The Product Intervention and Product Governance Sourcebook (PROD), introduced in January 2018, has the potential to radically change the way that most advisers run their Centralised Investment Propositions (CIPs).

With this in mind, we believe the time could be ripe for financial advice firms to ‘decentralise their CIPs’. This may seem like a counter-intuitive statement (especially as Rory Percival rightly pointed out, a CIP is an approach to standardise the delivery of investment solutions to your clients, rather than a single investment solution in itself) however, the traditional approach to client segmentation and breadth of investment solutions on offer will need a dramatic rethink for many advisers under PROD rules.

Here’s why…

Many advice firms have historically relied on CIPs to demonstrate fair treatment among their clients and consistency in outcomes. However, time and time again the Financial Conduct Authority (FCA) has warned that it can give rise to the ‘shoe-horning’ of clients into one-size-fits-all investment solutions.

For example, research from FE indicates that 31% of advisers intend to put 90% of their clients’ investments into a single centralised investment proposition, which creates concentration risk and the potential for shoe-horning.

In contrast, PROD requires advisers to adopt a framework to consider their entire advice process and ensure value for money for each element. The advice service; investment solution; asset management style; product and/or platform must be assessed and the adviser needs to evidence a truly client-centric offering.

The FCA often talks about ‘keeping the client at the heart of your decision-making process’ – and PROD seeks to do just this. This piece of regulation requires advisers and providers to evaluate each component in the value chain to ensure the cost and service is appropriate for the intended client segment.

 

Lack of awareness

However, in spite of the significant ramifications, there is a surprising lack of awareness about the PROD rules amongst financial advisers.

Last October, Rory Percival, a former technical specialist at the FCA who now runs a training and consultancy business, estimated that fewer than 1% of financial advice firms were complying with PROD rules. Meanwhile, recent research from consultancy the lang cat found that 57.8% of advisers were not even aware of the rules.

What is particularly concerning is the fact that PROD stands alone as a piece of legislation that gives the regulator teeth: the FCA is able to take enforcement action against firms that fail to comply.

If your firm is yet to engage with PROD, there’s no time like the present.

 

Client segmentation

The first area to look at – if you haven’t started already – is client segmentation. The FCA wants to see that advisers are taking a sophisticated approach to segmentation, which is no longer purely based on investable assets.

However, in many cases this still forms the basis for the fees that advisers charge and the investment proposition they select for clients. For example, clients with sub-£100,000 are often offered multi-asset funds, those with £100,000 to £500,000 placed into in-house model portfolios, while those with £500,000 plus may be offered bespoke discretionary portfolios.

Asset size cannot be the only measure for determining CIP suitability. While still a factor, life stages and the varying requirements throughout these stages must also be taken into consideration.

The investment solution offered must be broad enough to cover a range of clients, whilst also ensuring individual suitability. Breadth could relate to providing various investment strategies, such as active, passive, absolute return and income. Meanwhile, solutions can be packaged for clients in a variety of ways. For example as funds, model portfolios on platforms or direct, and bespoke portfolios.

PROD in practice

PROD requires a clear definition of segments and sub-segments, based on client characteristics and needs. These must then be matched to a platform, investment solution and advice service. At our DISCUS event on this topic, Percival provided several examples of segmentation under PROD and the table below offers a great starting point (the gaps should get you thinking about your own client segments):

 

Client segment Client
sub-segment
Investment solution Platform selection Advice service
Young accumulators Senior executives Bespoke discretionary DFM dependent Standard
Simple needs Multi-asset or Managed Portfolio Service Simple and low cost Light touch
Serious about retirement
Glidepath to retirement
Retirement income High income Centralised retirement proposition Withdrawal functionality Standard + cash flow planning
Low or no income Growth portfolio Withdrawal functionality Standard
Outliers

 

Following PROD, it’s highly likely that advice firms will deploy a service proposition that comprises of multiple platforms, Centralised Investment and/or Retirement Propositions and two or three advice services. We will see firms move away from using a range of solutions in all areas towards a very tight, segmented service offering, with each component in the value chain evaluated to ensure the cost and service are appropriate for the intended end-client.

If your firm only offers one CIP for a range of clients with different objectives and needs, then you may consider unwinding this CIP and creating an individual CIP for each of your client segments.

 

Time to review your panel?

PROD should also prompt advisers to review the discretionary fund manager (DFM) panels they have in place. Once again, they will need to justify why they have selected specific DFMs and demonstrate how and why they are able to meet the needs of the underlying client.

However, DFMs have long been chosen because they are believed to match a specific client personality – which can no longer be the sole reason for selection. Likewise, advisers often select the DFMs they know well, even if this means that a firm’s panel lacks diversification in relation to size and approach.

I often see a distinct lack of boutiques on panels, which is a shame because these businesses have the scope to think outside of the box and go the extra mile to meet the needs of the underlying client. Hopefully this is something that will change in the future.

My parting piece of advice is to engage with PROD – before it’s too late. It is never a bad thing to take a step back and look at your proposition with fresh eyes, and PROD provides advisers with an opportunity to do just this. You may find there is work to be done in relation to your CIP or panel, but ultimately any actions taken could prove to be positive for your business and the underlying client.