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Suitability: how far back should you go? Our readers respond

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Suitability: how far back should you go? Our readers respond

The news that Coutts is to conduct a suitability review of all of its clients’ holdings dating back to 1957 has made waves in the industry. The issue of suitability is one of the Financial Conduct Authority’s key focuses, so how far back should wealth managers take their reviews to ensure clients have not been put at risk?

Phillip Hilton, senior investment manager, Sanlam Private Investments

‘Assessing suitability is about ensuring that we, as investment managers, correctly identify the amount of investment risk to which it is appropriate to expose a client. We therefore seek to build a client’s “true risk profile” using our proprietary tools and knowledge. Essentially, this is all part of the Know Your Client process.

‘The process of assessing suitability is ongoing. Client relationship management lies at the heart of ensuring client suitability is sound.

‘Client agreement to the outcome of the suitability review is absolutely vital.

‘It is hard to say how far back you should review when assessing suitability of clients’ past investments but their financial background informs the decisions you make for them now. It is important to look for the relevant data and not waste resources. But the most important thing is what assets they have now and what will be affected.

‘Suitability is not only important for the client but it helps wealth managers as well. Having a close relationship with your clients and knowing their circumstances in depth helps to build their trust in you. If you make the effort with them, they value your expertise and service more.’

James Chu, director, Reyker, London

‘There are discussions surrounding how far back firms and individuals should look when assessing suitability. If suitability has always been embedded in the firm’s culture, this should never be a problem. This is probably why the Financial Conduct Authority has been emphasising the importance of a firm’s culture only recently.

  ‘As wealth managers we always act with care and treat fiduciary duties seriously, regardless of what the regulations said at that time. Such concepts were often advocated by professional organisations (eg, the CFA Institute) well before the retail distribution review was even suggested.

‘We see the relationship with our clients like travelling along with them on an investment journey. Ensuring investments and advice are suitable for the changing circumstances of clients is the key to making sure this journey works with the right outcomes for the client. 

‘In theory it should go as far back as possible to day one, although the regulatory requirement seems to be different. If a firm has nothing to hide from, it will have no problem to demonstrate suitability over any period.

  ‘In practice there are constraints, especially on paper-related records that were used. This is particularly true for clients with the longest relationships with the firm, which oddly will also be the focus of any review. So it won’t be surprising that firms are worried Coutts has set a precedent, as it can be highly disruptive. So the FCA may want to clarify whether they expect all wealth managers to follow Coutts.’   

James Mahon, CEO, Church House Investment Management, Sherborne (pictured above)

‘Suitability sits firmly with my view that investment management for private individuals is all about risk management. Finding a suitable mix of investments for an individual client is the key stage after discovering what their true risk appetite is.

‘Managers need to be mindful of the changing nature of retail clients’ needs over time so regular reviews are imperative. Circumstances change for all the obvious reasons, so what is suitable will change.

‘But to get to what is suitable, the risks need to be explained and understood. I am concerned that a lot of ‘risk profiling’ seems to be based entirely on volatility. This can be one useful measure of outcomes but, particularly for retail clients, it can be a blunt tool. Risk has several components and for many the risk of permanent loss of capital (and its ability to produce an income stream) is likely to be the most important consideration. 

‘If there is any doubt about the suitability of past investments then yes I think there is a need to look back to the outset of a relationship. You should look back as far as you can. I hope all managers have the ability to do this and too much information hasn’t headed into an “archive”.’

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