An equal bargain for its participants?
The move towards firm level investment strategies has grown at a tremendous rate over the last few years and is now embedded within the financial advice profession. Indeed, it is estimated that over 80% of financial advisory firms now operate a centralised investment proposition based on a recent survey of advisers by Equifax Touchstone.
Few, however, have a document to prove how this proposition works, how it relates to clients at an individual level and demonstrates how the decisions have been reached. Interestingly, something that has got lost along the way is the fact that it is this document that is referred to as a Centralised Investment Proposition rather than the underlying investments.
With the large expansion of investment propositions being operated, The Timebank is being asked by firms to produce a supporting CIP document as an independent service on a yearly basis to review and validate the investment proposition being offered.
This is seen as a key part of the regulatory and risk management oversight of this fundamental process. It is also a great opportunity, for example, to demonstrate to PI insurers how controls are in place and hopefully reduce insurance premiums.
So why has this paradigm shift taken place and what is driving it? What are the benefits for clients and firms and are these compatible? Is it an equal bargain?
The Retail Distribution Review (RDR) was launched by the FSA in 2006 with the majority of the rules to be implemented by the end of 2012. The main thrust of this to benefit the public (retail investors) was to raise the minimum level of adviser qualifications, improve the transparency of charges and services being offered and to remove commission paid to advisers from platforms and product providers. It also reemphasised the difference between independent advice and restricted advice.
For the public it was potentially the first encounter with a financial adviser discussing costs and charges upfront as fees that they would need to pay.
For many financial advisers, it was the final catalyst to review and change their business models. In a 1% world how were advisers going to have a profitable business going forward? This helped drive the move away from recommending and providing commission driven products to providing a comprehensive financial planning service more in tune with charging fees and/or a funds under management charge.
The idea of a centrally controlled investment proposition potentially offered all the benefits that an advisory firm would require to cut costs and increase efficiency and profitability by outsourcing a number of key investment functions.
Not having to constantly build, manage and monitor individual investment solutions for clients would allow advisers more face to face time with clients. This would free up capacity to see more clients and gain more business. It would allow advisers to do what a large number consider they are best at, managing the client relationships.
For smaller firms in particular it would push back the point at which the time spent on administration, reviews and just servicing clients exceeded that spent on generating new business. The cost and profitability implications for firms were obvious if it could be achieved.
Simplistically, as we know a CIP is the document that demonstrates a consistent approach to providing investment advice, clients understand this and buy into it. Consistency and process means security and peace of mind.
Irrespective, a firm needs to have a fully coherent client process in place behind the CIP. This also includes researching and agreeing on an investment proposition that meets the needs of the different client cohorts.
The firm is still responsible for ensuring they really understand the risks of the investment solution proposed, outsourced or not.
By many, CIP's were seen in the early days as an easy solution that benefited firms more than clients, and implementing and operating a CIP was simple, which isn't really the case.
Building a CIP is a sophisticated, complex and interconnected process designed to generate the right outcomes for clients. Each part requires a regular assessment to ensure it is doing what it should.
How does a CIP benefit the clients?
To gauge this let's look at the process and journey a client should go on with the firm and adviser prior to arriving at an investment.
The regulator in both its guises as the FSA and FCA laid this out in its Assessing Suitability paper: FG12/16 Replacement Business and Centralised Investment Propositions and its update. This paper made it clear that to operate a CIP effectively a wide range of elements needed to be in place to ensure positive client outcomes.
Only by doing this would the clients arrive in the correct investment solutions. Every component of the CIP needs to be evidenced, managed, overseen and reviewed to constantly ensure it is providing the right outcomes for clients.
Below are some of the main parts of the process to achieving this:
- Client Classification/Segmentation
- Client Service Proposition
- Advice Process
- Risk Profiling
- Cashflow Modelling
- Investment Philosophy/Beliefs
- Platform Proposition
- Pension Proposition
- Investment Proposition
By having a robust process in place clients, probably without knowing it, are taken on a journey that ensures the CIP is right for them or identifies that they need a different solution, as the case may be.
It is a consultative and educational process that clients can only benefit from.