Lobster-potting is a bane in our industry. Mark Polson of the lang cat used this descriptive term as part of the presentation linked to the recent research report with Origo 'A disconnected world', documenting some of the appalling consequences to firms that come from reluctance of tools and systems to share data effectively. Data may be assimilated by an application, but like a lobster in a pot, does not re-emerge in a useful manner.
A typical firm in our research uses 5 standalone systems in the delivery of advice, planning and portfolio management, and 2 investment platforms.
Not a single business process was available to our firms on a real-time, 2-way basis. None. Not one.
Origo and the lang cat: 'A Disconnected World: the Numbers'
Lobster potting is imbedded through decades of competing interests vying for control of adviser-originated inflows into their custody.
Incredibly, there are (in Mark's view) ZERO effective 2-way data-passing integrations that will support firms in real time. The lobster pot is a great metaphor for the phenomenon whereby the majority of technological entities in our industry restrict the flow of data between applications, and is the reason why:
- administrators can manage a maximum of £20m of assets-under-advice;
- firms are re-keying data into an average of 5 systems (not including platforms);
- advice is struggling to transcend its cottage-industry status and embrace higher levels of service and transparency;
Lobster potting is imbedded through decades of competing interests vying for control of adviser-originated inflows into their custody. Pre-RDR, product providers maintained the levers of control of clients' assets by payment of commission to advisers. Today the vested interests may have been transformed by regulation, but the bad practices live on in the reluctance of propositions to share data openly to assist in streamlining and reducing friction in advice. They still do not necessarily see it is in their interests to do so. The publication by Origo and the lang cat, 'A Disconnected World' is document that can be searched for and downloaded and is a brilliant description of the problem.
We wholeheartedly agree with the way the problem was framed, and are proposing a radical solution for firms, with assistance for platforms and back office systems in making available the data that firms need. We believe that facilitating the research around suitability is the key to meeting the challenge. Our new proposition is designed post-MiFID II and is based on three pillars: our independence and ability to present an even playing field in support of firms' preferences; our ability to apply a consistent and proven methodology across competing propositions and thirdly, our historic role of collecting and the relevant data, a role now critical to successful disclosure to MiFID standards.
Much as the government grew tired of cajoling the industry to reform its bad habits around the purchase of annuities and pulled out the sledge hammer of pension reforms (or freedoms) in 2015, MiFID's reforms of 2018 now biting, presented a sledge hammer to issues relating to disclosure and safeguards to consumers that arguably should have recognised more fairly the trust that advisers earn from their customers and the high standard of the advice that they can point to historically.
But MiFID is here to stay and has put enormous strain on the advice process before and after transaction (ex-ante and ex-post). In simple terms, the requirement to prove Suitability at Point-of-Sale and review represents a new world of difficulty as at a minimum, the following need to be addressed:
- Are the client's circumstances and objectives still current?
- Has the client's risk profile changed?
- Is the recommended strategy still intact?
- Is the recommended investment still aligned to all of the above?
This challenge is not something that can be completed with a few tick-boxes or confirmation over the phone. The lang cat research concludes that an average administrator in a firm can manage £20m of investments. MiFID may have just halved that.
At the heart of the problem lie irreconcilable conflicts of interest:
- Relying on the platform (or provider) for objective research that will lead to direction of inflows into their custody cannot support any kind of independent due diligence;
- Relying on the back-office system for financial-planning-based research won't work, as back offices are repositories of client and holdings data, mainly designed to facilitate payments. They do not maintain data exclusively for research purposes, meaning that due diligence needs to be performed outside of the back office;
- The research tools that they 'integrate' tend to be specialist tools not aligned to a central investment strategy that can encompass all the layers of costs in a recommendation, including product, platform and fund costs at share-class level;
- Firms must look to enhance the core capabilities of their back-office systems and platforms to establish robust and repeatable independent research.
The lang cat research concludes that an average administrator in a firm can manage £20m of investments. MiFID may have just halved that.
Problems for firms
Where tools offered by the platform are relied upon for ex-ante or ex-post reporting, generally their methodology cannot be applied as basis of comparison outside their own universe of investments reflecting their own custody arrangements. Even advisory businesses that channel all investments onto a single platform have to address the fact that often, many of the firm's assets-under-advice remain under third party custody.
They then run into the challenge that the fund data feeds are limited to unitised funds, preventing them from modelling platform, product or portfolio costs and charges that are relevant to their analysis. They are then condemned to multiple phone calls and requests for information from multiple providers and subsequent re-keying.
The threat of enforcement in the event of bias
For any firms doubting the responsibilities of firms to show their due diligence extends beyond the information provided by their favourite platforms, should read/reflect on the 'COBS 6.1F 'Client's best interests rule and using a platform service':
If the current approach condemns a firm to a slow death of research, re-keying, error, omission and stitching together reports manually, what does the perfect solution offer?
In short, full automation of the following:
- A Central Investment Strategy that can form the basis of all personal recommendations, including comparisons between ceding schemes or investments, that configure not just funds or portfolios, but also products and platforms;
- Model-driven ability (preferably stochastic) to risk profile all investments, without need to reference committees of experts for qualitative overview. It is impossible to prove suitability of an investment if you do not have access to a reliable risk profile for that investment, and that investment may be a bespoke portfolio, including funds that may not be risk-rated by the agencies;
- Ability to access the relevant pricing for ex-post as well as ex-ante illustrations, accessing the whole-of-market platform, product and portfolio costs, extending to discretionary managed portfolios (MPS);
- Ability to perform due diligence at proposition or segment level as required by MiFID on independent basis that is not reliant on information and conclusions provided by a preferred platform or product provider;
- Valuations from a full range of providers, not just those investments in custody of a preferred platform or provider;
- Ability to report extensively to assist governance, to the standards and requirements of the Senior Management Regime.
What is Synaptic offering?
To circumvent the challenges of lobster-potting, there are two initiatives underway at Synaptic, drawing on our traditional role of collecting and providing access to data to firms to support their compliance.
The first initiative is to complete the data-sets that represent the gaps in the advisory landscape available to firms via API. The second is to launch in 2020 a comprehensive research suite that will enable firms to manage fully-compliant and fully automated ex-ante and ex-post reporting (includes automated valuations), creating an even playing field for due diligence, transparency for the regulator and customers.
To meet 21st Century user-experience expectations, one of the UK's leading design agencies, OrangeBus, known for their work on the HMRC website among other accolades, have designed the user journey.
Supporting the firm's back office
Our philosophy is to reduce the burden for proving suitability for products and platforms whilst supporting back office systems as the repositories of customer and holdings data and own research that supports the proof of suitability for firms.
The following APIs are now available to third parties, in many cases representing unique datasets within the industry: