Klare Baldwin, head of marketing at FundsNetwork, says there is a reason advisers' use of centralised investment propositions has caught the attention of the FCA
As we begin the countdown to the first anniversary of the introduction of the Retail Distribution Review (RDR), the regulatory landscape is one which continues to challenge advisers and presents some sizeable risks to overcome.
These include: the move to a fee-based world; the Financial Conduct Authority's (FCA's) final rules on platforms and the threat to trail commission they present; and the regulator's greater focus on suitability.
On top of the mounting regulatory pressure, advisers will have no doubt recognised that their businesses also have to contend with a headache-inducing cocktail of increased costs and shrinking revenues. It's fair to say that, even ten months into one of the biggest regulatory shake-ups our industry has seen, the life of a financial adviser has never been more challenging.
With this in mind, it is encouraging to see that many advisers have taken steps to adapt and evolve their businesses by implementing strategies such as segmenting their client base and introducing a menu of services. In addition to thinking about the services that are offered, and to which clients, it is also apparent that advisers are considering how they can deliver these services more effectively. This has led to a proliferation in outsourcing elements of the financial advice process.
Time for a CIP
One common approach to outsourcing has been the use of centralised investment propositions (CIPs) such as multi-asset managed solutions, model portfolios and discretionary fund managers (DFMs).
Indeed, the use of these solutions, specifically of the multi-asset variant, has taken off since the inception of the RDR and now accounts for £113bn of assets in the UK – an astounding £12bn jump from 2012.
While many column inches have been devoted to discussing the benefits that outsourced investment solutions offer in terms of time and cost-efficiency (both to the adviser and the client), one of the main attractions that often gets overlooked is how these propositions can significantly reduce risk within an adviser's business.
One of the key ways that they can help mitigate business risk is that they help create a more rounded and complete investment service and ongoing process for clients, as advisers are no longer solely judged on the basis of their ability to pick an outperforming fund. Furthermore, with a reduced selection of funds to monitor within these propositions, risk relating to ongoing suitability can be reduced too.
If we delve a bit deeper and look at specific solutions that include risk-profiled funds for example, we can see that these can confer additional benefits and further help mitigate business and regulatory risk. A well managed, risk-profiled fund is typically managed within well defined parameters, most importantly its benchmark strategic asset allocation, so risk is kept at a consistent and appropriate level, meeting client needs and their attitude to risk. Moreover, some managed solutions provide a kit to help manage annual reviews, which helps advisers to ensure the ongoing suitability of the recommended fund.
It comes as little surprise then that CIPs and the benefits they offer to advisers and clients have caught the attention of the regulator. Indeed, it has stated that clients can benefit from more structured and better researched investments.
However, it's important to remember that the FCA has also commented that selecting a CIP does not absolve firms from their responsibility to ensure suitability. The regulator requires firms to conduct adequate due diligence to ensure a CIP meets the needs and objectives of its target clients. Furthermore, it is also keen to ensure that the cost of any CIP is not excessive and that clients are not shoe-horned into any particular solution.
While the regulator may be casting a watchful eye over CIPs and the solutions that underpin them, we nonetheless believe their popularity will continue to grow. We may even see record flows into multi-asset investments and model portfolios this year as advisers continue to mitigate risk and increase the efficiency of their businesses
Perhaps then, it's only a matter of time before we see this trend extend into the retirement space, particularly as pensions are increasingly becoming considered as part of a client's holistic financial plan instead of an isolated tax wrapper.
Read the FCA's April 2012 ‘Assessing suitability: Replacement business and centralised investment propositions' paper here: http://www.fsa.gov.uk/static/pubs/guidance/gc12-06.pdf
What is a CIP?
The FCA defines a CIP as a process which standardises a firm's approach to providing investment advice. It generally refers to portfolio advice services; DFMs; or distributor-influenced funds.
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