The start of a new year is always a good opportunity to take stock and reconsider, as you look forward to the year ahead. At the beginning of this new decade, there is a particularly strong case for revisiting your centralised investment proposition (CIP) if you haven’t done so for a while. Or, if your firm does not have a CIP, consider incorporating one.
The CIP is a long-established concept in financial services – dating back to the days of the Financial Services Authority, when it was discussed frequently as the regulator urged firms to prepare for the RDR.
A CIP can reasonably be defined as a standard approach to providing investment advice, from how the client's risk profile is assessed through to a centrally agreed investment solution.
The CIP is generally discussed then-and-now as a means of advising a client and recommending an investment solution in a controlled, explainable and repeatable manner, which can also be subsequently demonstrated.
CIPs are not mandatory, and firms have a wide range of alternative approaches available to them.
However, it would be worth thinking about incorporating one into your business if you haven’t already. If you have established one but several years ago, perhaps just to take your firm through the RDR, it would be worthwhile reviewing where your current CIP sits within your business. In particular, it’s important to evaluate whether it is still delivering what you need it to.
And, now would be a very good time to assert more control within your business, owing to a number of industry developments that have grabbed the headlines.
The first is the issue of liquidity, with a large property fund having recently instigated a period of gating. And, perhaps the most directly impactful, the winding up of a widely held high-profile and popular fund. Alongside these issues, there have been a few recent negative events at a number of fund firms, as well as with pension transfers.
A CIP and Investment Committee make a powerful combination
We firmly believe that a CIP provides a strong element of risk control for an advisory business, particularly when combined with an Investment Committee (IC) that brings in independent, external expertise.
The CIP and IC working together should allow advisers to demonstrate a strong process when it comes to investment selection, including a consideration of the ownership structure of a fund manager, as well as its funds and the potential mismatch between a daily traded fund and its asset mix.
It also enables the adviser to articulate why a particular asset class has been selected and how that maps onto a client’s needs and risk appetite – all the while being mindful and demonstrating that consideration has been paid to liquidity concerns.
This applies across the different kinds of investment proposition, whether advisory or discretionary services. A CIP and IC can help a business where it has created model portfolios, set up its own discretionary service or outsourced to another DFM.
Essentially, it allows a business to justify the selection of asset managers and indeed DFMs across most business models.
Ideally, that process will allow businesses to avoid problems in the first place. However, if over time selections have proved less than ideal, it should help a firm demonstrate why those selections were made. It will also prove useful in the circumstances of explaining the process to the regulator or the Financial Ombudsman Service, should the unfortunate need arise.
Making the outsourced-DFM model more robust
But away from specific fund selections, it may help deal with broader challenges to some firms’ models.
There are, for example, concerns about the divide between financial advice and an outsourced DFM solution. Specifically, in terms of ensuring that both align to deliver in the interests of the client and indeed do not move out of alignment over time in terms of the client’s risk appetite and the risk profile of the DFM.
The CIP furnishes such firms with a strong foundation from which to decide on the DFM, review it and ensure the process for both is recorded and can be demonstrated.
This is important given growing FCA concerns about suitability more generally, which is being driven by, but not exclusively, pension transfers.
This is a fraught and difficult issue, and the regulatory position has shifted, with rules having been tightening up including those requiring that the transfer and subsequent investment solution are considered together.
Indeed, we wouldn’t be surprised if another regulatory initiative materialised, perhaps under a new FCA Chief Executive, covering advice and suitability around both pensions and investments.
Whether that happens or not, a CIP, perhaps with input from independent experts, can make a significant contribution to tightening up processes and enhancing management understanding.
To be clear, we are not suggesting that simply creating a CIP and an IC resolves all suitability issues, but we do believe there is a strong case for reviewing your existing arrangements or considering creating new structures.
Look to the future
If a strong CIP and IC can be embedded within the business, and demonstrated and explained easily, it can make your business more robust and resilient, especially in light of some the challenges facing the sector.
Finally, it is also likely to mean that when it does come to a sale, more value can be realised from your years of hard work.
Today’s best practice may become tomorrow’s requirements, or at least what is increasingly expected by clients, regulators and prospective buyers. Why not fix the roof while the sun still shines - isn’t that what you encourage your clients to do?
Ian Furtado, Principle Consultant, The Adviser Centre
Ian began his investment career at Barings and has worked at a Director and Partner level in sales and marketing for a number of London based asset management firms and boutiques for over twenty five years. He has experience of managing institutional portfolios and knowledge of a wide variety of investments.
He holds the Investment Management Certificate, is qualified through the CII as a Financial Adviser and is also able to manage and advise on private client portfolios.
Ian is an independent Consultant to The Adviser Centre and a Director of Proactive Strategies Investment Research.
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