Risky business

Binyamin Ali

How do deputies carry out due diligence when they're choosing an IFA or an investment manager? What's the first thing they should be looking at?

Sir Alex Elphinston

We have a questionnaire that we would send out to make sure that they are compliant and everything else as well, to make sure that there would be a baseline at that level. That's where we would start.

Binyamin Ali

How robust do you consider that to be?

Sir Alex Elphinston

We've tweaked it from time to time so that it's asking things like, one of the things would be financial security, independence, so that it's not going to go 'bump' overnight or something like that.

How large is it? Are they part of a larger organisation? Those sorts of questions to start with.

Maria Meek

We do something similar. We ask about their professional indemnity insurance, we ask where their specialisms are, the individual advisers, who specialises in the personal injury side of things, who specialises in later life and elderly client - this is just to give us that, as you say, that baseline of very basic due diligence.

Richard Fraser

How far do you think you should go with the due diligence? What I mean by that is there is a whole raft of other things. For example, one of the biggest threats to us all now is cyber security. A lot of people put firewalls around the computer systems, but ignore the telephone systems and mobiles, and that's how they get in. I'm just interested to know where you stop and finish from your responsibility to have that type of information.

Emma Gaudern

I think that's quite an interesting challenge because as deputies, the nature of what we do is we charge for everything that we do. We all charge. So you can go to the nth degree in checking all of the information and the details of every single trade, but at the same time if you're doing that, it's costing the client. You have to wonder if that's the right thing to do and in the client's best interests.

Sir Alex Elphinston

There's also the Trustee Act, where we were supposed to do this, that, the next and the other, and Denzil was likening it to Re Buckley, saying the duties are similar. There's a lot that we would feel we would pass the buck back to yourselves [financial advisers]; that's your bag. That's part of the reason why we're employing you in the same way that clients come to us and they expect us to have ticked all of the SRA boxes etc. They don't actually go looking under the bonnet, fine tuning every last piece.

Sally Ashford

And I think that comes from having that relationship and the experience, the processes and actually, a lot of it comes down to your own experience of people. It's the actual individuals at that organisation because the organisation can be great, but the individuals within it can vary. Some of it is subjective.

Jane MacGregor

When you initially have a relationship with an organisation like Frenkel Topping, you will go through all of that as the relationship builds. You will probably not review it as often as you need to, but those of us who are panel deputies will know what we've had
to do to get on the panel this time.
All of the extra raft of questions around cyber security etc. means that I feel that the next time we need to review for the panel or even remain on the professional deputy list, because of the assurance visits we're having now and the professional deputy quality standards that we have, we need to show that
we have done the right thing for the client as well as doing the right thing for the client.

Melanie Williams

As a deputy you've often got the authority to appoint a discretionary fund manager in your order. I would certainly consider independent scrutiny of their work by somebody who knows what questions to ask. I don't think that's necessarily the deputy, we are not trained to have that knowledge.

Sir Alex Elphinston

We've taken to getting another IFA to come in and do a second check just as a reassurance and make sure everything is alright, but we haven't done it for everyone. I suppose we'll see as we go but part of it is, if we feel there is a problem with a particular provider,
we will dig deeper.

Jane MacGregor

I've done that, not that I think I've done anything incorrectly in the past, but we've had independent checks on any discretionary fund management run portfolio. Some are very familiar with personal injuries and some aren't.

Emma Gaudern

I think it's very difficult isn't it, because clearly, although they would deny it, any IFA would deny it, but one of their goals in reviewing a portfolio will be to say, 'Well actually, this isn't being managed terribly well and you should move this onto me'. So do you make it a stipulation, if somebody is independently reviewing a portfolio, that if they say that it's not up to scratch, you wouldn't send them
the work?

Fiona Heald

We haven't had that issue because we have somebody in particular who we ask to do it and it's not an issue. He's employed, as the outside person, on the understanding that he would not get the work he is sent to review.

Suitability

Binyamin Ali

Ok, onto our next discussion point; suitability. What steps does a deputy
need to take to ensure that a portfolio
is suitable to a vulnerable client's needs?

Mark Holt

As an organisation, we review all of the portfolios and a big thing is obviously risk - that's got to be a fundamental part of the foundation. Because lots of times when we've done reviews, you will find that some portfolio managers are more lax than others, but one of the things that generally happens is the asset allocation will slip quite dramatically outside of what you believe, or are led to believe, your clients are in.

David Mulholland

Asset allocations can slip away from that which is appropriate to a client's agreed level of risk very quickly. You would expect a portfolio manager to keep the asset allocation and the level of risk under constant review. Where a benchmark is adhered to this, may mean the portfolio manager closely replicates the asset allocation of the benchmark to maintain the agreed level of risk. We have found this approach can be quite restrictive to a manager who may want to move away from certain asset classes during periods of market turbulence; in these circumstances, the benchmark holdings may not deliver
a good outcome for the client.

A benchmark is useful as a guide to the past performance of the fund or portfolio under consideration. However, being closely restricted to the asset allocations of the benchmark may offer little client protection should an asset class, say equities, come under pressure. In this circumstance, a manager, and certainly his client, may much prefer the freedom to choose where to allocate the fund to protect from loss in equities rather than being restricted to the equity allocation
of the benchmark.

Importantly, clients may understand that a benchmark comparison is useful as a guide to the quality of a fund or portfolio, but they may not understand that the manager does not have the freedom to move away from the benchmark asset allocation during periods of volatility and potential loss. As volatility varies, clients should be informed of the difference between a portfolio constrained by an asset allocation model and one that is free to invest wherever the manager feels necessary. This freedom affords the portfolio manager the ability to better protect assets from risk and loss as well
as generate a return.

Mark Holt

All of our clients have, through no fault of their own, come into compensation monies. It's not our job to create somebody's wealth; unfortunately, they've got wealth. The important thing is to preserve it.

Binyamin Ali

Is this something that deputies are quite happy to take a hands off approach on and let the investment manager handle completely, or should they have more involvement in this?

Maria Meek

I take an interest in this in terms of wanting to know what is happening and what's going on in that regard. I have sat around the table with financial advisers and had that conversation and asked, 'There's a lot of money in cash. Why?' But more often than not, the conversation is that they're telling me what they've done.

Mark Holt

There's got to be a point where you cut off getting involved in what the underlying fund managers are doing, because that's what you're paying the fee for them to do. If you start interfering with the whole process, that's when the wheels can come off the investment vehicle.

Melanie Williams

We need to be careful not to be giving financial advice ourselves.

Binyamin Ali

So how do you identify a suitable financial adviser for a vulnerable client? Does it have to be an adviser who specialises in the area or can it be a generalist as well?

Sally Ashford

I think it depends on them. Some of them, even though they don't specialise in the area they do understand it. I recently had a case where we did a little beauty parade of the advisers. One was a specialist and one wasn't. It was blatantly obvious from the conversation that we had about the investments strategy that the non-specialist didn't understand it; phrases like, 'We can do very well with this because it doesn't matter. Even if she were to lose it, it's not the end of the world.' Well, no, that's exactly what it is!

Maria Meek

One of the issues with that is, I have found this in the past, where you have families that are adamant that this is for the family's financial adviser and they do understand and have the knowledge, but they don't quite grasp things like, in five years' time, you are going to spend £50,000 on buying a new car, because that's how much it costs to buy a vehicle that's big enough, can be adaptable, can suit where they live or has space for a wheel chair.

I think sometimes having someone who specialises in these areas, they understand the intricacies of the longer-term planning. It's those sorts of things
I think that make a huge difference.

Richard Fraser

That was a question that I was going to ask actually because, we're all commercial and we all live off the fact we get the fees in from this, but have you ever been put into a situation where you've maybe had an IFA coming from the family who you just don't think is right, and has put you in conflict with the family?

Because at the end of the day, if you go with them and they get it wrong, you're putting your professional integrity on the line because if they get that wrong, you're still the deputy and you're responsible to the court for what happens.

Maria Meek

The instances where I've had it is usually where I've worked with the family and spent a long time trying to educate them on why they're not suitable. You also often find that their fees will be ridiculously expensive anyway. You start digging into it and you find that there's all these other costs that they haven't disclosed or haven't really explained to the family.

But I have had one case where I've turned around and said, 'I'm sorry, we're the deputy, we do not think this is the right way to go. We can find another IFA if you want to have a look at them, but we are not going with this one'.

Jane MacGregor

And it's more difficult, as we all know, with clients with borderline capacity. You have somebody who is perhaps in their mid-40s or 50s, they have a financial adviser of some sort, they have borderline capacity and they believe very strongly that this financial adviser should continue.

Guidance

Binyamin Ali

One of the other issues we need to discuss here is guidance. Seeing as how we are on the topic of risk, do you all feel that there is enough support and guidance from the Court of Protection or the Office of the Public Guardian?

Sir Alex Elphinston

I do find that some clients will only listen to something that has come out of a court order. So once you've got the order from the judge, then they'll say OK. But then they won't listen to yourself or a financial adviser or whoever it is.

Jane MacGregor

I agree with that because what you'll find from clients is, they'll have held onto something that the QC had said all those years ago, because they see that person as having the authority far more than us.

When you're talking about the involvement of the judges, the fact that the clause still says 'discretionary fund manager', presumably you must have had discussions or tried to do something about that. What's the reaction been to that?

Richard Fraser

They have the court users group and the problem is that most of their work is with the elderly and the vulnerable, the actual protective part of it from acquired brain injury is a very small part of what they do. I remember the good old days with Denzil when you had the bigger cases and you would go in for that settlement meeting with him and he would sit down with the clients and put the parameters down - how the money should be invested, what it was there for and so on; they were invaluable.

Mark Holt

I think it's a point well made by Jane. The deputyship order is set to appoint a discretionary fund manager. Whether it's an elderly person or not, surely that is now obsolete, based on the conversation we've had here today, based on the FSA's thematic review, it shouldn't be that you have the power to appoint a discretionary fund manager, should it? That's actually badly worded now.

Robert Thomas

It comes back to the orders. We're trying to get round to sending our own draft order with our own paragraphs in there that we want, rather than relying on the court sending us their standardised stuff.

Jane MacGregor

How successful is that?

Robert Thomas

Moderate! Some of them just completely ignore it.

Investment

Binyamin Ali

Let's move onto investment. I'll start off with investment styles; what is a suitable investment style for a vulnerable client?

Jane MacGregor

With most clients, I'll say if the market is on upward trajectory, we want to be underneath that line and if the market is heading downwards, we want to be above that line. It's a very basic idea but it's conservative with a small c.

Richard Fraser

Another thing is of course benchmarking. How do you benchmark the portfolio? Do you benchmark to indices or do you actually set your own benchmark?

Emma Gaudern

I'm aware of benchmarking's shortcomings but we're moving more now to having a target that we're looking for as a return and to have a benchmark as well. You probably don't need a benchmark if you're achieving the target and we're doing very nicely, then I won't need to worry about what the benchmark is doing.

But halfway through 2008 when you're clearly not going to exceed the target or achieve the target that has been set for you, if we do have a benchmark in place and I can see that yes, our portfolio has fallen, but the benchmark has also fallen, I am likely to feel better about the performance of the portfolio.So you haven't achieved what we have asked you to do, but you are doing better than the market is doing, it's useful to understand that. I think benchmarks are useful in a falling market.

Binyamin Ali

Where does the performance actually come from? How do we ensure that they are getting the value for their investment fees?

Richard Fraser

That's a very difficult one isn't it, how do you justify the fees you pay and the value you get from it? Every half per cent you take off the table is a half per cent off the client's performance. The level we are, at risk level three and four; that becomes vital.

David Mulholland

For me it's a case of monitoring the investment process and its objectives; are they doing what they said they were going to do. You can't ask for perfection from an investment manager in terms of performance but you can check that they have stuck to their process. This understanding of the process, expected volatility and returns can offer a financial adviser the ability to plan and achieve a client's investment objectives.

Mark Holt

It's almost like we need to create our own benchmark for the clients we're dealing with. So your WMAs and the Association of Private Client Investment Management, some of the data they're pulling in will be wildly off piece as to where we are with regards to the investments we're putting together. To give you an example, we look heavily at a cap on volatility and we think it's absolutely crucial to effective management of the client's funds. So for risk level four, what's the cap on there?

David Mullholland

The risk capped strategy has a volatility ceiling of 6% at level 4. That volatility is more in line with level 3 (out of 10)

Mark Holt

So over the last few weeks, we've had an absolute plethora of phone calls from clients because they've seen that the portfolio has dropped slightly. You then explain to them that from January, the first two weeks were the worst ever recorded. So you have to remind that it will go up and down. So yes, you are down 1.5 per cent, but it's within our own benchmark. It's within the six per cent volatility.

Melanie Williams

Surely some of the skill there is knowing whether to hold onto a piece of stock that has lost value and wait for it to come back up or sell it, cut your losses and invest what's left into something else that might rise in value.

Sir Alex Elphinston

So are investment houses that flexible? If they're more concerned with their own neck, will they actually say, 'Well the house view is this, therefore I'm going to stick to that view'.

Richard Fraser

That's where you come into the conflict of interest. That's our job and this is where you have to trust your adviser because that's what we have to do too; explain to you what are process is and where the conflicts are - this also comes back to due diligence. There is a huge conflict there for the investment manager. So when we report back to you and we have this discussion, we should be able to articulate to you what we've done to make sure those conflicts are not there. It'll affect performance and asset preservation, which is what we're trying to achieve. So it comes back to the investment style. What is the investment manager going to do, what is he going to do to protect his job, rather than to protect the client's assets?

David Mullholland

There are two sides to this, risk and return. You can ignore risk and chase returns or vice versa. I prefer to have as much control as possible from a volatility perspective as this helps to reduce potential losses. Where the potential returns look good, if volatility may go beyond the parameters I'm comfortable with I would adhere to the volatility cap.

Charging

Binyamin Ali

Our next discussion point is charging. I know Mark feels quite passionately about this one, so I'll hand over to you to introduce it.

Mark Holt

Charging is something that has become much more of a hot topic recently. One thing that we've always prided ourselves on is that we've never hidden behind charges. The difficulty we have is we've almost always, particularly in the 'beauty parade' situation, we've come across some fund managers, where we've got one hand tied behind our backs.

Because what they might be suggesting is the charge to the client, we know in reality it isn't the charge to the client. But you can't really jump in and say, 'But they're lying to you', because that's not very professional. But in effect, they're lying to you. Does everyone fully understand what makes up the total cost to the client?

Maria Meek

What I find, because I know that there can be hidden costs in charges, is that you have to dig and dig to get to the bottom of the charges. I've had some where I've asked, 'Do you have any dealing charges?' and they'll say 'No', because they have the transaction charges in there and that will cover it. So you have to pull and pull, which is why I don't go direct to DFMs.

Sir Alex Elphinston

I'd like to do it the same way as solicitors do. You get a bill, it itemises your expenses and it's open. Also, everybody knows the 'ouch' of what they're paying. At the moment it's no different to what it was previously. You gave a broker or whoever so much to invest in a bond, they took their commission, you'd invest the rest and it was, 'Gosh, that didn't cost me a thing.' There's an element which is still the same.

Mark Holt

It comes back to the point I was making about there being so many ways for them to hide. We've always gone in and said the DFM charge is this, we have given estimations as to what the TER is going to be, we know what the custodian fee is for holding the assets, there is our charge, therefore, our presentation to you is it comes in at, let's say, 2 per cent all in. That is the true total cost of ownership.

The difficulty then is when you look at a big bank or a DFM, they will say, 'Well ours is 0.65 per cent, plus VAT.' And you'll be left thinking and asking, 'No it's not, tell us what the trading charges are'. Then they'll say, 'Well, we don't know what they are. We don't know what we're trading yet'.

So when you drill into that, because I have a banking and wealth background, I can tell you that it is going to be somewhere between 2.8 and 3.3 per cent - that's the true total cost of ownership.

Maria Meek

You often see it because you'll get the six month report through and there'll be charges on that, but if you then compare it to the contract notes, there are different charges on the contract!

Mark Holt

Exactly. There's no transparency.

Maria Meek

Anyone who doesn't have an understanding is not going to have a clue about how much they're paying.

Binyamin Ali

I think there is a general consensus here that there isn't a great deal of transparency when it comes to charging. So the next question is, what is to be done? How is the industry to improve on this?

Robert Thomas

Legislation.

Sally Ashford

There needs to be a standard way of being able to compare like for like. Because at the moment, without spending hours and hours and being careful, you can't compare.

Emma Gaudern

I think one of the most important things to come out of this is that there are no right and wrong answers. It's all about perspective. In the same way when we give legal advice to a client, there are different ways to achieve the same result and they all have advantages and disadvantages.

So where this leads us onto is one of the things we'll come to discuss later I think, which is whether or not deputies should have some kind of investment qualification, purely so that we can understand enough to take the decision.

Sometimes I think it's not so much about the decision you end up taking, but about having gone through a process to get to a decision. What we're all most bothered about is being able to turn to our client, look them in the eye and say, 'I genuinely did what I thought was best and this is how I got to that decision'. And you want to be able to say the same thing to the OPG, don't you?

General practice

Binyamin Ali

Let's move onto that then, shall we. Given the vast sums of money that deputies do handle, is there a case to be made that they should have some form of investment qualification?

Robert Thomas

I think you have to understand what the issues are so that you can explain them to your clients. We've spoken quite a bit about this today and whether we should have a qualification - I'm not entirely sure. I think we just need to be able to understand enough to be able to ask the right questions of the financial advisers we're engaging with, and then explain it all to our clients.

Sally Ashford

I think sometimes having the qualification would almost be more dangerous given the little knowledge we'll have. We're never going to be financial advisers, that's not what we wanted to be.

Robert Thomas

That starts to blur boundaries doesn't it?

Mark Holt

It's not what I wanted to be!

Fiona Heald

But it goes back to what we were saying about, 'I can't give you financial advice'. That's a really big fence we have and if you start jumping over that and getting involved in a little bit of this or that, I don't think that's the right place to go at all.

Melanie Williams

You'd never be able to keep up the knowledge either, because IFA's do this for a living.

Sally Ashford

As we were saying earlier, the danger is that you end up with a checklist followed by a qualification, and suddenly you can do this. There's actually a much wider perspective and a much bigger picture. There are always more things to take into account and if you're not careful, you could become outdated.

Melanie Williams

You can't be an expert on everything.

Sir Alex Elphinston

I was recently involved in another roundtable where we were talking about, should there be a kitemark for IFAs?

The trouble is, you can get it but when you've got it, the market moves on and everything else, so you could be setting yourself up to fail because you've got it and you don't keep it up to date. And if you do do it, are the OPG going to ask for it?

Mark Holt

That's a very valid point because even within our industry, to be qualified as a pension transfer specialist, you can sit an exam, pass it, and you could be doing pension transfer business today on an exam that you passed 10 years ago, and the market has changed dramatically in that time.

Melanie Williams

And you could have been out of that area of expertise for all of those years potentially.

Mark Holt

Absolutely. A kitemark or benchmark would only work if you had to do it every year, to prove that you're still up to date every year.

Richard Fraser

It's a bit like SOLLA [Society of Later Life Advisers] accreditation isn't it, because you have to renew that and prove that you're continuing to work with the elderly and the vulnerable.

It is something we've been involved in to try to get a similar type of kitemark in our industry for IFAs involved in this type of work, so we have something similar to SOLLA to say you've got the experience.

Maria Meek

I think that's a great idea but that's something that has to be maintained.

Jane MacGregor

It has to be credible, if you're paying to join something.

Mark Holt

We're working on a committee to try to put something together for that; there's a working party that has been pulled together. Those are the challenges that the committee members are facing as to who is going to do it; will it be the FCA, will it be the CII - who is actually going to be the body that says, 'This is the qualification'.

Looking ahead

Binyamin Ali

Thank you all very much. Moving onto closing remarks - how do we see the industry developing?

Emma Gaudern

My view is that over the next five years, we will see the OPG scrutinising deputies a lot more closely in relation to investment decisions that have been made, and that isn't all doom and gloom.

That's a good thing in terms of bringing the quality of deputies up and making sure we are all doing the right thing, and that can only be a positive for the clients, but the onus is on us to make sure that we have our processes in place.

Mark Holt

We've said on numerous occasions that we're always open minded towards expanding our advisory staff, but it does prove very difficult to actually find the type of people who you can actually trust to do the job in the same way that if you had the time, you'd go and do it yourself.

Richard Fraser

I think it's particularly hard for you guys because, how do you make sure that they're following the processes? It's quite easy for us in that, everyone in our business will have their file checked every month, where one or two of their files are checked. It doesn't matter if they've got 20 years' experience or one year of experience.

Emma Gaudern

You've got to have it more procedurally driven - there's nothing you can do about that. But that doesn't just apply to investments, it applies to everything.

Jane MacGregor

We have clients who'll say I've been on a conveyor belt at whatever firm, but I want a personal service. You balance that against the commerciality of running your department, what's in the best interests of the client, the increased scrutiny of the Public Guardian on what we are doing, and they want to know about the assets in the house and what's under the bed, but they won't allow us to go and look because we have to charge for it. So there is this really difficult tension - I don't think you do this work unless you enjoy it.

Sally Ashford

As was said earlier, we all do things that we know we're not going to get paid for because that's the only way we can actually do a good job. 

 

The Investment Risk Management
for Vulnerable Clients Roundtable
was hosted by Frenkel Topping on
26 February 2016 and held at Conaccord Genuity