There are a number of ways advisers are looking to comply with the new suitability requirements under Mifid II, in particular Prod.
Advisers attending International Adviser‘s Future Advisory Forum Europe event in London were asked by Square Mile Investment Consulting and Research to complete a questionnaire.
It found that around half are providing an advised centralised investment solution, with the other half opting for a discretionary-based investment management service.
Around 20% of advisers that favour a centralised proposition have started to outsource some or all of the decision-making regarding the asset allocation and fund selection.
Some used the services of third parties to help them create their fund panels or provide services into their investment committees.
The majority, however, are still doing this work themselves and only introducing a DFM in exceptional circumstances.
Suitability and regular reviews
Under Prod, advisers who choose to do all the fund research, portfolio construction and ongoing suitability monitoring themselves will need to ensure that every component or solution-based fund that they select for their clients is not only suitable for meeting that client’s needs, but is reviewed regularly and continues to be managed to its stated mandate or objective by the fund or portfolio manager.
John Lester, business development director at Square Mile, said: “While all FCA-authorised financial advisers were already duty bound to do this under the existing governance and suitability guidance, from 2018 this became regulation under the Mifid II Prod regime.
“Under the new regulation, all advisers must now be able to evidence in writing the suitability of each product for their clients. In the case of advisory services this means each fund within a client portfolio.
“As many advisers have already identified, this process can be incredibly time consuming and resource intensive, and leaves the firm and in particular the senior management carrying significant regulatory as well as operational risk.
“This is why many are looking to external investment specialist firms for assistance,” Lester said.
Outsource to a third-party DFM
It is therefore not surprising that 51% of the delegates at the Future Advisory Forum are already using discretionary services as an integral part of their investment process.
Around two-thirds of these outsource the discretionary management to a third party DFM, while a third have chosen to insource a discretionary service.
Outsourced DFMs can assist an adviser firm by providing either a commoditised portfolio management service on one end of the client spectrum, which is widely available on platforms, or a fully bespoke private client portfolio service.
Firms who have opted to insource discretionary services have done so by either attaining the licence themselves or leveraging off a third party’s discretionary licence to provide their own customised portfolios.
These portfolios are then managed by the third-party discretionary manager to a set of agreed mandates.
Reducing risk, complexity and cost
According to Lester: “While commoditised discretionary and multi-asset solutions can help adviser firms streamline their centralised investment proposition to an extent, insourcing a discretionary service can provide additional peace of mind across the adviser’s investment business.
“Advisers that are passionately independent and wish to map their portfolios to a bespoke suitability process can do so by contracting with independent investment firms who can provide bespoke discretionary mandates at a firm level.
“This enables the adviser firm to retain full control of their suitability process while outsourcing the asset allocation, fund selection, portfolio trading and rebalancing and a large percentage of the governance and oversight to the specialist investment firm.
“This process can be streamlined even further by the consolidation of the custody services across a narrow list of platforms, reducing not only the operational risk but also the complexity and, in turn, cost of delivering the investment service to clients.”
There are a number of firms that offer this service, some which offer a feted version of their vertically integrated solutions, and others that offer bespoke discretionary services based on independent qualitative research.
Lester added: “Advisers that have adopted these services retain the overall responsibility for the suitability process, but are spared from having to undertake the day-to-day monitoring of each individual component of their clients’ portfolios which is very resource intensive and time consuming.
“It makes good business sense to free up valuable advisory resource to focus existing clients as well as new business or key strategic initiatives, the two most important growth factors identified by advisers in the survey.”
