Client objectives are the starting point for virtually all advice scenarios, but how often do the objectives recorded on file look more like the product solution than what the client actually wanted to achieve?
We check a lot of files and some client objectives are clearly articulated in the client’s own words and are supported with meaningful rationale, but many more contain largely generic statements which are really a steer towards the solution recommended. This is particularly common in replacement business cases.
Most paraplanners and file reviewers will be familiar with some of the statements below, but is what recorded necessarily what the client articulated to the adviser when they first met? What do these frequently used generic one liners really mean?
“The client wants to review their pensions”. This often translates into: The client’s pensions need to be consolidated onto our preferred platform/investment solution.
Or, “The client is looking for discretionary/active/risk targeted fund management”. Which frequently means: The client is not currently in our CIP, but should be. Is it safe to assume that the firm’s advisers have their own money invested in the firm’s CIP? After all, this is what they’re recommending to many of their clients.
“The client is looking for growth above inflation over the medium to long term“. We see this one a lot.
Unless the client needs to generate an income, they’re probably expecting their investments to grow in value aren’t they? But what does growth look like? What are their goals or expectations? Is any positive return OK? Is that growth figure before or after costs? A gross return of say, 6%, may sound pretty good, but if half of that is taken in platform/fund/advice costs every year, is the net return acceptable?
Above what rate of inflation? CPI? RPI? What rate does the client think inflation is? UK inflation hit double digits recently, so after costs have clients’ investments actually beaten inflation? And how much above inflation? An extra 0.00001% is ‘above’, so is this satisfactory? How about recording what the client’s actual views are here?
Medium to long term?
This usually means anything beyond five years, primarily because most clients with a timeframe shorter than this probably shouldn’t expose their capital to the markets. But how many times is the client’s actual time horizon established? Surely some clients will have an idea of when they want their money back? And don’t some have plans for the money in some form? Not according to many of the files we review.
Client or adviser-led?
“The client wants to consolidate their pensions/investments because they don’t want the burden of the paperwork”. Really? Is the half dozen or so statements the client receives each year a burden? Hardly, when compared to a 42 page suitability report, multiple fund factsheets, KFDs, KFIs, etc. If there’s an ISA or GIA in there they’ll still receive quarterly statements. So what’s different?
“The client is looking for a smoothed return”. No stretch of the imagination required for where that’s heading.
Or, “The client is planning for retirement and needs to switch his/her pensions to a more modern contract that has access to FAD and a wider range of investment funds”. But the client is some years away from accessing benefits so why now? If the existing contract is cost competitive and has access to say, 300 funds, there really should be a compelling reason to switch now and in any event, couldn’t suitable fund(s) be found from within those available in the existing arrangement? At the point where the client retires the current plan could possibly be moved to one where flexible benefits are available rather than switching now.
And DB Pensions…
“The client wants maximum flexibility and to be able to take a higher income in the early years of retirement”. What does flexibility actually mean? How does this look in reality? Higher income? How much? For how long?
“The client wants to make sure that their family inherits the pension fund on their death”. Yet the file clearly states that the client is in good health. Pensions are supposed to provide retirement benefits for the scheme member, which is a view taken by the FCA, and if the client makes significant inroads into the fund how much will actually be left to pass on? Isn’t their property and other assets enough? If death benefits are so important, why not arrange life cover?
Well, the new solution is more expensive but it offers access to over 3500 funds. Well that’s OK then, because the client confirmed that they needed access to all those funds didn’t he/she? And the recommendation more often than not? One fund or a fund of funds.
OK, but where is all this in the FCA rules?
The issues above aren’t contrivances, we see them time and again, and this can leave some firms potentially exposed because they struggle to evidence suitability.
COBS 9.2 .2 states that:
A firm must obtain from the client such information as is necessary for the firm to understand the essential facts about him/her and have a reasonable basis for believing, giving due consideration to the nature and extent of the service provided, that the specific transaction to be recommended, or entered into in the course of managing:
- meets his/her investment objectives;
- is such that he/she is able financially to bear any related investment risks consistent with his/her investment objectives;
- and is such that he/she has the necessary experience and knowledge in order to understand the risks involved in the transaction or in the management of his/her portfolio.
- The information regarding the investment objectives of a client must include, where relevant, information on the length of time for which he/she wishes to hold the investment, his/her preferences regarding risk taking, his/her risk profile, and the purposes of the investment.
- The information regarding the financial situation of a client must include, where relevant, information on the source and extent of his/her regular income, his/her assets, including liquid assets, investments and real property, and his/her regular financial commitments.
And firms that think a suitability report is their get out of jail card should look at COBS 9.4.7, which 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;
- explain why the firm has concluded that the recommended transaction is suitable for the client having regard to the information provided by the client;
- explain any possible disadvantages of the transaction for the client.
Demands and needs means objectives.
This isn’t an exhaustive list of the ‘objectives’ we see on files by any means, but these examples appear with great regularity and if they are evident on files in your firm, maybe some changes are required?
For files to stack up, record what the client actually said, rather than what you wanted them to say. Or what you think compliance would like to see!