In the first article of a three-part series, PortfolioMetrix explored why PROD was introduced and what the experts think. The second article, based on the firm’s upcoming white paper, looks at some thoughts from financial advisers and how it recommends PROD can be adhered to …
As we all know, the problem with regulation is that there is often a large disconnect between the theory behind implementation and the practicalities of embedding it in your day to day business.
So we asked some financial advisers for their thoughts. We had representatives from ten adviser firms with total AUA of £2.4bn. The full spectrum was represented with attendees from firms with only one adviser through to those with more than 20 advisers.
The level of readiness was also broad. Some were comfortable that they had their PROD approach fully locked down but were interested to get a sense check. Others were earlier in the journey and were open to any insights on how to get their business PROD ready. As with the regulatory experts in the first article we have listed below what we thought were the most interesting quotes along with our take.
One adviser highlighted the scenario everybody is looking to avoid: "If you don't find common ground among your clients, you're likely to end up with 100 segments for 100 clients because every client is unique in some way."
Another added: "Individual suitability has to be the biggest consideration, the FCA shouldn't care if the best solution for the client is a few basis points more expensive than something mediocre." Indeed - cost in isolation is not always king.
A third adviser said there was clearly overlap between suitability, treating customers fairly (TCF), PROD and the firm's Central Investment Proposition. We would agree and it could make sense to combine them into one document.
PROD should lead to better outcomes for clients and post our discussions with the experts and practitioners we are recommending an approach that results in a client focused outcome but gets there in a practical and efficient way.
With PROD it is very easy to get lost in the finer details which can distract from the need to have an approach that can realistically be implemented within an advice firm.
A number of market commentators and consultants are suggesting an approach that starts with allocating a segment to each of the various client metrics (i.e. life stage, knowledge, income needs etc.)
They then suggest you should fit a solution (advice service level, investment solution and platform) to each of these segments. The problem with this approach is that you will end up with a very long list of segments which quickly becomes impractical.
There are multiple ways of creating a solution to solve for the eight segments above, but it does not have to be complex. It comes down to what your firm's beliefs are and if you have the right investment solution and platform providers.
For example, all eight segments could be covered by a high-touch advice service that utilises good quality cash flow modelling, combined with a risk-controlled total return investment solution, implemented via a platform capable of paying a defined income.
Equally, some of the segments could be solved with an annuity and a low-touch advice service, while others could be solved using an Income investment strategy and a platform that can pay out natural income and a moderate-touch advice service if you believe that is the best approach.
Our suggested practical approach is iterative in nature and starts at the advice service level. It then loops through investment solutions and platforms.
The client metrics mentioned above are considered continuously throughout the process.
Note: at the outset, you should include all the options, even the ones you have no intention of ever offering or even believe in. You can rule some out in future steps, which will provide valuable data for your PROD policy.
Three steps to success
- Start with the advice service level you already offer (for a lot of firms there is only one level of service offering). Now consider the different types of clients out there and assess if there are any other service levels you don't currently offer that a client could want?
- Next move to all the different investment solutions you would be comfortable using with your clients. Now consider the different types of clients out there and assess if there are any other investment preferences you don't currently offer that a client could want?
- Next move to all the different platforms you would be comfortable using with your clients. Now think about the different types of clients out there and assess if there are any other platform types you don't currently offer that a client could want?
Go around the loop as many times as required to ensure you have sufficient service levels, investment solutions and platforms to cover the needs of any client you are likely to advise.
Next having drawn up this big grid of the various segments, take a big red pen and put a cross through all the segments you don't want to cover.
Put a tick against the areas you might want to cover, but don't yet have a solution.
Finally, (this is a good by-product of PROD) take the opportunity to have a ‘spring clean' of the investment solutions and platforms, where you have multiple options in the same segment.
Now you are in a position to draw up your condensed PROD segmentation map as well as noting any universal rules and exclusions.
The third and final instalment in PortfolioMetrix's PROD series will appear on Professional Adviser next week (11 December).
Read the first article HERE
Ben Peele is managing director of PortfolioMetrix
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