"I am seeing the magic letters 'TCF' appearing increasingly often in magazines like RealAdviser. However, while the theory of Treating Customers Fairly seems relatively straightforward, experience of past regulation suggests the practicalities might not be so easy. Does the panel have any suggestions about how TCF can work in matters such as investment and financial planning?"
Nick Cann, Institute of FInancial planning
As the FSA has discovered with its thematic visits, mystery shopping exercises and TCF, many advisers are pretending to offer fee-based services so they can still call themselves independent. This really isn't good enough and, if the advisory business really wants to be seen as both professional and a profession, there are still a number of fundamentals that must be dealt with. The market is starting to repolarise itself to deal with remuneration and winning business models are starting to develop and flourish. Those providing advice and service are becoming more fee-based while those remaining in the area of transactional advice rely mainly on commission. The key is clarity and transparency and for advisers to get paid properly and fairly for the service they offer.
At the FSA conference in June, John Tiner spoke about the gold plating of compliance and the need to eradicate this if customers are truly to be treated fairly. Adding layers of extra paperwork does nothing to improve the understanding by the client and, in many cases, doesn't actually protect the adviser as intended anyway. Those advisers providing a comprehensive financial planning service are already treating their customers fairly because the client and their goals and objectives have to be central to everything they do. A financial plan brings everything together to provide a strategy that will, over time, provide the roadmap to achieving their goals and objectives.
The plan is personal to the client and combines lifestyle and financial objectives. However, all financial planning should follow the six-step process, which will consider the following: agree clients goals and objectives; gather all appropriate data; analyse that data; establish financial plan; implement plan; and review plan, goals and objectives.
Within the financial planning process, advisers should analyse cashflow requirements, appropriate risk profiles and, where investment is needed, the relevant asset allocation strategy. Most importantly, all this technical information and jargon has to be put into a format the client is going to be able to understand and act on. A huge report with standard paragraphs in compliance and legal speak does nothing to aid the client's understanding. The plan needs to be tailored to allow for differing needs.
Feedback suggests those moving to offer more of an advice and service-based proposition to their clients manage to implement the initial planning phase but still treat it as a transaction and struggle with the delivery of the service. While this is a positive step, advisers still need more support with building a valuable review service so the plan lasts the life of the relationship with the client and value can be delivered on an ongoing basis. Financial planning can - but shouldn't - be a transaction. It should be shaping a long-term relationship that will deal with the initial and evolving goals and objectives of the client.
www.financialplanning.org.uk, Tel: 0117 945 2470
brett davidson, fp advance
A recent report on 'Treating Customer Fairly' by the FSA highlights two key points. First, "a majority of firms say that they are implementing TCF programmes, but even in these cases we have found that the high levels of senior management commitment to the fair treatment of customers are often not yet reaching the frontline of firms' activities."
Second, "an example of where there is still some way to go is in Quality of Advice - where firms need to improve the way they give financial advice to retail customers in order to reduce the risk of misselling." This has major implications for our industry and impacts directly on the process of giving financial advice to clients. In addition to TCF, there are two business critical areas that can be improved directly as a result of a strong advice process.
Compliance: It is important that there is an advice process that can be monitored, measured and audited to reduce compliance risks. By developing a clear process, professional indemnity (PI) premiums should be reduced along with the risk of any misselling problems for the business. A client of FP Advance in Scotland has had PI premiums reduced by 50% simply by demonstrating a clear process for advice to his insurer.
'Selling the sizzle': Despite the need for a robust process, advisers must still feel like they have some 'sizzle' to sell. Currently in the UK, advisers tend to gravitate towards fund picking, investment performance and independence as the value-added components of their advice. However, these are low value-added parts of the advice process. The high value-added parts of the advice process involve understanding the client's goals and objectives, designing a financial strategy to achieve them and matching the financial solution clearly and strongly to the future achievement of these goals and objectives.
The 'sizzle' in a revised process revolves around selling a strong process to clients; demonstrating clearly the added value this process is likely to achieve for the client; showing examples of past success and added value for previous clients (via case studies); and matching any financial recommendations clearly with achievement of the clients' goals and objectives.
Many UK advisers are missing these critical steps and are simply doing 'financial reorganisation' for clients. This may involve a discussion about goals but often reverts quickly to simplifying or consolidating old investments and pensions. However, quality of advice, building a strong brand, reducing compliance risks and ensuring compliance with the FSA's Treating Customers Fairly initiative all go hand-in-hand and can be managed by a robust financial advice process.
www.fpadvance.com, Tel: 07917 152 124
phil Lindsay, obsr
Whether it is called 'Client Suitability', as it used to be, or 'Treating Clients Fairly', as it now is, the process of giving investment advice remains much the same. So what constitutes 'suitable' or 'fair' advice in the context of assessing investment performance?
Surely the adviser's objective is to give advice that will sustain a long-term relationship with the client, since that relationship is the basis of a long-term profitable business. Such a relationship will only be sustainable if the adviser adds value to the client and the client appreciates the value of service received. There is no short cut to giving suitable investment advice. Certainly using past performance as a sole arbiter is no way to ensure a sustainable relationship. Anyone - including the client - can look at a list and pick the top performer. Similarly, just picking a highly-rated fund is not sufficient. This may seem a strange statement coming from the group that helps produce the Forsyth OBSR Rating Service but the fact is that, in isolation, the rating is not of itself sufficient to ensure suitability.
Let's look at one sector - UK All Companies. There are currently more than 330 funds here, so what constitutes the 'best' UK All Companies fund? Bear in mind it includes at least 15 distinct investment approaches including All-Share and FTSE 100 trackers, large, medium and small-cap funds (and any combination thereof), recovery, special situations, ethical funds and so on.
A simplistic label - be it past performance or a rating in isolation - is insufficient. The Forsyth OBSR ratings do not identify the better UK All Companies funds since that universe is so heterogeneous that comparison between funds simply because they are in the same IMA sector is meaningless. What the ratings seek to show is the better funds of their type within the sector.
Forsyth OBSR distils the sectors into a number of such categories, called 'Investment Styles', before ratings are awarded. This ensures funds are compared on a like-for-like basis. All funds that invest in, say, large-cap stocks with a growth bias are considered together. Having refined the universe, comparisons are now valid and the better managers are awarded a rating.
The ongoing monitoring of a rated fund is conducted in the light of what it and its competitors are trying to achieve - not against other funds in the same sector. When it comes to looking at performance, again a fund is measured against what it is trying to achieve rather than against the sector average. It is fairly obvious that large-cap growth funds will not look good if smaller companies outperform over an extended period.
In these circumstances, past performance will lead an adviser to follow 'fashion', dropping a large-cap growth fund in favour of a smaller companies fund and presumably vice versa when large-cap stocks outperform. The job of a rating service is to identify the best funds 'of their type'. The adviser then has the more difficult task of identifying which type or types of fund are suitable for a client when the initial advice is given and monitoring advice as markets fluctuate and client circumstances change.
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