This arrives in an email from my friend Per Andelius. It refers to the FCA thematic review that can be found here. It’s a brilliantly written article and if anyone knows its source, please send it me, as I would like to have it credited , linked to its original publication and (if necessary) replaced by my own article.
It is truly shocking to see such shoddy standards in an area of advice where I thought the IFAs had “nailed it”. I have read the FCA report and am genuinely gob-smacked at what I read.
Around six in ten customers of UK wealth managers and private banks are receiving unsuitable advice, the UK financial regulator has said, in a scathing report that comes after it spent years trying to clean up the financial advice industry.
In a thematic review of the UK’s £600bn wealth management industry, the Financial Conduct Authority reviewed 150 customer files sampled from four unnamed wealth managers. It reported that 23 per cent showed a “high risk” of the client having received advice that was not relevant to them, and a further 37 per cent of the files indicated that the wealth manager’s advice was “unclear”.
The FCA said this meant that customers’ portfolios — for which many investors pay their advisers a substantial hourly fee to put together — were often unsuitable.
“One firm had elderly customers, including one over 90 years old, who were documented as having a medium risk appetite and a 20-year investment horizon,” the FCA report said.
The report found that another firm “appeared to be adjusting its clients’ documented risk appetites to meet the risk profile of their existing investment portfolios”, and that “many” firms “had failed to demonstrate from the information on file whether they had considered a customer’s capacity for loss.”
“We are concerned that some [wealth managers] do not appear to have heeded the messages we have put out in recent years, and taken steps to identify and correct problems we’ve previously identified,” said Megan Butler, FCA director of supervision, investment and specialists.
The FCA has written to all of the firms in question, and expects all wealth management companies to consider whether these concerns are reflected within their own organisations.
The reasons for failure ranged from advisers failing to update customers’ information often enough, to investment managers simply not doing their jobs properly.
Problems identified by the FCA included “investment managers using a risk categorisation methodology that conflicted with the firm’s own customer risk profiling,” as well as “investment allocations being made that did not accord with the customer’s expectations and/or match the customer’s attitude to risk.”
The FCA also found examples of “no clear rationale recorded for investment allocations”, and “no evidence on discretionary and managed advisory customer files to explain the lack of diversification within the portfolios”.
The regulator added: “We regard these failings as significant due to the high potential for unsuitability and the potential impact this could have on customers.”
On the plus side, the FCA noted that the proportion of cases of unsuitable or unclear advice it had found had declined since it last conducted the survey in 2010.
New rules were introduced in the UK last year that aimed to make financial advice clearer and more suitable. Under the Retail Distribution Review, advisers were forced to charge their clients upfront fees for their services, instead of earning their living by offering “free” advice while being funded by sales commission from asset management houses.
But the FCA’s report found that the new charging regime has created a new layer of opacity in communications between wealth managers and their clients, with firms in many cases obscuring the true costs of their services.
A main area of concern for the FCA was firms’ reporting of the charges they levied on customers for transactions made on their behalf. “Our review identified issues in this area across a number of firms,” the regulator stated.
“Numerous transaction charges were detailed individually within the acquisitions and disposals section of the periodic report, but were not aggregated and stated as a total figure. As a result, the total amount of fees and charges did not appear clear.”
Robbie Constance, a partner at solicitors’ firm RPC, said the wealth management industry should view the report as “clearly a final warning from the FCA”.
He explained: “The FCA’s thematic review report published today expresses concern about some wealth management firms who are still not getting suitability right despite five years of regulatory communications.
“There is always room for improvement, but don’t assume the entire industry is underperforming and write it off, as that would be bad for business and bad for clients,” said John Barrass, deputy chief executive of the Wealth Management Association.
“We are very keen to encourage the correct behaviour and the respect for each client. It is not in a firm’s long-term interest to behave in a way the clients do not like.”