Comsure Workshop on Suitability of Investment Advice – Following today’s Comsure workshop “Suitability of Advice” – A Workshop for Wealth Managers, Advisers, Trustees “I would like to thank Adrian Kemp [Managing Director – Brooks Macdonald – Retirement Services] for a well-rounded thought provoking talk.

His key message included what should a suitability report cover (as a minimum) and the length of those reports?

Adrian pointed out that the contents of any suitability report must include the following matters in easy and easy jargon-free format:-

1. Demands and needs – “i.e. the client objectives.”
2. Why it is suitable for that individual client
3. Not only the advantages but the possible disadvantages – “i.e. the risks.”
4. Less can sometimes mean more – but make sure you have a well-structured and understandable story.

He also reminded everyone that the test of the Suitability of Investment Advice also had to satisfy future scrutiny by Regulators, the Ombudsman along with Clients who may seek legal resolutions.

Mathew Beale the event “MC” closed the event and summed up the risk with the following thoughts

The simple message is “if you cannot prove what you did it may be deemed that it never happened”. Record keeping is essential, and this includes not only the initial advice but the ongoing relationship and discussions along with the changes in circumstances (including; clients, products and markets)

No matter how good you think a particular piece of work is, always seek an objective and independent set of eyes to looks for gaps not only at the time of execution but on a regular basis.
Make sure your compliance teams who audit the files [etc.] are adequately trained to understand the ongoing dynamics of the client, the products[s] invested in and the markets along with the associated risks.

Check list

In considering g what was said, I thought I would list some key points and provide some comments against each.

1. Client agreement.

i. The basis on which you are working for that client as found in the initial disclosure document, the terms of business, agreed with the client, which should be clearly setting out the basis on which service is being provided to that client, doesn’t need to be repeated in the suitability report.”

2. Client circumstances.

• Some facts need to be in there, for example,

i. if you are talking about the client’s objectives and some of the things around the client’s circumstances that demonstrate why the solution is suitable.

• However, you do not have to repeat the Fact Find.

i. However, the bits that say ‘Tom you are 37 and a sales director earning £50,000, married to Sue who’s a teacher earning 40,000 and you have two children…etc. – Why is that in there? The client must be wondering that too.

3. Attitude to risk and capacity for loss.

• These would need to be in the suitability report as they help to demonstrate why the solution is suitable for the client.

4. Investment strategy.

• If you have got a series of reports for the client, so long as it is clear to the client, you do not need to repeat everything you said first or second time around.

• Moreover, if there are sections that apply in both situations, for example, in a previous letter you might have explained your firm’s approach to selecting funds, or to its centralised investment proposition, you do not need to repeat that in full in a subsequent letter.

• You might want to summarise it or refer to a previous letter

• Think about what’s going to be clear to the client.”

5. Fund platform recommended.

• You would need to cover this. It comes under why the advice is suitable.

• Not only why it is suitable at all to use a platform for that particular client – because that is not a default position, it has to be relevant to that particular client – but also why that particular platform.

6. Product charges.

• Strictly speaking, you do not need to put product charges in a suitability report.

• You will have the product information, which will cover off the charges. However, think about it from the client’s perspective.

• There may be situations where the combination of charges is quite complex. So you might have platform charges, adviser charges, product or fund charges and if there is disclosure in different places in the product information that can be quite difficult for a client to assimilate, particularly if they are quoted in different formats as they often are.

• So it would be a good practice approach to include a summary of what those charges are.

• We have seen a simple table used, listing out each of the different areas of charges and totalling those up, and we think that is a good practice approach.

7. Cost comparison for replacement business.

• The regulator expects to see that in a suitability report.

• If the cost is higher, that is fine, so long as there is a good reason for that.

i. The cost being higher for replacement business would be one of the disadvantages –

ii. If the cost is lower, there is a probability that it is part of the reason why it is suitable

8. Reference to documents such as KIIDs and KFDs.

• Not strictly speaking required, but as there is a lot of interaction and connection between a suitability report and disclosure, that is probably a good practice idea.

9. Risk profiles of recommended funds.

• Yes, that would be essential and what the regulator would expect to see because it is part of why they are suitable for this client, matching up against the client’s risk profile.

10. Taxation of investments (internal impact on the client’s tax position and what needs to be reported to the HMRC).

• Some of this may be useful, and some of it may not be.

• In general terms, just the tax side would not be necessary as that would be covered typically in product information.

• However, where there are tax aspects that are a disadvantage to the client, then that is one of the areas that we need to have covered off in the suitability report.

• Any tax that is relevant to that particular client, again that would be a useful thing to cover off.

11. Risk warnings.

• Yes. There’s a potential disadvantage, and you need these. However, think about how you do this.

• We do tend to see risk warnings that are a page of standard risk warnings, and some of them apply to that client or that investment but some of them do not.

• Think about what risk warnings are relevant to the client and make sure you focus on those.

• It is probably asking too much to make risk warnings personal to the individual client, but do think about making sure they are relevant to that client.

• Don’t adopt a scattergun approach – if they do not apply, don’t put them in.”

12. The importance of reviews and their costs.

• It is up to you as an individual firm whether you provide a personal review or not.

• It is not automatically good practice to offer reviews.

• There will be some clients where a transactional process would be the right thing.

• There is one scenario where not having reviews would be a potential disadvantage because it has an impact on whether the advice given now is suitable or not and that is where you have a solution that is not self-rebalancing.

i. Let’s say you have got a centralised investment proposition of a model portfolio of 10 different funds to meet an asset allocation.

ii. This will go out of kilter over time if it is not reviewed and rebalanced.

iii. It is a potential disadvantage of that kind of solution, so you will need to flag up the importance of reviews to make sure the portfolio stays aligned to the client’s attitude to risk over time.

13. Limited or full advice disclosure and the specific cost of advice.

• Again, this should be in your initial disclosure documents; it should be clear to the clients up front.

• There are different ways to disclose your services and costs to clients, but one of the good practice ways that we talk about is having a letter of engagement or personalised client agreement.

• Once you have done the FactFind and you know what work you are going to be doing for the client, you set out in a letter of engagement the areas of advice and planning you are going to do for the client and the cost.

• If you have done that so it is nice and clear to the client upfront, you do not need to include that in the suitability report.

• However, bear in mind that if you have lots of layers of costs and adviser charging is one of those, then it might be useful to provide a summary table for the client.”