Research matters

Research does matter now – but not as much as it will do in the coming years.

As a traveller through our times, do things seem stable to you? Does the low inflation environment or challenges around liquidity cause loss of sleep? I worry about the European deadline and have been reflecting on the various insights provided by various industry experts. I wonder about the growth we have had over the last 10 years and am concerned about what it is hiding.

With increased use of platforms, there is more at stake than ever before should firms fail to evidence consistent and meaningful research. The big game changer has been the shift in strategy around research and due diligence required by the regulator.

I also reflect on the fall-from-grace of a certain fund with its own liquidity issues, and the subsequent scrutiny that 'gatekeeping' has attracted and think of the implications for any research that may have supported decisions that led to failure, using dreaded hind-sight.

We don't know what the tribulations ahead of us are, so anticipating the necessity to defend historic decisions causes us to reflect on what research means, and its role in providing evidence as to the decisions we make.

It turns out that a certain, very large advisory group had a significant mandate with 'that' fund promoter, so theoretically could have caught a nasty cold. Except they didn't, partly because they had control of the custody in a segregated mandate (so weren't affected by the demand for redemptions), but also because their homework had established that the particular fund manager's stock picking in un-quoted stocks, when analysed apart from their other investments, had not returned value historically. So un-quoted stocks were excluded from the mandate, and the group swerved considerable harm as a result. That seems to me to be an excellent example of valuable research.

Our benign 10 years in the markets are like the proverbial rising tide. Everybody invested has benefitted from nearly all asset classes recording growth. So not too much to defend. In the meantime, the regulatory authorities that were heavily criticised for being asleep at the wheel at the last downturn have been preparing the ground for far more rigid enforcement relating to the two principal pillars of their mission: prudence/risk management and protection of the consumer.

MiFID is a perfectly formed vehicle to deliver on this mission, and the FCA has already made announcements in relation to thematic reviews that will double down on the principles enshrined in the RDR and MiFID, with Proof of Suitability taking centre stage. Advisers have taken greater responsibility for their client's assets through pension freedoms. With increased use of platforms, there is more at stake than ever before should firms fail to evidence consistent and meaningful research.

The big game changer has been the shift in strategy around research and due diligence required by the regulator. Accompanying stringent disclosure requirements that are making everybody's eyes water along with the proof of target market, the new MiFID rules now require a full Suitability review to be conducted at least annually.

It won't be enough to present a list of holdings, agree that the world is well, and that progress is being made. Suitability will only be deemed met if:

  • there is a demonstrable plan;
  • that set objectives are still current; and
  • that a client's risk profile is up to date.

There must be an appropriate investment strategy that aligns with a client's plan.

In the past 6 months, Synaptic has focused on user research around MiFID challenges as well as suitability. The extensive research also involved interviews with software users, focusing on advisers and paraplanners.

 A brave call to discount possibility of 1% US Treasury yield in the next few years

A brave call to discount possibility of 1% US Treasury yield in the next few years

We have drawn some emerging themes out of the research that you may find of interest when developing or reviewing your own research capabilities:

1. Where's all the data? Why can't it all be in the right place?

A challenge recognised by firms everywhere, spending hours collating data from various sources to populate ex-ante and ex-post (pre and post transaction) reports. A challenge so big that some firms prefer not to take on new customers, cull existing or bail out altogether. Most tools cannot stitch the portfolio and product layers together across all AUM.

2. As 'aggregation' of firms affects more businesses, where is the software to support more joined up businesses?

A challenge exists around the ability for increasingly 'verticalised' businesses to combine management of their legacy books and work in a more modern streamlined business, consistent with practices across a wider group.

3. Firms are used to dealing with multiple software vendors. Is this avoidable?

It may be a firm's preference, but issues with compatibility are making it difficult to sustain, especially now suitability is to be reviewed annually.

4. The flow of data around the system still isn't right.

Firms prefer to co-ordinate things from the back office. However, integrations aren't what they should be, and re-keying is famously as inefficient and laborious as ever.

5. Retirement planning is becoming more important and the tools are struggling to keep up.

The wider adoption of cash-flow models has helped, but pension freedoms require more skilled research than ever to evidence the quality of firms' retirement planning.

6. Tools are struggling to deal with the wide range of investment 'pathways', where regulation and research strategies may vary.

Discretionary managed, insured, multi-asset, model or bespoke portfolios all require different treatment from the research point-of-view.

 the next chapter covers

Left: The FCA Thematic Review that set out the importance of research, due diligence and a 'culture of challenge'
Right: RDR and FAMR: the next chapter. The FCA's work is never done.

The themes coming through may not be news to the majority of advisers, however the age-old problems still persist. One solution that will help the adviser community to manage disclosure requirements, whilst reducing rekeying and finding information from different sources, is Synaptic's Instrument Disclosure Record.

The Synaptic Instrument Disclosure Record is a convenient and simple set of web APIs provided to assist you in meeting FCA obligations to disclose costs and charges as described by EMSA MiFID II legislation for Ex-Ante and Ex-Post client instrument illustrations and regular position statements.

You can customise the experience for your teams by building powerful reporting functionality on top of your advisory process – by providing access to both illustration and review reporting APIs as well as product and fund data services.

The solution has everything you need for the modern report formats, including the ability to combine pricing data on platforms, products and portfolios (such as discretionary managed portfolios), with investment projections and risk profiling.

Sounds incredible? Ask us about the Instrument Disclosure Record.

You can register your interest by contacting us on 0800 783 4477.