Outsourced Paraplanning – Demonstrating Suitability

The reason for paraplanners, including us outsourced paraplanners, is, in essence, quite a simple one; to evidence suitable financial advice.

Financial Advisers are experts in getting to know the financial planning needs of individuals and coming up with robust financial plans, they are, on the whole, not so good at evidencing this advice on a file!

The purpose of this series of articles is to share the advantages of a paraplanner and financial adviser working in unison.

Dealing firstly with effective suitability letters:

There are three things that need to be in suitability reports according to COBS:

 

1. Demands and needs – “i.e. the client objectives”

2. Why it is suitable for that individual client

3. The possible disadvantages – “i.e. the risks”

That’s all that needs to be in a suitability report!

Demonstrating Suitability
Demonstrating Suitability

here are some additional elements or guidance for some of the more complex areas like defined benefit transfers or drawdown, but for most businesses, it is just those three areas.

Rory Percival, ex FCA, used as an example a letter, in a recent presentation, he received from an adviser listing the various points that the firm’s compliance officer said had to be included in a suitability report. Percival went through them one by one to clarify for the audience what was needed and what wasn’t needed in a suitability report. We list the points here and quote Percival’s comments against each.

 

• Client agreement. “The basis on which you are working for that client. That shouldn’t be necessary. If you’ve got the initial disclosure document, the terms of business, agreed with the client, which should be clearly setting out the basis on which service is being provided to that client, that doesn’t need to be repeated in the suitability report.”

 

• Client circumstances. “Some of them need to be in there, for example, if you are talking about the client’s objectives and some of the things around the client’s circumstances that demonstrate why the solution is suitable. But the bits that say ‘Michael you are 48 and a sales director earning £50,000, married to Tracey who’s a teacher earning 40,000 and you have two children…etc. – why is that in there? The client must be wondering that too. That’s not necessary, that’s just repeating things from the FactFind (and meeting notes).”

 

• Attitude to risk and capacity for loss. “These would need to be in the suitability report as they help to demonstrate why the solution is suitable for the client.”

 

• Investment strategy. “The letter I got said this section was quite long and went through all the processes, selection, research, etc. Also, because the advice process had taken a number of months, everything that had been said before in previous meetings and reports, needed to be brought up so the latest suitability report was self-standing.

“That’s not the case. If you’ve got a series of reports for the client, so long as it’s clear to the client, you don’t need to repeat everything you said first or second time around. And if there are sections that apply in both situations, for example, in a previous letter you might have explained your firm’s approach to selecting funds, or to its centralised investment proposition, you don’t need to repeat that in full in a subsequent letter. You might want to summarise it or refer back to a previous letter; that’s fine. Think about what’s going to be clear to the client.”

 

• Fund platform recommended. “Yes, you would need to cover this. It comes under why the advice is suitable. Not only why it is suitable at all to use a platform for that particular client – because that’s not a default position, it has to be relevant to that particular client – but also why that particular platform.”

 

• Alternative products. “We often see suitability reports with all the products that aren’t recommended and why they haven’t been recommended. This is a myth. You don’t need to do that one; you can scrap that whole section.”

 

• Product charges. “Strictly speaking you don’t need to put product charges in a suitability report. You’ll have the product information, which will cover off the charges. But think about it from the client’s perspective. There may be situations where the combination of charges is quite complex. So you might have platform charges, adviser charges, product or fund charges and if there is disclosure in different places in the product information that can be quite difficult for a client to assimilate, particularly if they are quoted in different formats as they often are. So it would be a good practice approach to include a summary of what those charges are. We have seen a simple table used, listing out each of the different areas of charges and totaling those up, and we think that is a good practice approach.”

 

• Cost comparison for replacement business. “We expect to see that in a suitability report. If the cost is higher, that’s fine, so long as there is a good reason for that. The cost of being higher for replacement business would be one of the disadvantages. If the cost is lower, the probability is that it is part of the reason why it’s suitable.”

 

• Reference to documents such as KIIDs and KFDs. “Not strictly speaking required, but as there is a lot of interaction and connection between a suitability report and disclosure, that’s probably a good practice idea.”

 

• Risk profiles of recommended funds. “Yes, that would be essential and what we’d expect to see because it’s part of why they are suitable for this client, matching up against the client’s risk profile.”

Risk profiles

• Taxation of investments (internal impact on the client’s tax position and what needs to be reported to the HMRC). “Some of this may be useful and some of it may not be. In general terms, just the tax side wouldn’t be necessary as that would be covered typically in the product information. However, where there are tax aspects that are a disadvantage to the client, then that’s one of the areas that we need to have covered off in the suitability report. Any tax that is relevant to that particular client, again, that would be a useful thing to cover off.”

 

• Risk warnings. “Yes. There’s a potential disadvantage and you definitely need these. However, think about how you do this. We do tend to see risk warnings that are a page of standard risk warnings, and some of them apply to that client or that investment but some of them don’t. Think about what risk warnings are relevant to the client and make sure you focus on those ones. It’s probably asking too much to make risk warnings personal to the individual client, but do think about making sure they are relevant to that client. Don’t adopt a scattergun approach – if they don’t apply, don’t put them in.”

 

• Importance of reviews and their costs. “It’s up to you as an individual firm whether you provide a personal review or not. It’s not automatically good practice to offer reviews. There will be some clients where a transactional process would be the right thing. There is one scenario where not having reviews would be a potential disadvantage because it has an impact on whether the advice given now is suitable or not and that is where you have a solution that is not self-rebalancing. Let’s say you’ve got a centralised investment proposition of a model portfolio of 10 different funds to meet an asset allocation. This will go out of kilter over time if it’s not reviewed and rebalanced. It is a potential disadvantage of that kind of solution so you will need to flag up the importance of reviews to make sure the portfolio stays aligned to the client’s attitude to risk over time.”

 

• Limited or full advice disclosure and the specific cost of advice. “Again, this should be in your initial disclosure documents; it should be clear to the clients upfront. There are different ways to disclose your services and costs to clients but one of the good practice ways that we talk about is having a letter of engagement or personalised client agreement. So you have your generic initial disclosure document that you provide to the client, but then once you’ve done the FactFind and you know what work you are going to be doing for the client, you set out in a letter of engagement the areas of advice and planning you are going to do for the client and the cost. If you’ve done that so it’s nice and clear to the client upfront, you don’t need to include that in the suitability report. But bear in mind that if you have lots of layers of costs and adviser charging is one of those, then it might be useful to provide a summary table for the client.”

We base our suitability letters on that thinking!

If you are looking for a paraplanner why not contact us below