Professional Adviser Article – Lee Fisher – Choosing the correct Investment Proposition for clients

Read the full article here – https://www.professionaladviser.com/opinion/4029095/lee-fisher-choosing-cip-marathon-sprint?utm_medium=email&utm_content=&utm_campaign=IFA.Update_RL.EU.A.U&utm_source=PA.DCM.Editors_Updates&utm_term=BURTON%20%26%20FISHER%20FINANCIAL%20SERVICES&uid=6e2a4a0821fc1ef1cb0627412a44d319

Centralised Investment Proposition – Ongoing regular due diligence requirements for a firm

Following on from my previous article detailing the process to select a Centralised Investment Proposition (CIP) or Discretionary Fund Manager (DFM) for an IFA firm, it is only right that we now move on to consider the importance of the ongoing due diligence to support this decision.

Choosing and deciding upon an MPS/DFM or CIP is only the start of a long journey and I know from experience that as our firm has grown and developed, so has our client bank. Consequently, the DFM’s that we have chosen to work with have also had to embrace change and adapt. It is vitally important that this happens. An IFA firm must consider alternative solutions to ensure that the firm maintains its independence and the client is always invested in the most suitable solution for their requirements.

As an example, our firm first decided to use an MPS solution for our core growth portfolios, this decision was obviously not taken lightly, and we soon came to recognise that we would also need income portfolio solutions for clients, together with other suitable portfolios, for example AIM portfolios or ESG offerings. This shall be even more important given the proposed requirement to take clients’ ESG or sustainability into account when giving advice under Mifid suitability requirements.

Indeed, the FCA in its regulatory guidance states: “We recognise there can be benefits to offering a CIP for both clients and firms. Clients can benefit from more structured and better researched investments and firms can benefit from efficiencies in the management of risks associated with investment selection. However, we have concerns that, in certain circumstances, a CIP may be unsuitable for a retail investor.”

The essential point here is to realise that a firm must maintain a strict regime of ongoing due diligence with all of its investment solutions and ensure that the firms that they choose to work with continue to evolve and meet the needs of the firm’s client’s.

The overwhelming choice of DFM solutions now available means that selecting the right option from the market is increasingly difficult, and when taking account of the breadth of complex investment instruments used to form solutions, the apparently simple approach has become all the more complex.

It is also far too easy to stay with a pre-selected solution as the ‘route of least resistance’ and firms must ensure that a rigorous and compliant regime is in place to ensure that products remain suitable for clients at all times.

The following are areas that need to be reviewed on a regular basis by the firm’s compliance team.

1. Identify the relevant criteria required for your client.

You must first identify which criteria are applicable to your client segment and how you intend to work with your clients.

Consideration needs to be given to several areas including perhaps financial strength, investment structure, service levels and reputation, fund and platform availability, software solutions/client access, charges, investment mandate, process, and resources of the DFM, etc. The list seems endless!

To make matters even more complex clients must not be ‘shoe-horned’ into an inappropriate solution. Clients are also likely to be further segmented at a firm level. One DFM solution is therefore unlikely to be suitable for all clients.

2. Prioritise and review your selection criteria.

Having selected your criteria, you need to create a shortlist of suitors. Perhaps you can score each potential partner? Much the same as when a firm reviews a wrap provider, there are several electronic solutions available on the web that should assist you in the process. As an example, Defaqto and Synaptic research enable you to score a wide range of criteria, related to themes mentioned in step one.

3. Create a shortlist.

The process above should allow you to review firms that now match your selection criteria. Importantly it should also provide an audit trail to allow you to prove to clients why you recommended a particular solution.

At this stage it would also be useful to review any available independent reports on the potential firms and support the key themes that have been identified. For example, if available, you could seek a report from Asset Risk Consultants (ARC) to assess performance, independent compliance resources to review ‘under the bonnet’ systems and controls, and perhaps a review of AKG to discern the DFM’s financial strength.

4. Talk to and meet relevant firms.

This is the time-consuming part. Especially if the existing DFM solution that you utilise is no longer suitable, or you need to look at adding a new solution.

In a post Covid world perhaps this needs to be a zoom call, but you certainly need to meet the shortlisted firms and ascertain whether they will be a good cultural fit for you, your firm and most importantly your clients. This is also the time to ask detailed questions about the investment process and how the day-to-day transactions shall take place on client’s behalf.

5. Keep an audit trail and repeat process as appropriate.

The due diligence process forms part of your compliance file, therefore all records should be kept in case you are required to demonstrate the procedure employed in reaching your conclusions. In the event that there is a change to your business proposition, or as part of your ongoing monitoring, the process should be repeated at appropriate points.

Conclusions

The use of CIP’s and DFM’s within IFA practices is a trend that has increased dramatically over the years and in my view shall continue to increase as regulatory constraints and compliance pressures continue to drive advice firms to investment solutions that free up time for the planners to concentrate on the client, rather than running investment portfolios in house. In addition, as clients become more demanding it is only right that IFA’s interrogate their DFM solutions on a regular basis.

Factors within our industry will likely drive change in both client and firms’ behaviours and a DFM solution must continue to be suitable for the client at all times. As previously mentioned recent developments of late can be seen in the drive towards ESG investing, and already there are worries within the IFA world of so-called ‘greenwashing’ – where portfolios are marketed as ESG by the provider, rather than actually being ESG – This is obviously a growing concern for many advisers and firms have to be aware of the relevant pitfalls within any potential client solution.

One thing is certain, firms and clients shall continue to develop and evolve. It is crucial that a firm’s investment solution continues to adapt to meet the needs of both regulation and the client, in order to ensure positive outcomes for all parties.