If you ask most advice firms which part of the advice process consumes the most time, most will reply: “Suitability Reports”. Based on the mammoth documents that some firms still produce, we can understand why.
We do have some sympathy with firms though. On the one hand they’re told by the FCA that reports are too long, but on the other they need to make sure that all the bases are covered in case of a future complaint. So what do most do? Chuck the kitchen sink at it!
Well, yes, based on a high proportion of reports we see. We’re aware that a wordy 42-pager (plus the other 100-odd pages of key features, illustrations and fund fact sheets) is often seen as a get out of jail card/panacea for all ills/silver bullet when it comes to evidencing that their advice is suitable, but in reality it rarely is.
An adviser we deal with was of the opinion that that his 50 page epics added real gravitas, but they didn’t really, they added gravity. In the days when these went out in the post, the local postie must have dreaded delivering them and when the envelope did finally plunge through the letterbox and concussed the dog the client must have wondered if all the fees they paid went on stationery, print toner and postage!
So, what’s required?
First and foremost, robust KYC. Without a good fact find which clearly explains (in their own words preferably) a client’s actual objectives, provides a clear outline of their personal and financial circumstances, attitude to risk/capacity for loss, knowledge and experience, etc. – basically all the stuff required within COBS 9.2 – firms will struggle to evidence suitability. It really doesn’t matter how nicely the report is written if it’s based on fresh air.
When it comes to preparing the report how many paraplanners face the challenge of putting a coherent document together with nothing more than a half completed fact find containing a few basic facts and some scribbled notes? Maybe this explains why so many reports look pretty much the same as the ones that preceded them.
Assuming you have the key components in place and relevant supporting research (positive thoughts here please) then you can go about preparing the report and recommendations. Sounds straightforward doesn’t it?
For suitability reports, what do the rules actually specify?
It may come as a surprise that the rules relating to suitability reports within FCA Handbook aren’t that exhaustive – the key ones are generally contained within COBS 9.4 (and COBS 9A.3 for MiFID/IDD business).
COBS 9.4.1R specifies the circumstances where a report must be issued. Generally, if you provide a personal recommendation you should issue a suitability report. There are a few exceptions in COBS 9.4.3R (imagine the hasty Googling of this now), but COBS 9.4.7R covers the actual content requirements.
It states that the suitability report must, at least:
- specify, on the basis of the information obtained from the client, the client’s demands and needs; (read ‘objectives’ here)
- explain why the firm has concluded that the recommended transaction is suitable for the client having regard to the information provided by the client, and:
- explain any possible disadvantages of the transaction for the client.
This isn’t really complex at all and if the rationale behind the recommendation has a solid foundation it shouldn’t be difficult to produce a report based on these requirements, but for some reason firms still feel the need to produce reports of at times, biblical proportions .
Specific rules covering timing of issue, DB pension transfers and income withdrawals are also in there, but good practice suggests that reports should be prepared and issued before the advice is imparted to the client. Why make life complicated, just make it standard practice to do the report before presenting the advice.
Don’t forget COBS 4.2.1R
Suitability reports also fall under the auspices of financial promotions, so they’re captured by the fair, clear and not misleading rules.
Have you ever read a report issued by another firm/adviser? Was it fair, clear and not misleading? What if another firm/adviser read yours? Do you actually read your reports from the perspective of the recipient before they’re issued? If your name goes on it surely it makes sense to ensure that it says what you intended. Do you check for errors and typos? A quick spell check could make a big difference.
Reports are fundamentally a letter/communication to a client, so why do so many include terminology that most people can’t understand? Or use jargon, or present information in a format that makes little sense? And how many are so long that the client gives up reading before they get halfway through?
What we frequently see
- Introduction – a lengthy intro about how long the firm/adviser has been around and how much money it manages.
- Background – often a detailed list of facts about the client that they already know. Their age, spouse’s name, number of children and ages, etc. Most clients won’t be that impressed to be made aware of this of course. How would you react? Each line frequently starts with ‘You’.
- Recommendations – a box containing the recommended solution(s), but before the basis for these is explained.
- Your objectives – statements that frequently bear a remarkable similarity to the features of the recommended solution. Or just generic statements with little or no substance to back them up.
- Attitude to risk – lengthy descriptions of what cautious or balanced or adventurous or whatever means and the client’s ‘score’. Quite often there are screen shots of the RPQ provider’s outputs also.
- Capacity for loss – often quantified with words like ‘some’ or ‘high’. What about £?
- Sections covering the product(s), provider(s), asset allocation, fund(s), cancellation rights, etc.
- Explanations what the product is and what it does. How many times does a client need to know what an ISA is?
- A section on the firm’s CIP and how this works. But not what actual benefits it conveys to the client, because it’s a generic statement and not personalised to the client’s objectives.
- A range of tables, graphs and charts including costs, fund performance, portfolio composition and so on.
- An explanation of the advice costs (but not always in monetary terms)
- Risk warnings – a long list of bullet points covering generic risks and tax aspects.
Where do you go from here?
The above format is actually reasonably logical and has a degree of flow to it (well, in some aspects at least), but so often we see each section embellished with lots of words that seek to justify the recommendations, yet they are frequently based on very little and often bear hardly any correlation to what was actually discussed with the client. Without a decent fact find and notes it’s just a smorgasbord of words and the weaker the KYC, the longer the report usually gets.
Bizarrely, the most significant communication the client receives from the firm is so often the least understandable and despite firms’ best efforts to provide a defence, in the event of a complaint a report littered with errors, omissions and misleading statements actually does the polar opposite in many cases.
One of the principles of Consumer Duty is client communications, so why do so many firms contrive to communicate in language that clients can barely comprehend? How would you react if you received this sort of thing from your adviser?
If your firm is still spending numerous hours preparing massive reports using old templates (which are sometimes addressed to Mr & Mrs Smith, but refer to Mr & Mrs Jones because it’s a cut and paste job) then maybe you need to make some changes?
Well written reports add value, but poorly written ones just reflect badly on the firm and worse still, can end up breaching several rules. Either way, if your advice is based on weak or inadequate KYC you will struggle to evidence suitability of advice, so perhaps the silver bullet is the fact find, not the report?