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The 'art' of suitability poses 'serious' issues for wealth firms

The 'art' of suitability poses 'serious' issues for wealth firms

A new report has underlined the growing problem suitability is posing for wealth management firms.

The assessment was revealed in performance benchmarking and research firm Compeer's annual compliance survey, for which it partnered with fintech firm JHC. 

The findings were based on interviews with chief operating officers and senior level risk and compliance staff from wealth firms managing around £100 billion in assets under management.

The individuals were asked how their businesses are coping with compliance changes and whether they had identified areas where technology is helping to manage the additional workload created by the growing regulatory burden.

The analysis highlighted that suitability remains a 'serious' concern across the industry. It noted that despite the fact that underlying issues and regulations have been present for a long time, the number one reason why suitability is still a significant challenge is because firms simply do not understand the requirements. 

The study found that there was a lack of a time-structured process review when it came to suitability.

A total of 71% said that reviewing suitability processes was something that evolved as they went along, learning new things about what the Financial Conduct Authority (FCA) expects.

The trial and error process also applied to how effective their internal procedures were at serving clients, and building systems that allowed them to better match client requirements with suitable investments.  

Firms were also asked how long it takes to review the ongoing suitability of client portfolios. Answers varied from a 'few seconds' to a 'few days'.

Some firms conducting compliance monitoring are able to have their IT system pull up data and build a report relatively quickly.

Taking into account face-to-face meetings however, meant that a number of individuals spoke of timeframes in days and not hours. 

Depending on whether this is done from a compliance or investment management perspective, firms were looking at the suitability of client portfolios anywhere between ‘constantly’ and ‘annually’.

Many front office staff were aware of suitability issues on a very regular basis and there were ‘official’ review points every 12 months.  

While many firms recognised the benefits associated with technology and the automation that it could bring, many admitted that the manual element could never be extinguished.

They said this was because suitability was often an ‘art and not a science’ where personal relationships and understanding came into play- 76% said they used a mixture of systems and manual processes to do the review.

Amir Hakim, head of wealth solutions at JHC, said: 'Suitability is an issue that will only grow in importance, but the research findings highlight that firms are still not getting to grips with it. The FCA wants to see more rigour and process around suitability.

He added: 'Ideally, investment managers should be monitoring their portfolios on a daily basis. It sounds daunting, but in reality, it doesn’t need to entail large scale changes or huge costs.

'We can see that a huge chunk of the industry still isn’t utilising technology, but when it comes to suitability, technology can be light touch, quick to implement and a relatively inexpensive solution.' 

The study also showed that compliance is no longer a role undertaken by a single department, with the entire firm engaged. 

At many firms, all departments saw an increase in time spent on regulatory tasks, with 58% of senior management spending up to 40% of their time on regulation. Alongside this, while compliance costs remain static, 59% of respondents put this down to the investment being spread across the whole business. 

Firms also appear to be very unprepared for incoming financial regulation - 41% of firms believe it will be tight to reach all the necessary requirements for Mifid II, while 31% of firms have not yet looked at general date protection regulation (GDPR) requirements. 

'Compliance is something that is often viewed as a burden, but this report reveals that it is equally an opportunity,' Compeer senior research analyst Nik Lysiuk said.

'Regulation-driven IT spend shouldn’t be viewed as a necessary evil, but instead technology can be utilised to lower costs and enhance service, allowing client-facing staff to focus on managing their client relationships while the technology takes care of identifying and highlighting any regulatory issues.

'Plus, compliance can offer an opportunity to gain competitive advantage, especially when you consider that parts of the industry are seriously unprepared when it comes to Mifid II, GDPR and beyond.' 

 


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