In focus: CIPs Unpicked part 2

5 min read 16 Aug 21

Welcome to the second and final part of our mini content series lifting the lid on CIPs. We started off looking at some of the basics of running a CIP before unpicking some of the biggest CIP considerations: suitability and segmentation. There’s a lot to say on both suitability and segmentation so we’ll certainly be touching on these again as we now turn our attention to some of the practical due diligence requirements for running a CIP.

So what does good due diligence look like these days when it comes to your CIP? One thing that is becoming increasingly clear is that due diligence, for platforms through to risk profiling or cashflow modelling tools, should be much more than just a tick box exercise. Both the FCA’s emphasis on individual client suitability and also PROD regulations all point to the need for advisers to clearly articulate and demonstrate their process in quite some detail so that the suitability and value of advice can be clearly understood. In its recent paper on platform due diligence, financial consultancy the lang cat explains that this means advisers need to ‘write everything down. Absolutely. Everything'. This may sound a tad dramatic but the need for a detailed approach is reinforced again later in the same paper:

"The narration of each positive and negative decision you make is absolutely central is ensuring your process is defensible"

That certainly sounds about as far away from a tick box exercise as you could possibly get. But before you start having nightmares about being trapped in a never-ending cycle of due diligence processes, let’s take a breath and remember that a detailed approach does not mean you have to carry out deep analysis of every single provider in the market. And even for those platforms you do need to assess, it also doesn’t mean you have to ask hundreds of questions or produce a report that’s equally as long. It’s very much a case of keeping clear notes as you go while avoiding the temptation to turn this into your first novel.

And the most important thing throughout all of this is to have a clear line of suitability running through everything. Essentially, individual client suitability should be the end goal of each and every part of your due diligence process.

We had promised to keep this mini-series as practical as possible and we’ll stick to that now as we look at two examples of due diligence for platforms and risk profiling tools in more detail.

Practical platform due diligence

Going back again to the previous point about suitability, one of the absolute top practical questions to ask yourselves as a firm is what platform functionality your different client segments will need. Alongside any functionality your firm may also have to deliver the CIP, this list will provide an excellent way of whittling down to the most suitable platforms. There’s no need to include the most obvious questions about ISAs, for example, which every platform should have. But you may want to ask about access to certain specialist assets, if this is relevant for any of your client segments, or drawdown functionality, for example.

This leads us nicely onto the question of platform pricing and due diligence. Assuming that client suitability is underpinning every part of the process, then a platform’s pricing should not be looked at in isolation. If a platform is cheap but ultimately unsuitable, then that’s that. A better place to start is to identify those platforms that are suitable for your client segment(s) and then assess pricing amongst this group of platforms.

There are of course questions that can be harder to assess. Getting a clear sense of a platform’s commitment to market is another due diligence priority but the many different provider business models out there can make it challenging to fully assess financial strength. We would also argue that looking purely at profit and loss in isolation, as a measure of commitment to market, is too simple. This is where an unbiased, third party agency like AKG can come in to help review more than just financial strength. And then there is the less tangible but still important question of a platform’s cultural fit with your business, which can be difficult to judge from the document-based part of the due diligence exercise. Meeting with platform representatives at a later stage of the due diligence process can be really helpful in giving you a feel for how they operate in practice. 

"One thing that is becoming increasingly clear is that due diligence, for platforms through to risk profiling or cash modelling tools, should be more than a tick box exercise."

Risk profiling due diligence

Risk profiling tools are now used by most firms with all clients, regardless of what client segment they’re in or whether they are in accumulation or decumulation. It’s unsurprising then that regulation, MiFID II to be exact, is in place to make sure that advisers take reasonable steps so that tools including risk profiling, are “fit-for-purpose and are appropriately designed for use with their clients, with any limitations identified and actively mitigated through the suitability assessment process.”

When it comes to putting this into practice, the FSA’s final guidance on the use of risk profiling tools, (FG 11/05 Assessing Suitability) may be older but it is still very relevant and also provides a helpful guide. It makes it clear that although advisers need to understand how risk profiling tools are designed to work, including their scope and limitations, this doesn’t need to be a massive deep dive. In particular, the guidance notes that advisers should specifically assess whether the risk profiling questions are worded correctly for their target clients.

As you would expect, the risk descriptions within the tool must be fair clear and not misleading. In terms of what this means in practical terms, red flags tend to include vague language, failure to quantify risk, subjective descriptions that could be misinterpreted e.g. ‘cautious’ and, of course, the use of jargon. It’s also important to look carefully at the asset allocation recommended by the tools because advisers must be able to deviate from the model when client circumstances dictate this.

Remember back at the beginning when we said due diligence wasn’t just a tick box exercise? This is certainly true when selecting a risk profiling tool, as a wider sense check on all aspects of the client’s profile should also be carried out in order to ensure a suitable recommendation.

That feels like plenty to chew over for now and, along with the previous article, this CIPs Unpicked mini-series should leave you with lots of practical tips and helpful perspectives on some of the different components that make up this vital part of your advice process.