A PROD in the right direction?
We are fast approaching the third anniversary of the introduction of MiFID II this coming January, which is probably best known within the industry for introducing legislation to make costs and charges much more transparent. While the spotlight has very much shone on this area over the last few years, the FCA is shifting its focus to the legislation surrounding its Product Intervention and Product Governance sourcebook, more commonly known as PROD.
The upshot of the PROD sourcebook is that a product recommended by an adviser must meet the need of one or more identifiable target markets by appropriate distribution channels. The overarching aim here is that two similar clients should be able to see two different advisers within the same advice firm, and leave with similar (and, of course, suitable) outcomes.
Despite a full review and segmentation of an advice firms’ client bank now being a regulatory requirement, many have still not carried out the appropriate work needed to satisfy the FCA’s requirements. Segmenting your client bank can be trickier than it first seems especially as, unlike the legislation around costs and charges stating specifically what is required, the FCA have given no explicit rules or guidelines stating how this must be carried out. Given the huge range of variables between firms and clients, this shouldn’t come as any great surprise.
Here at Apricity, and across the whole of The Verve Group, we are beginning to see a rapid rise in enquiries from firms requesting assistance with their requirements for PROD. While previously it may have been approached as a retro-fit tick-box task to get out of the way, many firms have now used the Covid-crisis to fully review their business and taken the opportunity to ensure that both their service and client proposition are suitable, profitable and futureproofed. Carrying out a formal analysis can actually serve as a valuable exercise to begin streamlining the services you offer to your current clients, and to help you target the clients you actually enjoy doing business with.
How can it work in practice?
Let’s say, for example, you have a Trust client with £300,000 across three onshore investment bonds through three separate providers, three different fund ranges with no overlap, three charging structures, each paying out regular capital withdrawals to beneficiaries and a 10-year periodic IHT liability to manage. The Trustees meet with you twice a year in person to discuss the management of the plans and have the funds rebalanced following each meeting.
You also have a client 25 years away from retiring, also with £300,000 worth of assets. They have £100,000 in an ISA, £80,000 of unwrapped investments and £120,000 in a SIPP; all on the same platform and invested through a Managed Portfolio Service. The client is happy logging into the platform to monitor their plans and receiving an annual review report via e-mail.
Your firm has a single-tier charge where clients are charged 1.00% of their assets under your management, meaning you get £3,000 from each of them. Overall, you might view £6,000 between them as a fair price for your business despite the work imbalance to keep both clients on your books – swings and roundabouts and all that.
However, the FCA (and probably the clients) are likely to take an entirely different view; this is exactly what they are keen to address with regards ongoing adviser servicing, as there is clearly no differentiation in costs to the client for significantly different levels of service. They will inevitably start asking questions around what exactly the young client is getting for their money as opposed to the amount of work and wealth of attention being showered on the trust clients for the same cost.
The same works in reverse, many advisers are now dealing with clients in drawdown, have added in cashflow management, twice-annual meetings and far more services than they gave in accumulation, but still charge the client the same as they did previously. The process is really about identifying your client segments, building a service proposition that is right for both them and you and ensuring that the recommended solutions are suitable for each segment.
Have some flex
It isn’t necessary to be overly rigid and work only on the basis of the segments and services provided to them; it is still possible and, indeed, preferable, to create categories, that can be narrow down your target clients, to the target products, and tailor to suit them. You should also have the flexibility to deal with outliers, those who don’t fall into a particular category, and will need some individual product and service analysis doing.
With the increase of focus in this area recently, we have enhanced our offering via our DNA service. With the breadth and depth of knowledge of the teams at The Verve Group, we have come up with a compelling offering where we are able to assist with not only your PROD requirements, but also with your Platform Due Diligence and Centralised Investment Proposition. Handily, the DNA service is also modular, meaning you can select one, two or all elements depending on your needs.