Nothing stands still in the world of financial advice. Change did not end with the implementation of the RDR and it would be a mistake for firms to think that all those changes made to business models for RDR – charging structures, investment process and the rest – means that everything is now sorted.

The FCA has been working away in the interim to assess how firms have embedded the changes necessitated by the RDR. In its paper, TR16/1 Assessing suitability: Research and due diligence of products and services (February 2016), the FCA reports on the findings from its thematic review of how well firms are undertaking research and due diligence on the products and services that are recommended to clients.

The concern that was the catalyst for this review was the FCA’s assessment, based on other data, that poor research is one of the three root causes of poor client outcomes (the other two being incorrect risk profiling and costs).

The review primarily followed up on guidance paper FG12-16 Assessing suitability: Replacement business and centralised investment propositions (July 2012), in particular the Centralised Investment Proposition (CIP) aspect.

What is a CIP?
Quite simply, a CIP is a standardised approach to providing investment advice. Examples include model portfolios or discretionary investment management, either in-house or referred to a third party where the adviser has some say in the investment strategy adopted.

FG12-16 listed a number of requirements and it is useful to have a reminder of these.

• Firms need to identify target clients for whom the CIP is suitable (and, by definition, have a methodology for advising clients who do not meet the CIP criteria);
• Costs are an important factor in assessing suitability of products, particularly so with CIPs which are often more expensive than similar alternatives;
• Ensure there is no ‘shoe-horning’ of new clients into the firm’s CIP and no mass ‘churning’ of existing clients into the CIP – particularly relevant if the firm has acquired another firm or a new client bank.

Findings
So, back to the recent review. It aimed to identify how firms research the market and ensure that they recommend suitable solutions for clients, including:

• how firms select products, funds, platforms, and DFM services;
• how firms create panels and CIPs;
• how firms consider options for an individual client.

Only 13 firms were included in the review and the good news is that, overall, there were many examples of good practice. The FCA stated,

“In the main, we found that firms sought to achieve positive outcomes for clients when undertaking research and due diligence …”

Inevitably, though, some poor practice was also uncovered, ranging from inconsistency across different products and services to insufficient due diligence on platforms.

Particular mention was made of poor practice in relation to platform research and due diligence, with which the FCA said it was “disappointed” especially in the light of previous expectations around platform selection having been made clear.

Due diligence and Platform selection
FCA Factsheet no. 012 was where those ‘expectations’ were outlined.

• Having appropriate criteria for selecting a particular platform;
• Managing conflicts of interest – were the benefits to the firm a key factor in selection and/or use of a platform (training or other help, financial incentives, tools available);
• Benefits to clients must take precedence over benefits to the firm.

The following statement from the factsheet is perhaps the one that might be of most concern to firms.

“Developments in the market could mean that your chosen platform provider(s) may not remain the most appropriate option for your business or your clients. You may need to carry out periodic reviews.”

There seem to be mixed views. At least one platform operator has suggested that the review did not go far enough and that firms should be digging much deeper into platforms before using them. But some firms have said it might create problems if firms feel they have to move clients to a different platform ‘every five minutes’!

Historically, many firms created panels of providers and products. These were relatively simple to research as, in most cases, the providers and products were pretty familiar, although the criteria used to decide some firms’ panels might have included more consideration of commission payable than was desirable. New clients got the product from the current panel and existing clients in products no longer on panel generally stayed where they were because of surrender penalties and costs of switching.

In recent years, as new providers and more ‘exotic’ products became available, it has become more complex to do research and undertake due diligence – structured products are a case in point.

Researching Platforms is patently at the higher end of complexity – not only do the features and costs need to be compared but more difficult to assess factors, such as the financial stability of the platform operator, need to be researched and considered. And concluding that a new platform should be available, especially if that means an existing platform is no longer to be used, has potentially far reaching implications for how a firm deals with clients on the existing platform. It is undoubtedly a much bigger logistical exercise to migrate clients from an existing platform to a new one, re-registration notwithstanding. And firms are understandably reluctant to build relationships with an ever expanding number of platforms as, at some point, this becomes inefficient for the firm and also arguably for its clients.