In the last edition of Connection, I offered some thoughts on constructing a CIP and touched on the issue of the PROD rules (Product Intervention and Product Governance Sourcebook). These rules were introduced over a year ago, but got lost in the noise surrounding MiFID II. Evidence suggests that a significant number of advisers have yet to fully adopt these new rules and not surprisingly there's been quite a bit of negativity about what is seen as yet another box ticking exercise from the regulator.
We work in an industry awash with acronyms – which isn't necessarily a bad thing, as long as they don't crop up in conversations with investors. Mention PROD to Joe Public and it will no doubt raise suspicions of an electric shock applied to a cow's rear end – but like KYC and TCF that have come before, PROD introduces rules that protect investors and reduce business risk. What's more, if applied correctly, the new rules should also help advisers to run their businesses more efficiently and profitably – what's not to like?
Know Your Client
Financial advice, at its core, is about people. It's about understanding their goals and aspirations and offering solutions that provide the most suitable way of meeting them. That's probably why KYC seemed a much simpler concept to embrace than PROD – after all, 'knowing your client' is something that comes naturally as part of the advice process.
But let's be honest – on the face of it PROD seems more difficult. In years gone by, when Life Companies ruled the roost, products were pretty opaque and everyone just had to trust that the correct investment decisions were being made. For many investors this worked out okay – but for others it didn't, as anyone hit with an MVA on a With Profits policy, or a shortfall on their endowment policy will no doubt tell you.
Thankfully, we now work in a much more transparent industry – but the regulator isn't resting on its laurels and PROD now requires advisers to not only 'know their client' but to also 'know their product'. So what does this mean to advisers and how should these rules be incorporated into the investment process?
The first step should be quite straightforward for most firms – PROD is all about an advice firm understanding and categorising its clients so that it can offer services and products that are suitable for them. In my travels around the country speaking to advisers, most seem fairly clear about the 'typical' clients that they handle – for some that might be young professional entrepreneurs, for others it might be post-retirement drawdown clients. So while there are always the odd outliers, most advisers should be able to identify the broad client segments that sit within their client base.
Once this process has been completed, an adviser can consider the choice of products and services that are best suited to each segment and which (if any) platform offers the best value for money. These categories will differ from firm to firm – for some it may be as simple as three segments; younger clients accumulating wealth, middle aged clients approaching retirement, and older clients taking retirement income. For others, it might be broken down further to categorise clients into simple or complex needs – for example where additional tax planning is required or in the case of more elderly clients, where IHT or trust planning is needed.
I'm of the opinion that most advisers, at an individual client level, are already applying these types of more sophisticated categories to clients. But at a business level, many firms are still segmenting their overall client base according to their wealth – a hangover from pre-RDR and perhaps exacerbated by the way that most platform charging works. It's clear that this won't wash with the regulator – so firms need to translate the knowledge that exists of individual clients into a set of documented principles that establish broader categories.
It's a matter of doing the hard yards. There's no opt out on PROD, so whilst for some advisers it might feel like a load of work just to keep the regulator happy, there's no doubt in my mind that it will have the desired effect of improving client outcomes. It will undoubtedly also bring all sorts of associated benefits to adviser firms, not least the obvious reduction in business risk. Alongside that, expect to see a significant reduction in admin time and resource.
So the client categories have been established (I made that sound easy didn't I?). This just leaves the process of identifying and monitoring the products and services that meet the objectives of each segment. Firms will approach this process in different ways – some will perform research in-house, while others will outsource to an external research provider who specialises in whole of market qualitative research (extra points for those who spot the brazen plug…).
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.
©RSMR 2019. RSMR is a registered Trademark