An ongoing trend
I remember when the Retail Distribution Review (RDR) was implemented in the UK around 6 years ago, there was a rush by financial advisers to ensure they could justify the “suitability” of their financial advice. This was due to Suitability being a core tenet of RDR, in addition to the much-lauded aim of increasing transparency of fees and commissions paid to product providers, advisers, and the distribution layers in between.
The movement for evidencing Suitability gave birth to the concept of “risk-rated funds” (allowing advisers to match certain investment funds to the risk profile of their clients), the growth of outsourced compliance services and adviser networks (providing advisers assistance in explaining specific financial products being recommended), and renewed interest in cash flow planning tools (allowing advisers to illustrate the impact of future income and spending plans).
The UK’s Financial Conduct Authority continues to put Suitability high on its agenda, having published The Assessing Suitability Review in May 2017 with a follow-up review planned in 2019. Certain robo advisers also came into the spotlight in 2018 for purported Suitability failings.
The financial planning process
According to the Chartered Institute for Securities and Investment (CISI), the financial planning process can be summarised as follows:
Source: Chartered Institute for Securities and Investment (CISI)
Step 1: Establish Goals
Goal-setting is perhaps one of the most important parts of financial planning, and allows a financial adviser to determine the most suitable course of action to be taken for their clients to meet their financial needs.
Example of goals include purchasing our first property, paying for our children’s education, and retiring comfortably by the age of 60. These can be organised by short-term vs long-term goals and by priority.
Step 2: Review Assets and Liabilities
This is a fact-finding exercise where individuals or couples record all their household assets and liabilities. This includes our home and any mortgage against it, cash in our bank accounts, any investments held, insurance policies taken out personally or through our employer, and any debts owed.
Depending on the scope of engagement, financial advisers may require permission from their clients to contact the respective providers of the client’s existing financial products, to obtain further information on them.
Step 3: Evaluate Financial Position
With the visibility of seeing all our assets and liabilities in one place, we would now be able to assess how close we are at achieving our goals.
For example, a couple may feel that a £30,000 deposit will be required to purchase their first home, but they only have £20,000 in the savings account designated for this purpose – a £10,000 shortfall from the target amount.
Step 4: Develop Financial Plan
Having understood our financial position, we can then chart a “route map” to achieve all of our financial goals. This can be done with the help of a financial adviser, who not only has to know the wide range of retail financial products in the market, but also how suitable they are to their specific client.
For example, certain high-return investments may be deemed unsuitable for an individual due to their low tolerance for risk or low “capacity for loss”. A multi-millionaire may be able to absorb losses of £50,000 given their significant high net worth – and hence deemed as having high “capacity for loss” – but a high-return investment may still be unsuitable for them if they have a very conservative attitude towards risk, and are unable to sleep at night knowing their investment portfolio might fall in value.
Taking the earlier example of the couple saving for their home purchase deposit, knowing they have a shortfall of £10,000 may make them decide to save more regularly or start putting money in investments with potentially better returns.
Financial plans are not limited to savings and investments. For example, an individual may take out a life insurance or income protection policy after realising that their spouse and family may struggle financially should he or she experience an untimely death.
Step 5: Implement Financial Plan
This may be one-off actions such as consolidating our investments and pensions on to a single platform, or ongoing activities such as spending less and increasing our annual pension contributions.
Step 6: Monitor and Review
Our lives undergo a continuous series of changes; we may get married, have children, secure a higher paying job or experience the death of a loved one – all of these may result in changes to our financial goals.
Hence, it is important that the financial planning process is not undertaken only once in our lives, but we should constantly monitor and review our financial position vis-à-vis our financial goals to ensure the former is on track – and suitable – to meet the latter.
Suitability: The only way forward
The UK and Australasia – two markets FNZ has significant presence in – have been the leaders in the push for Suitability in regulated retail financial advice. Other regions around the world are also moving away fast from sales-based methods of selling financial products, to a more holistic financial planning approach.
Given regulatory headwinds, ensuring Suitability is prioritised is the only way forward. FNZ continues to develop user interfaces, tools and infrastructure on our platforms to support this agenda, keeping in line with our corporate vision – “Helping people achieve their financial goals”.
Group Chief Strategy Officer
Din is a chartered accountant and M&A professional, with experience in corporate finance and investments within the Financial Institutions and Technology sectors. He is part of the Corporate Development and Strategic Ventures team at FNZ, responsible for setting out the group’s global strategy and undertaking new ventures to help grow the business.