Risk wise advice

It may have been overlooked by some in the pre-Christmas rush,
but the Financial Conduct Authority (FCA) selected the suitability of investment portfolios as one of its hot topics in its December regulation round up.

It is a fundamental conduct of business requirement that firms providing discretionary and advisory portfolio management services obtain comprehensive information regarding each client's circumstances, investment aims and risk appetite. This is then followed with providing them with investment portfolios that match the client's needs.

Not up to scratch

Towards the end of 2015, the FCA published findings1 from its thematic review of suitability of retail investment portfolios provided by wealth management and private banking firms. The results show that a third of the firms reviewed by the FCA fell substantially short of the required standards, and a further third needed considerable improvements.

This is not the first time that
the regulator has targeted suitability
of investments in the private wealth sector and although improvements
have taken place, there appears to be
a wide variation in the performance
of individual firms.

Many need to raise their standards to be able to demonstrate that they are providing their clients with investment portfolios that are suitable for their needs and circumstances.

The FCA outlined three key areas for improvement:

1. Many firms still have to make substantial improvements in gathering, recording and regularly updating customer information to support the investment portfolios they manage for customers;

2. Firms need to do more to ensure that the composition of the portfolios they manage truly reflect the investment needs and risk appetite of their customers, especially those who have a limited capacity for, or desire to expose themselves to the risk of capital loss; and

3. Firms need to ensure that their governance, monitoring and assessment arrangements are sufficient to meet their regulatory responsibilities in relation to suitability.

Wealth managers and financial advisers who provide discretionary and advisory portfolio management services to private clients, must ensure that they review their procedures against the examples of good and poor practice as set out in the FCA's thematic review.

In particular, firms should ensure that they have robust systems for obtaining client information (for example asking a range of questions regarding risk appetite to get a true picture) and that they can show a clear rational for investment allocations for each customer. Firms should ensure that clients are not encouraged to list particular investment objectives and risk appetites in order to match one of the firm's 'off the shelf' portfolios.

Fit for purpose

If a wealth manager does not adequately identify and document their customers' circumstances, investment aims and risk appetite, and provide them with appropriate portfolios, they can expose them to an unnecessary level of risk (or conversely to an investment strategy which is too cautious) and of course leave themselves open to complaints and claims for redress if clients lose out as a result.

It is worth mentioning the responsibility of private clients and their intermediaries to inform wealth managers about any changes in their circumstances that may impact their investment objectives and risk appetite.

Issues such as the birth of a child, retirement, sale of a business, divorce or bereavement should be considered and if necessary, reported to the wealth manager. Private clients and their intermediaries should of course feel empowered to question the composition of their portfolios at
any time.

They should also request that their wealth manager carries out a re-profiling of their investment objectives and risk appetite whenever they feel it is necessary. 

References

1. See the FCA's report: https://bit.ly/1RsdvA6 

 

Kate Troup is a partner at Charles Russell Speechlys