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Fowler: why wealth managers are to blame for suitability crackdown
Markets
by Stuart Fowler on Jun 28, 2011 at 10:20
Fowler Drew founder Stuart Fowler believes wealth managers should take responsibility for failing to develop and articulate a robust and theory-based approach to risk assessment.
The former wealth manager cover star writes:
When FSA director of conduct Sheila Nicoll told the delegates at the Chartered Institute for Securities & Investment’s annual conference two weeks ago that discretionary fund managers (DFMs) it sampled ‘were not adequately recognising the risks that clients were willing to take and the inconsistencies between portfolios and the client’s attitude to risk, their investment objectives, investment horizon or the agreed mandate’, one can imagine the audience was pretty shocked.
The FSA has since sent a ‘Dear CEO letter’ calling on all firms to consider their own processes and report back by 9 August. It is a very public blow to confidence in a fundamental function of wealth management.
We could see this coming after the retail distribution review pushed private wealth managers into the same ‘holistic’ financial planning model as IFAs, without acknowledging that the market may not look like this or that the market might be right.
Discretionary differences
The Dear CEO letter on the FSA website acknowledges that the wealth management industry includes many business models and that it has not examined this theme before. It is presumably better acquainted with the IFA sector, notably after its comprehensive Treating Customers Fairly assessment.
But clients of wealth managers have very different expectations. They often reveal only enough information about themselves as is sufficient for a portfolio mandate for part of their balance sheet. They do not necessarily want a holistic financial plan. They hate ‘fact find’ forms. They often see the mandate as a performance race, over quite short distances. They generally presume that the solution has to be suitable as a portfolio, not as a set of discrete decisions or trades.
Given these differences, I would expect an objective and complete assessment of the suitability of portfolios to be quite a demanding task for supervisory staff within the best-run firms, let alone in the FSA.
The ‘Dear CEO’ letter covers two types of problem:
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1 comment so far. Why not have your say?
Knowledgable insider
Jun 28, 2011 at 13:44
Apart from the legal profession what other industry is able to create its own demand and thus create job security without commercial targets. If the employees at the FSA were so clever at defining risk and return wouldnt they be advising the industry how they should be investing? No of course they dont because they have less idea than the rest of us - a case of needing no talent to be a critic. Success is now measured by our ability to tick all the boxes and if the client has lost his shirt, no matter, as the correct (according to the FSA) procedures were followed. The whole issue is laughable or it would be if the consequences were not so dire. Experience or investment talent is not recognised due to the fact that the FSA has none itself and unless it can be learned in a taxt book dosnt exist. If you wish to lay blame it is the fault of this new Government who had the chance to close this mad demon that dear Gordon introduced but no chance of that i'm afraid as the MP's who might have done somtheing constructive have not been given a role.
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