Client suitability: wealth management best practice

There is no doubt that regulation has been a hot topic across the financial services sector ever since the downturn. This year the FSA has raised the bar even higher for investment managers in the retail sector to demonstrate their duty of care towards private clients. As I see it, this increased focus means investment managers today need to provide proof when faced with the question, ‘do you know what your client needs from the service you provide?’ My view is that proof of client suitability can easily be achieved by ensuring a strategy is in place to demonstrate that wealth management services are really the best fit for each client.

It sounds obvious, but the first step in determining client suitability is undertaking a comprehensive review to ensure all important financial information and client circumstances are documented. Alongside this, investment managers need to review the suitability of existing portfolios to the individual circumstances of each client. They also need to seek an agreement through an active dialogue with existing clients. A suitability assessment should then be completed for all discretionary and advisory managed clients. This should be reviewed on an annual basis.

Regular monitoring of portfolios to ensure adherence to compliance rules around asset allocation, risk, diversification, concentration, turnover, dealing size and restrictions should also be a part of the client suitability strategy. This will ensure that no client portfolio is allowed to exceed the agreed parameters of their mandate. To help this process, automated portfolio alerts should be presented to investment managers pre-trade so that potential issues are flagged before it’s too late. Ultimately, tighter business processes are now a pre-requisite for client managers to demonstrate that they are meeting regulatory requirements and ensuring sufficient controls are exercised.

By putting all these measures in place as an integrated part of a client management platform, wealth managers can ensure that client suitability isn’t just another overhead. It should allow discretion to be exercised with confidence and give investment managers the peace of mind to know that unforeseen adverse impacts are captured both pre- and post-trade. Most importantly, this approach should, enable investment managers to focus more time on what they do best.