What is a central investment proposition?
A central investment proposition is a standardised investment approach that allows independent advisers to offer a comprehensive, consistent, and value adding investment solution to all their investment clients. They are a key part of an holistic advice process for all financial planning firms.
It means that instead of conducting whole of market investigations advisers can focus on a range of providers and products within a well-researched Centralised investment proposition (CIP) which is reviewed on a regular basis by an investment committee.
4 out of 5 independent financial advisory firms already have a central investment proposition of some kind. However, probably all of these need to be reviewed in the next few months in line with the impending Consumer Duty requirements.
Who benefits from a CIP?
A crucial aspect of a CIP is that it must not just be a good fit for the advisory firm but more importantly for its clients. A good CIP should reflect client segmentation. A good understanding of knowing which client fits into which segment means clients are dealt with efficiently and from a regulatory viewpoint, compliantly.
Flexibility for clients is also a vital consideration, life events can dramatically change a client’s investment requirements. It should also meet the needs of various attitudes to risk and investment time frame windows. An offering of passive and active investments, ethical offerings and different tax options also make a robust client friendly proposition.
Any costs should be transparent.
How does a CIP work for an advisory firm?
Some firms have an investment committee that meet regularly to gauge whether their picks are providing what they set out to do. They chose which providers and products to place within their CIP. They also set the parameters of when advisers can go outside of the CIP. An experienced paraplanner, in-house or external, is an ideal person to sit on this committee.
Establishing and running a centralised investment proposition has always been a challenge for smaller to medium independent advisory firms. The introduction of Consumer Duty makes the challenge slightly harder and more accountable.
There should be no blurring of lines between efficiency for a business and what is good for the consumer.
Firms that have investment committees that consistently appraise investment selection, performance and value for money for their clients have real responsibility.
Inhouse research is expensive from a time perspective. It is also pressurised because the aim of achieving positive performance on a value for money basis can be hugely impacted by markets. Any member of an investment committee working in the summer of last year can relate to this.
Third party offerings
Investment selection can be delegated to a third party but is important advisers know their responsibilities to the third party and their own clients.
A range of players have entered the market with the aim of providing outsourced investment solutions for advisers and to take away some of the challenges of running a centralised investment proposition.
Managed Portfolio Service (MPS) providers, Discretionary Fund Managers (DFM) and platform providers have all realised the IFA community is a good place to expand their own businesses.
The challenge for businesses moving away from their current self-picking system or to another third-party provider is to ensure any migration does not have a negative impact on their clients. They will also need to ensure that any proposed solution will fit in with the customer journey, segmentation and be flexible enough to adapt.
Due diligence should be comprehensive. There is a real challenge for an adviser to explain why their firm is moving from one third party to another in a short space of time.
Consumer Duty means that most firms are reviewing all aspects of client interaction.
Recently five different third party providers were recently interviewed by an adviser business. Only one of them had a clear plan for how it would operate under Consumer Duty. So, it really is important to look at governance when considering working with any third party provider.
Whether having an in-house selection approach or that of using a third party, the consideration of providers Consumer Duty plans should be a key consideration.
Back-office systems
Another consideration when establishing an effective Central Investment Proposition is ensuring the chosen risk profiling tool works in conjunction with CIP offerings. Compatibility of a client’s attitude to risk with a selected product or fund should be in place.
Complacency
Which CIP option an advisory firm takes the main thing to consider is accountability. CIPs should be reviewed on a regular basis, and good record keeping of discussions on the topic made.