In recent News & Views, I have been looking at how investment portfolios are structured and how they both manage and vary risk to meet individual objectives. The Fund Manager has a specific task to deliver the anticipated returns within an agreed risk profile and timeline but how do we get to the point where those instructions can be given? To answer that, I need to consider the role that we play as Financial Advisers.
Although the Financial Conduct Authority (FCA) are there as our Regulator with a large focus on delivering good outcomes for clients in a fair and professional way, they also emphasise to us that we need to treat ourselves fairly as well as our clients. Historically, Financial Advisers have tended to undervalue themselves and the services they provide - the FCA consider this to be a potential problem and part of the reporting we must undertake to them looks at our fee levels, margins, mix of business and sources of income. There is also a regular review of our capital adequacy, as there are minimum requirements to be maintained which are determined both by the levels of business we undertake and the different types of advice we provide.
They are also concerned that we avoid “cross subsidising” any services so that we ensure that we fulfil the Regulator’s “Treating Customers Fairly” requirements. All of this is background to how we have to operate, before we begin the process of providing financial advice.
The whole process begins with being able to demonstrate that we fulfil the KYC standards – Know Your Client, to a sufficient degree to be able to provide relevant advice. We are categorised as Independent Financial Advisers, which from the FCA’s perspective, means we have access to and must consider whole of market solutions for our clients. This differs from other types of Advisers who are restricted to a narrow range of product providers and /or solutions. Being fully independent brings with it higher levels of operation inasmuch that we cannot simply pay lip service to having access to the whole market, but must have systems in place to be able to demonstrate how we undertake our research and maintain an ongoing review of the advice we give, to ensure that it remains relevant and that it is the best solution for clients.
In addition to having the financial resources and systems in place, each individual Adviser has an obligation to maintain minimum levels of CPD – Continuing Professional Development. This has a base level of 35 hours per year plus an additional 15 hours relevant to the Defined Benefit pension advice we provide. We also must have an ongoing process to fulfil our obligations to ensure our standards are maintained. This is achieved by a monthly ”competent Adviser” review which is undertaken by an independent third party firm with us demonstrating that we meet our KPIs – Key Performance Indicators.
Gathering relevant information (KYC) I liken to painting a picture. We often start with an outline sketch and then need to “add the colour” to get a complete and clear picture to enable the advice process to begin.
The colouring in, includes understanding aims and objectives, preferences and sensitivities, the resources available and considering all the potential “what if” scenarios that might impact the advice. This could include changes in circumstance or family matters or could be outside influences such as tax or legislation changes and future investment performance.
Understanding the complete picture then enables us to provide relevant advice and our ongoing reviews enable us to ensure the advice remains relevant and fit for purpose. This in turn enables us to determine what instructions should be given to the Fund Managers for them to complete their role.
As we know, we live in an ever changing world, and that is very true when it comes to investments and financial planning. We make assumptions at outset, knowing for certain that things will change and not work out exactly as anticipated – hence the need for review.
When we structure our advice, we also need to take into account tax considerations, to make sure no more tax than is necessary is incurred, whilst remining safely within the bounds of legitimate tax planning. We also need to consider legal aspects and on occasions, it will be necessary to work alongside other professionals, particularly when it comes to Estate or Succession planning, looking at appropriate Wills and sometimes the use of Trusts to fulfil objectives.
Behind the scenes, we are monitoring all these factors, including regular review meetings with the Fund Managers who have been appointed, not to try to tell them how to do their job, but to ensure they stay on track with the stated objectives, to understand their approach and views on markets and opportunities as they arise, with the overall objective of ensuring that their solution remains relevant for individual clients. These are all the responsibilities we take onboard and often forget to tell our clients that we are doing this for them.
Industry research demonstrates that the services of an Independent Financial Adviser, can and often do make a difference of as much as 2% - 3% per year in net value terms. This is not an additional investment return, but rather the combined effects of maximising tax efficiency, appropriate investment structures and suitability.
As you are probably aware, the US opened their borders to overseas travellers from the UK and Schengen area countries with effect from 8th November, which has resulted in a huge increase in passenger numbers. On Monday, we saw video footage of two planes taking off from Heathrow, both bound for JFK in New York – one was a BA flight and the other Virgin Atlantic. They used both runways and took off at exactly the same time, with allegedly “friendly competition” between the pilots as to who would make it to JFK first – I don’t actually know who made it first, but the sense of normality that this generated was a relief to many with pent up travel hunger.
As you know, I am currently in the US, having first spent 2 weeks in Canada, and the difference between the 2 countries, when it comes to Covid management are huge. In Canada, we had to show proof of vaccination at every café or restaurant we wanted to use and inside everywhere, face masks are a requirement. In the US by contrast, not once have we been asked to prove our vaccination status and the wearing of face masks, is an individual choice and whilst some establishments have a recommendation to social distance and wear masks, many people here in Florida do not seem to do so!
I know we have to learn to live with Covid rather than in fear of it, but the almost total disregard for caution is just a bit concerning.
We are now down to the last few days of our trip, and I am pleased that we went ahead. More paperwork along the way has been the main experience, but I am pleased to say that Chris has not lost her appetite for retail therapy – I just hope we can get it all in the suitcases for our return!
As always, stay safe.
Best wishes. From all at RAFP