The Financial Conduct Authority (FCA) has a clear set of guidelines that require wealth managers to demonstrate the exercise of their duty of care towards clients. All wealth management firms recognise that protecting their client’s interests is the major requirement in any service offering.

This article will examine the issues currently surrounding suitability, and then suggest ways in which new technology can be applied to solve these issues.

In the eyes of the FCA it is not sufficient to give assurances that client interests are properly managed.  All wealth managers must be able to demonstrate that they have taken reasonable steps to ensure that any personal recommendation is suitable for their client. 

This of course implies that the manager knows what is reasonable, what is suitable and, crucially, who the client is! 

The apparently simple requirement of client identification is a major issue for most firms. A client is a person or a corporate body to whom advice is being given for a given service.  The Conduct of Business (COB) rules require a clear distinction on this point. It is unfortunately all too easy for wealth managers to confuse the person with whom they have a relationship with the legal ownership of a portfolio of assets. It’s not unusual for a portfolio to be associated with multiple persons even though the mandate for that portfolio may only have been signed by one.

Joint client relationships create the most confusion in this context, where a person defined as the owner of a portfolio is in fact not the owner of all associated accounts.  Examples of this scenario could include, for example, when a spouse or partner’s ISA is included within what is ostensibly a single person’s portfolio; an individual SIPP account combined with multiple accounts for more than one person;  or a group of accounts owned separately by an individual and a corporate body being managed under the same portfolio mandate. While any of these scenarios may seem reasonable when seeking to maintain a good relationship with a wealthy individual and efficiently manage their asset portfolio, they are clearly problematic in the context of the suitability assessment.

The COB rules were not known in this format when the majority of the customer and portfolio management systems used by wealth managers were implemented, and the majority of back office systems in the market pre-date Big Bang. Such systems have not been designed to clearly ‘understand’ the client relationship. What this means is that even with a well implemented suitability process, compliance with the COB is undermined because the data structure is inadequate.

Apart from having a clear view under the rules of who a client is, wealth managers must show that they have obtained enough information to understand that the service being provided for a client

• meets his/her investment objectives;
• is such that he is able financially to bear any related investment risks consistent with his investment objectives; and
•  is such that he has the necessary experience and knowledge in order to understand the risks involved in the transaction or in the management of his portfolio.

Many existing suitability solutions confuse the monitoring of portfolios against the client mandate with the suitability of the service or product to the circumstances of the client. Monitoring the assets composition of a portfolio against its asset allocation boundaries, and other risk parameters is a daily obligation. If the mandate itself is unsuitable to the client, that daily monitoring exercise is academic.

The information regarding the investment objectives of a client must include

• information on the length of time for which he wishes to hold the investment(s),
• his preferences regarding risk taking,
• his risk profile,
• and the purposes of the investment.

The information regarding the financial situation of a client must include

• information on the source and extent of his regular income,
• his assets, including liquid assets, investments and real property, and
• his regular financial commitments.

Obtaining this information is a challenge in itself for wealth managers. Clients may be unwilling to disclose details of their personal wealth, or they may not appreciate the need to understand the risks they are taking both in terms of their tolerance and capacity for loss.  In the past these ‘difficult’ topics may not have been fully addressed.

The amount of information required to be captured is open to interpretation and compliance managers may ask for different levels of detail.  Some organisations will also be unwilling to place an additional burden on client facing business generators, or feel that extended questionnaires will put off clients and will tailor their questions accordingly.   Many client facing wealth managers see this level of in depth suitability probing as questioning their ability and integrity.

All too often the systems on the market simply mirror this situation and perpetuate these challenges, rather than help to resolve them.  They do not have an accurate data model to enable the wealth manager to capture this information easily, adding to the frustration in the front office. However, there is no avoiding the obligation to capture a reasonable amount of detail across each of the above items in the context in which they make sense, and to the satisfaction of the regulator.

Fortunately there are systems out there which will allow wealth managers to capture the data required to demonstrate the suitability of their offerings. My next blog  in this series will identify the key features to look for when choosing a wealth management system to assist you in meeting your statutory obligations, as well as being a powerful tool in effectively managing asset portfolios.

Until then…..