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

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

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.

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2 comments so far. Why not have your say?


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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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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