By now most firms will have a centralised investment proposition (CIP) in place.
A survey in 2016 by Money Marketing found that 82 per cent of the firms asked were using a CIP. Yet there is no consensus around what a CIP should look like, how it might be constructed and what to consider in order to avoid shoehorning clients.
Taking the last point first, the FCA has continued to raise concerns about the risks of shoehorning, and has focused on two key aspects in particular:
More recently, risk mapping and a reliance on risk graded funds has come under the spotlight. The concerns are that a risk profile score, which in isolation does not tell anyone much at best, is being used to determine what fund(s) the client’s money will be invested in.
A case in point: a 25-year-old investing £500 a month is going to have markedly different considerations to a 65-year-old needing income of £500 a month from their investment, even if their risk scores come out the same.
A firm’s CIP can be found wanting where there hasn’t been sufficient thought as to whether the proposition is suitable to particular client segments, as well as individual client circumstances.
The next natural thing for advisers to consider on CIPs is the product intervention and product governance rules, or PROD for short.
The PROD rules came in under Mifid II and are inextricably linked with CIPs. The FCA position on PROD is:
“Products should meet the needs of one or more identifiable target markets and be sold to clients in the target markets by the appropriate distribution channels.”
When the regulator talks about ‘distribution’ in this sense, it means advice firms. Essentially, this places a requirement on firms to divide current and potential clients into identifiable segments. A number of firms will already have their own ways of segmenting potential clients based on certain common criteria, and PROD makes having a formal process in place a requirement.
While sounding like an extra burden, an effective CIP should already be based on segmentation. In theory, the firms with CIPs in place should already have a formalised approach to segmentation – although it’s doubtful whether this is actually the case.
We can consider how segmentation allows the firm to focus on the CIP offered to typical clients within a segment.
|Minimal existing assets / regular savings
Starting values less then £30,000 and/or regular contribution plan of £500 per month
|No complex needs currently. A light touch annual review (e.g. specific to client proposition) likely to be the solution.
Areas of advice pension/investment contribution planning along with mortgage/protection.
You could then use the information above to create characteristics of the segment, such as:
These characteristics should broadly match the target market, the products and investments being recommended listed in their prospectus.
This may seem obvious and, to a lot of advisers, something they are already doing. The PROD rules however require this to be formalised and easily demonstrated. On the one hand, assessing target markets allows a firm to meet its PROD obligations while, on the other, it can help streamline the process of putting a CIP in place.
Depending on how the firm is set up, in terms of target clients there is a whole range of segmentation that can be done. The following are further examples that might be added to the table above to create a full suite of segmented clients:
Identifying clients in this way can help avoid the appearance of shoehorning. Where a similar investment or product is used across clearly different segments or target markets it can be difficult to prove the process has the required level of flexibility and level of personalisation.
Some of the main benefits of carrying out this process include:
This initial list could be very short or long, depending on how restrictive or open a firm is to different types of clients. But the creation of that initial list of client types will provide the foundation for thinking about a CIP and what that looks like.
We’ll have another article coming soon, where we will consider the specific pros and cons of having a CIP within your firm.