Establishing suitability: keeping up with the regulator Part II

By Kaavya Dijendranath

Updated on Thursday, 8 September, 2016

Earlier this summer, a statement from the newly appointed Director of Supervision - Wholesale, Investment and Specialists at the FCA – Megan Butler proved that suitability is right back on top of the regulator’s agenda as they believe ‘firms still need to up their game’ whilst demonstrating suitability within their portfolio recommendations.  The statement warned that the regulator would continue its scrutiny of wealth management firms until they gain satisfactory evidence that firms are stepping up and looking at suitability ‘as the day job’ rather than a regulatory checkbox.

This announcement follows the results of its last thematic review conducted in December 2015 titled ‘Wealth management firms and private banks: suitability in investment portfolios’ which found that 23 per cent of the 150 files (from 15 firms) reviewed indicated a high risk of unsuitability and a significant 37 per cent had unclear evidencing. Alarmingly, the review also highlighted poor practice in the case of an 84-year-old client who was given a 10 year plus investment time horizon and a 90-year-old client whose recommendations were based on 20-year investment horizon. The report emphasised the need for firms to adequately gather customer information and do more to ensure that the composition of the recommended investment portfolios truly reflect the risk appetite, investment term and personal financial goals of their customers.

Despite these concerns being prevalent, little is done by away of accounting for term/time horizon in outsourced investment products available to Advisers. Granted that investing in collectives largely means investing for long-term returns, but it can often be in conflict with an investor’s current situation (e.g. age) or investment objectives, making it challenging for Advisers to establish and maintain ongoing suitability.

The research team at FE, aimed to address this challenge by carefully creating model portfolios that are inclusive of a client’s investment objectives, attitude to risk on a scale of 1-5 and investment term (short term: 3-7 years, medium: 7-15 years and long term: 15 years plus). The resultant range of portfolios offer a suite of 16 models that adhere to strict risk budgeting and are term weighted at every risk level; thereby offering Advisers 31 (including hybrids and a dedicated income portfolio) robust investment options to suit a variety of investor profiles and needs.  

In his book ‘Winning the Losers’ Game’, American investment consultant Charles D. Ellis explains that “Time – the length of time investments will be held and the period of time over which investment results will be measured and judged is the single most powerful factor in any investment program.” At FE we believe that the diversity in our investment options is key in supporting Advisers achieve client objectives.

Speak to us for more information on our methodology or model factsheets.

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