Skandia's Michael Barrett looks at the questions advisers need to ask in order to avoid provider bias within platform-based tools...
This website carried an article recently exploring whether attitude to risk (ATR) profilers are "regulatory tickboxing" or "planning essential". The consensus was clear: an ATR tool can add value to the advice process but it supports advice and does not replace the need for an adviser.
Tools that can help facilitate a discussion about different types of risk - for example: risk tolerance, risk required, risk capacity and even risk composure - can help engage customers with the advice process, as well as help towards ensuring a suitable outcome, but the wider conversation is key. Advisers need to choose their ATR tool wisely, not only to ensure it fits with their wider advice process but also to ensure it will not introduce any conflicts of interest into the process because of provider bias.
ATR tool integrity
Advisers have been expressing concerns about the integrity of platform-based tools for a number of years and rightly so. We recently asked 500 advisers how important it is for asset allocation tools to be independent of provider bias. An overwhelming 96% stated it is important, with almost half stating it is a critical factor.
How to weed out provider bias in ATR tools
The importance of this issue has also been recognised by the Financial Conduct Authority (FCA) as part of its recent platform paper (PS13/1). The revised conduct of business (COB) regulations set within the paper give advisers a regulatory obligation to use tools that are independent of bias from April 2014. The updated COB rules state that, when using a platform service provider, advisers "must take reasonable steps to ensure it uses a platform service which presents its retail investment products without bias". This raises a number of questions as to what constitutes bias and what "reasonable steps" are actually required.
Elsewhere in the platform paper there are a few clues as to what advisers need to look out for. The practice of varying the platform charge due to the investment solution selected, and in some cases offering a "free" platform if in-house funds were used, has been banned. We have already seen a number of providers who have historically offered these sorts of deals rapidly backtracking and announcing revised propositions.
The area of investment tools is less clear, but there are a few sensible questions advisers can pose when assessing platform functionality: for example, when you use investment tools, are you pressured or guided towards certain investments, especially in-house funds? Are the funds shown alphabetically, or have certain funds been given greater prominence? How easy is it to pick the in-house funds? How does this user journey compare to selecting external fund managers?
While most advisers are smart enough to see through these tactics, they are a good indication that perhaps all is not what it should be and, more worryingly, underneath the bonnet, the engine might be cause for real concern.
The plus points
The advantage of using a platform-based tool is that it can accurately match the client's needs (as identified by the adviser) to the end investment solution and then provide tools and solutions to ensure this match is maintained on an ongoing basis. This can be hugely powerful when ensuring suitability but introduces a risk if this matching process is not transparent and free of provider bias.
It is vital that all of the economic data and assumptions used to derive the suggested asset allocations are shared with advisers and the source of this data is clearly identified. How often is this data reviewed and by whom? How are the outcomes of this review process communicated to advisers? If the platform has an in-house asset management arm, what involvement do they have in this process? Are they influencing the outcomes to drive flows into their funds?
It is also important that the tools themselves offer the level of functionality and flexibility required to help advisers engage with their clients. How prescriptive are the recommended asset allocations? What happens if the adviser wants to alter an asset allocation; for example, to increase exposure to emerging markets? Does the tool help provide the optimum portfolio for these needs or is the adviser left to make the investment calls themselves with no indication as to its impact on the client?
Providers need to ensure advisers are able to access clear and accurate information regarding their platform and any platform-based tools, so that they can meet their new regulatory obligation.
It is important this information is provided at a number of levels, with details of what is going on underneath the bonnet within the asset allocation engine but also providing more visible reassurance to ensure a risk profiler can be used without putting the adviser at risk.
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