. How many similar situations will companies have been involved in?

When considering the implications of this judgment, I believe companies should be asking if there are implications for other forms of technical support they provide to advisers.

Another common form of assistance is provision of software to help an adviser with identifying client attitude to risk, asset allocation and portfolio modelling. The vast majority of life offices and wrap platforms now provide such tools to advisers and these are usually heavily branded with the name of the organisation supplying the tool.

If the presence of a technical specialist means the provider can be ruled to have influenced the advice process, could the supply of software, prominently displaying the provider brand, not also have the same effect?

Before the ruling, I suspect that most firms would have been happy to rely upon the disclaimers they use but, against the background of this case, there must be a strong argument for examining the issue in more detail.

In DP07/2, the FSA has certainly raised significant questions around the use of these tools. It makes it clear that the adviser is ultimately responsible for any recommendations but stresses the need for advisers to be properly trained in the use of these tools and that organisations supplying the tools have a responsibility to ensure that advisers understand how they operate.

It is important to recognise that tools of this type will use a wide range of assumptions, for example, real and nominal interest rates, inflation, equity risk premium, etc, when arriving at the results.

Equally, for any given attitude to risk there will be many possible asset allocations that might be appropriate.

Anyone using tools of this type must understand that if you put the same client responses in to a range of different tools supplied by different life offices or wrap providers, the various tools will produce some very diverse results, even when the attitude to risk would appear to be similar. It is not a matter of one asset allocation being right and another not, but of differ-ent approaches being used.

This issue becomes even more important when one understands that, frequently, the actuaries at the organisation supplying the tool will define or modify the asset allocation recommended for a given attitude to risk based on their perspective of the financial market.

Periodically, actuaries will change their views and modify the assumptions. At present, there is generally no specific way of communicating either the actuary’s original assumptions or subsequent changes to advisers using these tools.

Late last year, a number of IFAs raised this issue at FTRC’s Adviser Forum. They felt it is important to have more transparency over how these tools work as they are increasingly becoming a core part of the advice process.

The actual advice is being given by the IFA but if the recommended asset allocation is being designed by a product provider, it is hard not to argue that the actuary is having an impact on the advice.

It soon became obvious that more information is needed to be available to advisers so they could make informed decisions when selecting the tools to use with their clients.

To try to address this, earlier this year, 14 organisations including advisers, life offices, wrap providers and software suppliers agreed to work together through Adviser Forum to define what additional information advisers might need.

The results of this work have just been published. These take the form of good practice notes that can help advisers in collating the information they need from organisations supplying such tools.

The notes document issues over the use of attitude to risk questionnaires and asset-allocation tools. They include a draft due-diligence process for advisers to consider and templates for factsheets that the tool supplier can create for advisers.

As part of the diligence process, it is recommended that the provider document the asset allocation behind each of the models used within their system. This would allow the adviser to recognise which tools most closely reflect their own investment philosophy.

During this process, it has become clear that the major issues arise around the availability of information to advisers on what drives the operation of the tools.

Documenting clearly to the adviser the assumptions behind the software as well as the details by sector of each of the asset-allocation model, that is, the percentage of different classes of assets, will substantially help advisers in properly taking control of the advice process.

This should go a long way to mitigating any suggestion that the tool provider might be unduly influencing the mix of assets recommended.

Software-based tools of this nature have a great deal to offer advisers and can, I believe, be valuable in helping them analyse a client’s needs and suitable solutions to them.

However, in order to use them appropriately, advisers need to be fully conversant with how the tools work and the type of outcomes they are likely to produce.

It must also be clear that these services explore possible approaches. They are not delivering certainty but are best used to help the adviser in establishing how the clients feel about risk and identifying an asset allocation that reflects this.

Over the past few years, tools of this nature have become vastly more sophisticated. In the past, there has probably not been enough work to maintain adviser education in this area. The mechanisms now identified should help to address this and ensure that, when using such tools, the adviser is truly in control of the advice process.

It has become clear from the work to date that there is a similar need for further understanding around the operation of stochastic modelling tools and fund selection tools. A project to address this will start in October.

The full good practice notes for the use of attitude to risk questionnaires and asset-allocation models can be found at:


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