Long ago when I first joined the financial services industry, the acronym 'CIP' didn't exist and nor did the process to which it refers. It's probably unfair to use the oft quoted 'pin sticking' analogy, but there was certainly a culture where research was largely limited to a flick through the life and pensions supplement of a particular trade publication.
Thankfully, most would agree that we're in a much better place now. Post-RDR, the majority of firms have adopted some form of standardised process for matching clients with a suitable product or service – helped in large part by the increased use of back office systems, risk profiling software and platforms.
But just as many firms were settling down into the broad use of a CIP, along came MiFiD II (which caused much consternation throughout 2018) and Prod. Worryingly, studies show that over half of UK advisers are unaware of the full implications of Prod. We will return to the impact of Prod in future articles but for now it does seem like a good time to set out some basic best practice principles on how to build and monitor a centralised investment proposition.
The primary benefit of a well-designed CIP is that it creates a consistent and repeatable approach, which should produce better outcomes for investors. It should also enable a firm to operate more efficiently – with more time dedicated to offering clients the level of service that demonstrates value for money. It goes without saying that if the CIP is operated robustly and is well documented, then the regulatory risk to a business is significantly reduced.
So where do you start? The first questions would usually relate to the philosophy that a firm adopts and the tools that it uses. This should be documented to form the basis of a client service proposition. Common questions are;
- Am I independent or restricted?
- How do I consider risk and discuss capacity for loss?
- What is my approach to asset allocation?
- What type of clients do I deal with? And how do I segment them into defined categories?
- How do I research and select solutions to match the requirements of each client segment?
Having a structured advice process, containing several stages that are each underpinned by a robust methodology, will set your firm apart from the competition and help you to target the type of clients who see the value in the services that you offer.
This is the bread and butter for advisers. Increasingly, many are introducing lifestyle and life planning questionnaires into the process along with cash-flow modelling software tools, seeking to respond to the increasing sophisticated client needs and to differentiate their service from the competition.
Attitude to risk
Advisers use a variety of tools to determine a client's attitude to risk and increasingly these involve more scientific approaches such as psychometric testing and questioning techniques, but there is no substitute for a good old fashioned discussion with your client where you can probe and challenge their attitude to risk and their understanding of the impact of market volatility on their investments. This area is fundamental to establish client understanding, another part of TCF, and needless to say this must all be recorded on the client file.
Many books have been written on the subject of asset allocation and the impact – both positive and negative – on long term investment performance. In setting asset allocation it is necessary to do this at a strategic level, based on the client's appetite for risk over the longer term, meeting the client's expectations as determined by the risk profiling exercise. Some form of tactical overlay may then be considered to respond to shorter term shifts and trends in the market, but the strategic position should remain the starting point.
Fund selection/portfolio construction
This is an equally important stage of your investment advice process and you should ensure you choose funds based on a combination of quantitative and qualitative factors. The quantitative measures centre on performance and risk with a number of measures used in each area to provide a comprehensive picture.
The qualitative assessment of any fund is to assess how the fund will perform in the future. The purpose of this part of the analysis is to ensure that the fund has robust fund management processes in place and a strong fund management team, and the qualitative screen allows a more detailed look at how the fund actually operates.
By combining both quantitative and qualitative research you build up a thorough understanding of the fund and how it works in different investment conditions, and this can then be fed through into any selection for portfolio building.
Monitor and review
Not least to ensure you can justify the payment of ongoing remuneration, you need to have a formal process for monitoring the underlying funds which form part of your recommendations made to clients and for reviewing performance and any required rebalancing.
Once your investment strategy and process have been agreed, selecting a platform will be easier and some solutions will probably be capable of being eliminated because of the approach you want to take.
By spending time reviewing your investment strategy you will provide focus in delivering a world class client service that will allow you to continue the journey towards delivering improved levels of advice and building trust with your clients.
This is one in a series of articles around CIPs and PROD.
Jon focuses on key relationships with RSMR's existing and new advisory client firms. He joined RSMR from Macmillan Cancer Support, where he led in the development of a unique financial guidance service tailored to the needs of cancer patients and their families.
Before this, Jon spent many years with HSBC Global Asset Management. He brings a wealth of relationship management experience – having worked with advisers, wealth managers and DFMs. He travelled internationally in his role at HSBC, but some years ago made the decision to return to Yorkshire to be closer to his family. Jon lives locally with his partner and young son and outside of work he enjoys family life, rugby league and real ale.