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Do You Really Know Your Customer?

Advisers will staunchly defend the advice they have provided as the best advice for the client circumstances. Undoubtedly they believe that they obtained the right amount of information, soft and hard facts about their client, their goals and aspirations, attitude to risk and full details of their existing arrangements. All this was recorded along with their budget, an assessment of affordability and all the other elements that have gone into the mix for producing the advice given.

As a checker of a file, what do you look for other than the correct documentation and forms filled correctly?

The key to a good fact find is that it can tell a story as a stand-alone document, a snapshot of the client’s situation but with additional areas for their future plans and why they entered into the areas of investment, savings and planning that they have already undertaken.

There are no hard and fast rules on how to go about this and every firm will have a different slant on the requirements of the content, but simply put, before you can give any investment advice to a prospective client, you need to record;

• a detailed breakdown of income and household and personal expenditure

• assets and liabilities

• accurate details of existing savings, investments, pension and life assurance arrangements

• terms of any wills and details of expected inheritances

• sufficient details of occupation status and prospects

• health details

These may sound obvious, but often areas are skipped over or not as thoroughly recorded as they could have been. Health details are often glossed over or answered “OK for age”. This is a totally subjective answer as what a young adviser may consider acceptable for a 70 year old may differ totally to what a more senior adviser would consider as “OK”. If there are health issues, medication, treatments, monitoring by doctor or consultant and any other relevant details could help support the justification of a recommendation if challenged in the future. If the product recommended may need medical underwriting then the better the picture now, the more accurate and pertinent the recommended company or product can be in the future.

Reviewing these items can help provide the soft facts you need to complete the picture. You need to include, ideally in the client’s own words;

·         Goals – what are they planning for? What are their key milestones? What birthdays, weddings, anniversaries are important to them. Is retirement a key driver? If there are many, what are the priorities?

·         Aspirations – are they likely to be offered a partnership or directorship? Will they have to “buy in”. Do they want to start their own business? What sort of capital will be needed? Do they want their children to go to university? Which one? Why?

·         Investments and Savings - why did they invest/save before? What was the purpose? How often have they invested and in what products? Have they ever invested in any other area (shares, investment trusts, CFDs, UCIS etc.)? What were their expectations? What was their experience? How often have they disinvested or cashed in/transferred a plan? What kind of volatility had been encountered and how did they feel about it?

·         Cash and Immediate plans - What sort of cash do they like to keep on hand for emergency use? Do they have any planned major expenditure in the near future (conservatory, upgrade of car, sabbatical or extended holiday etc.) How much liquid money would they need access to, say within two weeks, if a major calamity befell them?

·         Requirements – if investing for income, how much would they need after tax each month, quarter, semi-annually or annually? What period is important to them? Do they need fixed income or is variable acceptable? Do they need a minimum amount as an absolute? Is their tax status likely to change? What is their view on interest rates? Do they see their spending patterns changing? Is there a likelihood of further money available in the future? Are there any ethical concerns on a moral or religious foundation?

·         Affordability – is their declared budget affordable? Is it realistic or are they over-stretching themselves? Is there likely to be pressure applied to the budget in the future (sustainability) or is there a need for further increased savings or investment as part of a strategy as things ease off financially (children leaving home, mortgage repaid, inheritances etc.)

·         More information - Is there need for greater or more in-depth fact find or section within your form for an analysis of pension planning, inheritance tax planning for client or future inheritances by the client or perhaps even a portfolio planning section? Do you need detailed tax calculations or state benefits received? These sections may not be important to the majority, or only require high level input, but if a greater degree of planning is required, these can help justify your recommendations better and more accurately.

·         Changes to circumstances – is there potential dependant issues? Elderly relative going into care? Disabled child needing further adaptations/upgrades in the house? Private education changes?

 The purpose of this seemingly deep and intrusive questioning is to provide you with the information you need to assess and recommend a suitable, affordable and sustainable product or portfolio of products. To do this you need to be aware of their whole situation. When assessing your client’s needs you will need to consider their hopes and aspirations plus any beliefs, circumstances or fears and obstacles or restrictions to planning. This will help you clearly establish what their priorities are and ensure you are treating them as fairly as possible. It may also identify the potential for further advice and services.

 Establishing Attitude to Risk for each area is also a part of this process and it is not proposed to discuss the various options within this document. Different areas of planning may bring a different attitude – life or critical illness cover might be a “no risk – needs guarantees” and regular savings may be a “Medium to High –willing to accept the variations of the market for overall longer term averaging and potential gains.” Good practice is not to fit the client into an ATR box, but interpret the client’s feelings and level of understanding to the relevant product and investment area.

 Risk profiling. Do you have a consistent way of assessing a client’s risk profile? Is the definition of risk categories you use clear and meaningful to the adviser and the client? Do you explore the client’s attitude to risk across their different objectives? Do your advisers understand how to use a client’s risk profile in practice when recommending a product and any underlying funds for investment?

 To maintain consistency and demonstrate that you treat customer’s fairly, you should have a documented sales process across the company for training to new recruits and holding experienced advisers to a standard. If you need help in documenting your specific sales process, CEI Compliance can help you develop your own brand of advice and help fill in any blank or grey areas at the same time, using their wealth of experience from all sizes and manner of firms they deal with.

Assessing the needs

By the time you have completed the in-depth questioning, you will have a really good idea of what makes the client tick. You will understand (and hopefully recorded) their feelings and assumptions as well as their understanding of the risks of inaction as well as their experience of investment funds, markets and various products (or maybe even none at all!). From this information you will formulate an opinion of the best way to address their needs. This could be the main area of the suitability report you are going to construct or it may be a section on the fact find, or a file note summarising your thoughts. Good practice would also be to consider if topping up of existing plans is a worthwhile option and could save them unnecessary charges.

 The Suitability Report

As we all know, communications with client’s, however delivered, should be fair, clear and not misleading and serve their purpose. This is so that a client understands how and why your recommendations meet their needs and objectives.

So many advisers still have a degree of difficulty in this area. Quite simply it should be seen as the natural development from the properly detailed information you have either obtained or reviewed with the client (if this is an existing client). Ideally you should review the details annually and at least biennially as changes occur gradually to people and they react accordingly, not usually considering the situation or position that they were in just twelve or twenty four months previously.

The suitability letter should not be a regurgitation of the fact find. Give the client a copy of your fact find and the notes as part of your recommendation pack and keep the report succinct, relevant and pertinent. The client does not need to be told they live in a three bedroomed house with four children and their wife; they know that already. What they don’t know is what your assessment and recommendation to satisfy either their perceived or imagined need is, or why it is going to satisfy their appetite. So you have to be fair, clear and not mislead them in any way. To give you an idea of how you could construct an investment suitability report, you need to devise a checklist to make sure you have covered all the areas you need to.

For example, are the clients objectives/needs clearly documented (income/growth)? Refer to the fact find quoting their words or specific areas that were discussed, including what they don’t want or are fearful of.

Have the reasons why a unit trust/OEIC/Investment Trust/Bond has been recommended over other alternatives been documented? What is the tax advantage specific to their needs? What are the disadvantages?

Perhaps an investment trust has been recommended. Have you made the client aware that, generally speaking, the risk/reward compared to similar unit trust/OEIC funds is greater because:-

·         The value of shares in investment trusts are influenced by demand as well as the value of the underlying assets - Investment trusts frequently trade at a discount to Net Asset Value and the discount can widen if there are more sellers than buyers

·         Investment Trusts can borrow to invest and this can increase the volatility

Has minimum investment term been specified? (i.e. – 5 years +)?

Does the suitability report provide an explanation of the following?

  • Internal taxation of the investment
  • Events that constitute a ‘disposal’ for CGT purpose
  • Taxation of gains in the hands of the investor
  • The annual CGT exemption
  • That higher rate taxpayers will have a further liability on any dividend or interest distributions (regardless of whether paid out as income or re-invested to purchase new units)

If the recommendation involves a switch between funds does the suitability report:-

  • Detail any penalties incurred and the CGT liability on disposal of units
  • Provide sufficient evidence (particularly where there is a cost to the client on disposal) to demonstrate a likely financial advantage to the client

Does the suitability report confirm the basis of ownership (single/joint)?

If income is required does the report document how this need has been met, the current income yield on the fund(s) recommended, and what this approximates to in monetary terms? Has the client been made aware income can fluctuate?

Are the following areas covered?

  • Desired term
  • Size of investment
  • Affordability
  • Any surrender penalties (if applicable)?
  • If any existing contracts have been cancelled have the reasons why and been documented together with any disadvantages?

Has the clients ATR been described together with a summary of the discussions regarding risk/reward?

Has the recommended fund split been documented together with confirmation as to how the overall asset allocation matches the clients ATR?

Is there confirmation of why the provider was selected, that matches the research?

·         Are the following risk warnings included?

  • Past performance is not necessarily a guide to future performance
  • Unit-linked:- Unit prices can fall as well as rise
  • Property Fund warning

Has reference been made to the charges and cancellation sections of the KFD?

If written on a limited advice basis have the warnings been included?

Note: While this guide is provided to give you the generic and generalised requirements, your own judgement is required to provide specific details relevant and pertinent to the client. No responsibility can be taken by CEI Compliance Limited in the failure of your inclusion of any area of regulatory requirements. If you have any queries, we can be contacted on 0800 689 9 689


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Author: Lee Werrell
Posted: Wednesday, January 26, 2011 | 11:19:50 AM

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