Key ingredients of suitable advice

18 December 2018

Delivering suitable advice doesn’t stop with risk profiling your client. Interestingly, the Financial Conduct Authority (FCA) doesn’t recommend a specific process or tools that firms should use, but firms must take reasonable steps to ensure a recommendation is suitable for their client¹. What’s more, in the very same document, the FCA states that “all firms, regardless of size or type, can carry out good research and due diligence”.

So, what’s actually the FCA’s advice on the subject? In FG11/5 the FCA states that a firm needs to be able to demonstrate how any recommendation of or transaction is suitable for a particular customer given each of the constituent parts of the suitability assessment.

Good practice is to use tools that automatically maintain a record of the risk profiles recorded for each customer along with the date that each assessment was made.

Information regarding the investment objectives of a customer must include, where relevant, information on the length of time for which they wish to hold the investment, their preferences regarding risk taking, their risk profile, the purpose of their investment and their capacity for loss.

Bearing this in mind, it is clear, that to provide good advice you don’t necessarily need a particular tool but a set of processes. At the same time, without any software tools this process would be very lengthy, especially if every research started from the whole of market. In 2016, we launched a series of  workflows in Engage that support best practices and link risk profiling with fund research in one seamless process, saving you both time and money.

Using Engage for investment research

Engage is a whole of market research tool. For suitability purposes we recommend you use the risk profiling tool in conjunction with the research tool. That’s mainly because it simply saves time and prevents you from having to subscribe to a separate risk profiling tool.

Once you have established your client’s agreed Risk Profile (we have covered our approach to this process more in this article), Engage will show you the funds, DFMs or portfolios, which are risk rated accordingly. This means that you can research the right combination of funds (or DFMs), platform and product, that would work for your client. You can start from any point that works for you – we usually recommend to start with fund research but it is possible that your centralised investment proposition is linked to certain platforms and you might want to start with those. Whichever step you choose to take first, it means that Engage will naturally eliminate incompatible choices in the next one. For example, if you narrow down your research to two or three funds, it would recommend to you only the platforms that offer these funds in the next step and vice versa.

Every step of your research is automatically recorded, giving you the opportunity to include into your report comparison tables and your notes. Defaqto is a financial information business and our Consultants analyse the whole of market to compare features and combine it with other sources of data, such as Morningstar, to give you as much information as possible. We also include MiFID II fund data, KIIDs, fund prospectuses and fund factsheets. All this data is fed into Engage to help you do the due diligence efficiently.

Using fund panels and adviser-led model portfolios

You can also choose to use a set panel of funds that are recommended by your firm based on your firm’s own research or ask Defaqto for help with panel setup – this can be all programmed into Engage. The other interesting point is the possibility of including your own model portfolios. As Defaqto sets up its own asset allocations linking to the Defaqto Risk Profiles, Engage is able to risk rate adviser-led model portfolios. This is quite useful as it significantly simplifies due diligence for advisers preferring to build and recommend their own portfolios.

Ensuring consistency and saving time

One big challenge identified by the FCA is making sure the central investment proposition is consistent across the whole firm. It’s not necessary to have certain tools to achieve this, as at its core it is all about identifying the right process and making sure everyone follows it, but software tools can certainly help to make your life easier. Engage allows you to save your preferred filter settings as a template, including using filters such as MiFID II data. This saves time and narrows down the search in a more manageable way. It’s also a good solution for those who either identified certain filters as suitable for their clients as a part of their CIP, or firms that would like to make sure the investment process is standardised across the whole company. We have also introduced KIIDs and fund factsheets and prospectuses in Engage, so they can be added easily to the final report or use for your reference from within one system.

Platform research

In the light of on-going discussions about platform charges, it is also worth pointing out that when recommending a platform, Engage is once again a great tool for researching the various details. It helps you even to highlight platform charges together with other features that might be of interest to your clients to be able to recommend one that is suitable for your clients’ needs. Once again, this comparison table can be included to your overall report together with your own notes.

The bottom line

Whatever your CIP is, it is important to make sure it is suitable for all your clients and that you are doing the necessary due diligence. You have to make sure that you have the right processes in place and software tools can support you in delivering suitable advice. Engage Core offers the flexibility to support most CIPs including adviser-led model portfolios. At the same time our three-way research approach makes sure you always end up with research you can execute.

If you are a current customer with any additional questions, please don’t hesitate to contact our Customer Support at customersupport@defaqto.com or 01844 295544 Monday to Friday between 9 and 17:30.

If you don’t have currently a licence, you can learn more about Engage Core, our end-to-end financial planning tool, and request a demonstration, here.

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¹ FCA TR16/1, p.5

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