Compliant suitability: Still elusive, still urgent

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Compliant suitability: Still elusive, still urgent

The predominant responsibility of a wealth manager is to deliver suitable and appropriate advice to their clients.  Why then is the FCA, five years after making it a central aspect for review and guidelines, still finding fault with suitability? 

The FCA has seen improvements in the sector, but figures still point to 23% of sampled advice showing high risk of not being relevant and a further 37% of advice being unclear (FCA Thematic Review, December 2015). Given that no advisor sets out to give poor advice, and training requirements to give advice have never been higher, what is going wrong?

Client loads for relationship managers have increased in recent years, meaning less time to issue and record advice and monitor portfolios.  Equally, the rate of innovation in financial services means ever-increasing solutions and theory for the individual adviser to digest and translate to clients.  Firms must develop processes and install systems that can effectively cope with more clients, instruments and a changing landscape but there are various cases when such projects are ultimately insufficient.  Other failures occur when unsophisticated, box-ticking suitability processes are used without rigour.  While designed to match the regulator’s box-ticking audits, these often fail to capture a client’s requirements, backgrounds and objectives and are a common cause of audit failure.

Will fear of falling foul of the FCA simply create a population of advisers who deal in products offering the lowest regulatory risk and stick with the herd?  Much has been written recently that might encourage advisors for soon-to-be and recent retirees to maintain higher levels of equity in their portfolios, versus traditional ‘lifestyle investing’. The latter moves clients into less risky assets as he or she ages, but can provide insufficient returns for longer retirements.  However, if an advisor did maintain equity and risk levels for such clients, in a scenario of downward markets and equity losses – even with the correct documentation and research – one can imagine successful claims to the Ombudsman being made over client losses as the advice is contrary to traditional approaches.  Individual advisers should feel safe in providing sound investment advice, and that safety is largely down to wealth management firms to provide.

Ramifications include fines and damaged reputations and, in the worst cases, lifetime bans from financial services.  The few words on this page do not begin to unravel the causes and effects of suitability failures, but I would reserve a final thought for the end.  Five years of dealing with changing requirements, altered internal processes, new systems, client concerns and a fear of litigation will have taken its toll on many advisers and their firms.  We are reaching a point of saturation of interest on the issue: with every new iteration, practitioners will take less and less notice, creating malaise or apathy or even worse still, increase the workforce attrition as people leave for competitors or move out of the industry altogether.

So what does this mean?  There is an ever-shrinking window for business leaders to come to terms with suitability, understand, to the full extent, what is best practice and to implement appropriate processes.  The results, should firms not do so, will be conspicuously available from your preferred news vendor.

 

 

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Joseph Marti

Joseph is a management consultant for Knadel specialising in the investments sector, with experience as a practitioner across the retail and wealth management industry ranging from front office private banking to internal operational change projects.

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