Getting it right: considerations when building a CIP

By Tahmina Mannan FE Research and Opinions

Updated on Tuesday, 1 December, 2015

Although the term centralised investment proposition (CIP) is now common parlance in this industry, the ever growing range of investment approaches still leave adviser firms unsure on how to proceed.

Recent surveys have shown that some 80 per cent of larger adviser firms have already set up a CIP, but for those still looking to make the leap - just how does a firm begin to assess the myriad of options available to them?

Before we go on, what exactly is a CIP? A centralised investment proposition is a standardised approach to investment advice - which means that you develop and adapt your business to identify a centralised investment methodology that meets the needs of the majority of your clients. You may still need alternative options outside your CIP for those clients with more specific needs.

Typically, it includes a standardised risk profile questionnaire together with a range of investment solutions linked to desired outcomes for that specific client. And while that sounds simple enough - that is where the simplicity ends.

In the current market, there are a whole host of tools and services on offer to support the CIP creation process as well as relatively clear guidelines set out by the Financial Conduct Authority (FCA). The regulator says that a standardised investment approach should not be used as a one-size-fits-all solution and that firms should be careful not to shoe-horn clients.

For advisers who do want to look at outsourcing their investment solution as part of their CIP - there are two main options; model portfolios and discretionary managed services.

Advisers have typically tended to gravitate towards using a multi-manager or multi-asset fund for clients with smaller pots - but look to discretionary fund managers when faced with a more high-net worth client.

Lately however, studies have found that growing numbers of advisers are turning to discretionary fund managers as an investment solution for medium- and high- net-worth clients.

DFMs take the burden of ongoing management away from the adviser and can be offered by platforms, and a discretionary manager will actively manage the models ‘on platform’.

While DFMs gain in popularity, the regulator has been voicing concerns that many advisers are disregarding the top-down approach in portfolio selection - recommending products based on their familiarity with them as opposed to selecting them based primarily on client needs. Some firms are opting to put the time and cost efficiency of the firm above suitability considerations in CIP creation.

However, the regulator’s position is quite clear. When selecting a provider for CIPs, there should be two overriding consideration: due diligence in the selection process, and ultimately - the suitability of the products for the client.

A recent study by CWC Research and the lang cat found that some advisers appeared to be falling short on FCA requirements, on things like - inability to cite the main charges on preferred funds, despite the availability of data providers and tools.

The study found that advisers would too often recommend certain funds simply because the firm had track record of using them, not because they were always necessarily best suited to a particular client’s needs.
But is that because advisers are increasingly squeezed for the time and resources needed to adequately asses the wealth of new products and providers hitting the market?

How does an adviser determine the efficacy of one product or provider over another at a time when the market is still criticised for being rather opaque on costs?

Questions like these go a long way to explain why FE Transmission, rolled out in March this year, has been so popular among the adviser community. The service, accessible to FE Analytics users, helps DFMs distribute model portfolio data and reports to any adviser in the UK.

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But more importantly - the service allows an adviser to stress-test a DFM for risk-suitability in a very time-efficient and accurate manner. The service allows advisers to integrate model portfolios into their due diligence, portfolio selection and reporting workflows. This has the added bonus of also producing highly-professional, glossy reports and goes a long way to help justify fees.

Advisers also gain access to research tools, market data and comprehensive reporting - all of which helps the adviser provide better advice whilst establishing a robust investment process and of course an audit trail.

There are currently around 9 DFM providers on FE Transmission - but that number is set to grow as more and more DFMs, and advisers alike, see the usefulness of the service.

It is easy to imagine the fund provider community will be active in developing risk-targeted multi-asset solutions and tools over the coming years, advisers should note that in the end that there is no simple rule that will highlight to them which investment solution type is best suited for their client.

This comes from the face-to-face time spent with the client themselves and thorough research of the solutions available. When using any outsourced investment solution, advisers need to make sure there is additional ongoing governance, review and rebalancing in place.

Advisers should also note that the final guidance on ‘Assessing suitability: Replacement business and centralised investment propositions’ (FG12/16) from the regulator is a good place to help set parameters for the CIP creation process. The FCA clearly highlights examples of good and bad practice and just what concerns them.

By using a CIP, you can effectively outsource the work involved in portfolio construction - freeing you up for the all-important client-facing tasks. This does not mean, however, that you are outsourcing the regulatory risk for selecting, constructing and executing the CIP in the first instance - that responsibility stays with you.

More efficient operating model, yes, but fully outsourced regulatory risk, no, absolutely not.