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View the article online at http://citywire.co.uk/wealth-manager/article/a757880

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

by Anna Dumas on Jun 20, 2014 at 07:43

‘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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2 comments so far. Why not have your say?

CoeurDeLion87

Jun 20, 2014 at 10:54

I'm afraid this is just one more farcical waste of time that FCA has indoctrinated into the 'new' untested culture within the 'wealth' arena. Having destroyed many firms and experienced personnel in the process the FCA (FSA) seems to have completely ignored one of the main market maxims that has been around for '00s of years. That is "..there is no point in jobbing backwards". It's important to remember that one man's HIGH risk venture is another man's LOW risk opportunity. In the good (old) days everyone understood that building a relationship with each client was the key to the client's success. Understanding each client's risk appetite was part of this but each day this might have changed due to personal or market circumstances. Life in the markets is like "dancing on quicksand" and today is NO different. The worrying aspect to this new (super rigged) culture is that ultimately every 'wealth' manager will end up with taking NO risk or at best eliminate risk at all costs for a fat fee. So much of these fees are going towards the regulatory regime that is now in place that engenders more Marxist theory than that of Mises (or even Keynes at his best) as was witnessed by Charles Stanley earlier this week.

Reading the comments from the experts in your article I'm not sure I'd want my money managed by those supporting this new culture. What many investors want to see is a culture that safeguards their investments, allows them to take some element of risk (within reason) but more importantly investors want their investments managed by people who are market savvy.

Sadly there aren't many remaining who put clients and markets ahead of regulatory gobbledegook.

When the next crisis arrives the current swathes of box tickers will point towards the 'norm' which compliance departments engineered but this wont save investors large %'s of capital. The only benefactors at the end of the day will be lawyers and regulators who have far too much influence over decision makers and the processes. Taking market instinct out of the equation is the major part of the RDR problem.

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Hicks

Jun 21, 2014 at 10:13

James Mahon makes a good point above when he says that risk is more than simply having a tool to measure volatility. The problem is that everyone is in favour of suitability but no one is quite sure how to do it. I would suggest:

1) Suitability has to cover a client's holistic wealth position. Every firm therefore needs to understand a client's overall wealth. Larger clients will often be unwilling to reveal this information but at least a firm's records should document that the questions were asked. An attempt needs to distinguish a client's overall risk profile with the profile for a particular portfolio. For instance, it may be perfectly reasonable for a client with a "balanced risk profile" - and we can discuss what that means !- to balance cash held at a bank with an equity portfolio with a wealth manager. The problem is that this is impossible to capture retrospectively and many are still failing to do it currently.

2) Time horizon does not necessarily justify per se high equity weighting. How many people in the industry understand Samuelson's fallacy of time diversification?

3) With the exception of model driven discretionary portfolios, systems and box ticking does not count as a suitability review. Suitability reviews need to be conducted and documented six monthly by a really senior investment professional. Most firms are still frightened of the cost implications of this.

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