5 min read 28 Feb 20
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After a brief respite, a new latticework of regulation has emerged to test advisers’ compliance systems. From PROD and MiFID II, to the latest adviser suitability review just recently announced by the FCA, will a centralised investment proposition (CIP) or its rarer cousin, the centralised retirement proposition (CRP) be enough to keep the regulators at bay?
The majority of advisers – 82% by the lang cat’s research - have built a centralised investment proposition. The intent is clear: to deliver repeatable advice, so that a client gets the same outcome whoever advises them. The biggest problem we see here is a ‘cookie-cutter approach’ - risk process, asset allocation, risk profile 1-6, a lot of boiler plate text on the recommendations and done. This may not wash in a world where making really clear links between the solution and the client’s needs is a major focus.
The key then is the process, not the solutions, used to deliver the outcome. This is a frequent source of confusion. We might even say that the ‘P’ of CIP or CRP should mean ‘process’ rather than ‘proposition’.
Does PROD change anything? Certainly, advisers need to pay attention. This is the rule book now, and the benchmark by which suitable advice will be judged. To our mind, PROD requires a level of personalisation not always met by boiler plate risk warnings.
In theory, under PROD, every product manufacturer should make a judgement on the right market for their product. That’s quite tricky and many have not done it – or if they have, advisers aren’t aware. This means that the burden falls on the adviser. PROD demands that a distributor (MiFID II language for ‘advisers’ in our context) should consider price, financial strength and service when selecting products. In other words, advisers need to find products that are well-made, fairly priced, and perform in a way that is appropriate. That ‘appropriateness’ comes from the information advisers gather from their clients and depends on robust back office systems.
Much has been said about PROD and segmentation. PROD doesn’t force anyone to segment anything. In fact the word isn’t even used. But it does ask advisers to think of clients in ‘target market’ groups with similar needs. Individual suitability is still king, but we do have this new, helpful concept of groups (which is where all the segmentation noise comes from.)
To our mind, the existing practice of segmenting by value is unlikely to be sufficiently ‘granular’ under the rules. That said, segmenting by lifestyle, probably isn’t adequate either. Retirees, for example, can have radically different needs. Single person households, for example? Specific professions have unique requirements – doctors, for example.
Most advisers won’t have time to make meaningful change to their systems ahead of the first suitability review, but they can do it for the next one. Planning is planning and, of course, most do it very well. This is about stitching a solution set together with the right processes and a very clear sense of what is, and what isn’t, suitable for individual clients. Advisers should also think about what they need from platforms and any other kit they use in order to be able to achieve this - and not be afraid to ask providers for it.
Adoption of CRPs certainly appears to lag that of CIPs, so M&G Wealth decided to investigate further by finding out if and how adviser firms are starting to use a CRP through a series of adviser case studies carried out with help from the lang cat. Some firms had a clearly defined CRP – by which we mean a set of investment solutions - which is distinct from how they approach clients in accumulation. Others, by contrast, said they saw no difference between a CIP and a CRP, and therefore took the same approach for clients in accumulation and those reaching, or in, retirement.
However, what’s interesting is that when we asked these advisers to give a breakdown of how they work with retirement clients, it became clear that certain parts of their process changed notably – including a much greater focus on capacity for loss and sustainability of income.
Whether advisers call it a CRP or not, it’s encouraging to see them focus on changing their processes accordingly for retirement clients. Although again, from the regulator’s perspective, the key will be articulating this consistency of approach while also demonstrating the right level of personalisation.
Aside from the upcoming suitability review, ultimately advisers still have time to get this right because the majority of today’s wealthy retirees have defined benefit schemes. The cohort that will depend on the sustainable withdrawal rate determined by the adviser are probably not retiring for another 5-10 years.
Again, it’s the process that’s important. There is hardly ever only one right answer. Think of it as maths homework – one point for the answer, the other nine for the method you took to get to it.
At our events at the beginning of 2020 Mark Polson, Sir Steve Webb and Sarah Pennells shared their insights around how regulation and a changing – and ageing population – are making planning for a sustainable retirement income increasingly challenging.
Take a look at the case studies that Mark mentioned earlier.
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