Regulation is changing how wealth investment managers determine their clients’ needs. This means that they need to not only advise clients on what investment strategy to take, but also ensure that it can actually be delivered in a compliant way.

Increased regulation is changing the way wealth investment managers determine their clients’ needs. This means that they need to not only advise the client on what investment strategy to take, but also ensure that it can actually be delivered in a compliant way. Here, Brent Randall, product director at Third Financial, discusses the need for client suitability and the steps that need to be taken to ensure industry best practice.

There is no doubt that regulation has been a hot topic across the financial services sector ever since the downturn. This year though, more than ever, pressure has been placed on financial regulators to be seen to be doing their job in protecting the interests of individual investors.

The Financial Services Authority has recently raised the bar for investment managers in the retail sector to demonstrate their duty of care towards private clients. Investment management firms recognise that protecting their clients’ interests is the major requirement in any wealth management service offering. That said, in the newly sharpened eyes of the FSA, it is no longer acceptable to simply give assurances that client interests are properly managed. 

This increased focus means that a significant challenge facing the investment manager today is the need to provide proof when faced with the question, “do you know what your client needs from the service you provide?” Whereas previously they might simply say “of course”, this has all changed. In a financial market where one of its principle tenets has been severely undermined, it is no longer good enough to simply go on trust alone.

The essence of client suitability assessment is to demonstrate that wealth management products and services are really suitable for each client. It serves as a prompt to determine what additional client information is needed for specific investments and how frequently the information should be reviewed. It sounds obvious but surprisingly this is an area where investment managers are under significant pressure from the regulator.

So how does one go about implementing a client suitability strategy? Firstly a comprehensive review of client suitability is necessary to ensure that all important financial information and client circumstances are documented and on file. Alongside this validation of client data, investment managers need to review the suitability of existing portfolios to the individual circumstances of each client and seek an agreement through an active dialogue with existing clients. A suitability assessment should then be completed for all discretionary and advisory managed clients and should be reviewed on an annual basis.

Client suitability assessment is a key element of any new business take-on process. When a new client is introduced to the organisation a standard set of sales procedures and best practice processes should be adhered to. The components of this process should include:

-          Preparation to ensure that the prospective client and investment manager are fully prepared to cover the client’s agenda and key concerns.

-        Sufficient time spent explaining the core topics that will influence the decision making process.

-         Confirmation of the prospect’s current situation, aspirations and understanding, in order to provide suitable professional advice.

-         Presentation by the investment manager to explain the level of investment risk and clarify why the suggested approach is suitable.

-         Acknowledgement of any objections /concerns and agreement to proceed.

-         Completion of all relevant documentation.

-         Acceptance of the new business including any relevant verification, anti-money laundering checks and internal sign off.

Regular monitoring of portfolios to ensure adherence to a set of compliance rules around asset allocation, risk, diversification, concentration, turnover, dealing size and restrictions should also be a part of the client suitability strategy. This ensures that no client portfolio is allowed to exceed the agreed parameters of their mandate without specific dispensation being granted in consultation with the client. These portfolio alerts should also be presented to investment managers pre-trade so that potential issues are flagged before decisions are confirmed.

Implementing enhanced business process and supporting technology is now a pre-requisite for client managers to demonstrate that they are meeting regulatory requirements and so that clients can be assured that sufficient control is exercised on a daily basis to protect their interests.

A client suitability strategy is not simply an overhead if implemented as part of an integrated client management platform. Far from constraining the ability of investment managers to use their expertise in generating returns, this formal process allows discretion to be exercised with confidence.

Giving investment managers the peace of mind to know that unforeseen adverse impacts are captured pre- and post-trade through client suitability measures, enables investment managers to focus more time on what they do best.