A high proportion of advice firms operate a largely recurring income model and with this comes the obligation to conduct client reviews. This is a subject that raises its head frequently with firms, especially with Consumer Duty considerations.

Reviews are nothing new but when MiFID II came into effect on 3^rd January 2018 it introduced an often misunderstood and overlooked rule within COBS 9A, specifically COBS 9A.3.9, which states that:

Investment firms providing a periodic suitability assessment shall review, in order to enhance the service, the suitability of the recommendations given at least annually. The frequency of this assessment shall be increased depending on the risk profile of the client and the type of financial instruments recommended.

Even when non-MiFID products are involved, where firms have agreed with the client that they will provide reviews, for which the client pays ongoing advice charges, they must provide what has been promised (and there are several words that define taking money for doing nothing). Don’t forget that as the rule states, for some clients reviews must be more frequent than annually and ‘risk profile’ doesn’t necessarily mean at the upper end of the scale. So is this double trouble?

A changing landscape?

With the advent of Consumer Duty we’re now receiving queries from some firms who are trying to segment their client banks and are thinking seriously about the new rules and client outcomes, but it’s clear from some of the recent queries that this is opening up a whole new can of worms because the segmentation isn’t based purely on portfolio values or recurring income.

For example, some firms have asked whether clients with needs that are not complex and don’t actually need an annual review, but currently pay an ongoing advice charge of say, 1% per annum, could be moved to a review every two years (or even three years in one instance) but with the ongoing advice charge reduced by a proportionate percentage.

So can firms do this?

Generally speaking, no, particularly where clients hold MiFID products – ISAs and GIAs frequently contain MiFID products, but this is also a matter of principle.

Further examination reveals that many of these clients have relatively modest portfolios which don’t generate significant income, but the firm effectively defaulted them into its ongoing review service so they’re now stuck with a dilemma, because they still need to provide the service they agreed, but are doing so at a loss much of the time. We’ve written about this several times previously and at an adviser conference in February 2023 FCA Director of Consumer Investments, Therese Chambers, openly asked if as many as 90% of clients actually need an annual MOT.

And if they don’t…

The problem now, as is highlighted above, is that firms have started to realise that the remuneration generated is often insufficient to cover the cost of delivering the review, so they are looking to reduce the burden of the workload, but at the same time are trying to retain ongoing income and a relationship with the client.

We’ve also questioned whether some clients actually need an annual review, what they get for the money and why the ongoing review ‘service’ appears to be a default approach. It now seems that the penny is starting to drop in some firms.

So, what are the alternatives?

This is the quandary that many firms now face. One the one hand they now know that provision of an annual review for £X is not profitable (although we believe that many still don’t know what it actually costs to provide a review), but on the other they don’t want to give up the income. And when there are many clients in similar circumstances, when aggregated this revenue stream can be very considerable.

The reality is that if firms want to retain the income then they must provide the service they agreed with the client – good client outcome. Or change the way they operate, which may involve taking an income haircut.

Or maybe not.

One course of action is to tell clients that you will no longer take the ongoing advice charge and that you’ll provide a reactive service, providing reviews as and when required, but for an agreed fee commensurate with the work involved at the time. This may work well and both sides will be happy, but is extraordinarily difficult for some firms to do.

Alternatively, you could inform the client that you can no longer afford to provide the service to which they’ve become accustomed and they either disengage (may be good or bad from either perspective), or they agree to pay a higher ongoing advice charge, which allows the firm to deliver reviews profitably. But will the client see value in this and what impact will higher advice fees have on the value of their investments? Here comes the Price and Value problem.

Difficult choices

As the Consumer Duty landscape unfolds, we expect to field more queries from firms who now face the almost unavoidable prospect of reviewing their charging structures, many of which have remained resolutely unchanged since RDR, or even before.

Providing answers won’t be easy, but the reality is that there is far more to the new rules than just performing a price and value assessment.

Some firms will need to fundamentally rethink the way they operate, but some will undoubtedly cling to the wreckage and hold out for as long as they can (or dare) before making changes.

In the end it comes down to providing clients with the service they agreed to pay for.