Centralised Investment Propositions

172 | Centralised Investment Propositions

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Tutors:

  • Graham Finlay, Vice President of Strategic and Technical Sales Team, BMO Asset Management
  • Karl Dines, Head of Business Consultancy, SimplyBiz

Learning outcomes:

  1. The development of the centralised investment proposition and the regulator’s intentions behind this
  2. How to go about putting a CIP together and the main pitfalls to avoid
  3. The importance of having a well-documented process for the firm and its clients

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Hello and welcome to this academia learning unit on centralist investment propositions. Before we get into the content, let's start by having a look at the learning outcomes. They are, the development of the centralist investment proposition and the regulators intentions behind this, how to go about putting a sip together and the main pitfalls to avoid and the importance of having a well documented process for the firm and its clients. And now let's meet our panelists and experts. They are Carl Dynes who is head of business consultancy at simply biz and Graham Finley, vice president of the strategic and technical sales teams at BMO asset management. Well, let's come to you first car. We're talking about centralist investment propositions. Can you start by giving us a good robust working definition of what a centralist investment proposition is. Yeah. The interesting thing is that the regulator doesn't prescribe what a centralist investment proposition should look like. What we're interested in is that firms have a logical process in order to do that. So C. I. P. Is a methodology on how you actually provide good client outcomes using all the tools you've got available for you, such as relevant financial instruments, products and platforms. It's not about who you use and why. It's about how you actually got to that conclusion and the and the methodology you employ in order to do that. Thank you sir. I think key point then is it's it's not a product. It's a way of thinking about how you put portfolios together for clients and and documenting it exactly. I mean the operative word here is methodology. Um and it should be, you should be able to describe in detail within your document exactly how and why you've come to the conclusion that you have taken a certain course of action either for clients, individually, of particular segments of clients. Okay, thank you, grown family. Can you tell us a little bit about when the central investment proposition was first introduced? Um and where does Bmo fit in that C. I. P. World? Well, that's carl just mentioned the F. C. A. Or F. S. A. At the time, I mentioned it in a paper back into in 2012. I think it was the the final guidance paper of of that point and it was about assessing suitability And they had noticed, I think it was really personal at the time, he was kind of the head of that area had noticed that advisory firms were becoming structured or some advisory from becoming structured in what propositions they put out to the marketplace. So, from that paper in 2012, it's kind of evolved into, into a commonly used phrase right across the marketplace as it's developed over that period of time. Bmo, how do we sit in it? Well, we've always trying to be very tentative with products and solutions that we can offer. So things like the lifestyle funds which we launched back in 2007, they were linked with his investment proposition into the client's risk profile. So again, these are, these would help out in clients or the centralist investment proposition over the course of the last number of years, obviously the markets developed hugely and recently can we've, we've introduced um, solutions into the marketplace that give clients the active marketplace proactiv solution, but a passive price point. So trying to come up with these types of solutions that can be a part of that overall centralist investment proposition. Okay, thank you. We'll call given the sips or cRP s have been around for a while. I'm clearly over 9, 10 years, there's been a lot of evolution. Um, what are some of the major challenges or developments would you, would you say that have come about? Oh, um, as Graham said, finalized guidance 1216 was, was was the publication that uh, that the FCFC came up with. And again, it was all about this idea of centralizing. We should go right the way back to that period and indeed we say this now is that as an industry we're very good at doing a very good job for our clients, firms out there, know exactly what they're doing, You know, the market, they know how and why to invest. What will seem to be notoriously bad at as an industry is actually taking that information and get it documented in a way that is clear for people to understand, especially industry professionals and that's one of the major hurdles is to get all this really good information out of advisors heads and getting it down in a logical formats that can easily be followed basically because there's so many moving parts. Now, if you roll forward to where we are today, we've got even more moving parts, which makes it even more complex to get things down in an order, which is easy to understand if you take things such as the emerging retirement strategies, for instance, um, A S G, which is coming to the forefront now, um introducing the introduction of product governance, even though it's always been a thing, um, uh, into C I. P s, you can see how they're becoming more and more complex and indeed more people are therefore looking to formalize this, but there are so many different ways that you can move around, it's difficult to get it in any sort of real order. Thank you. Given that central investment proposition seems to have to do more and more Graham, you touched a little earlier on the point about price, how do you make trade offs between providing all of this richness and complexity that's clearly building. But this constant pressure on price as well. Well, for a product providers side, it's really trying to give that value for money. I think that's what we're always looking for. We're always striving for that and I think one of the big, big drivers of the changes in C I. P. S over the last number of years and underlying investment solution has been driven by price and the FCC have always come out and said they're not a price regulator, but going back to the same time that the C. I. P. Was developed, it was also the time of RDR. So I think what we've seen is a lot of business models and looking at their own price structure and how that's going to continue to be competitive over the years. And one of the, one of the issues with that has always been the underlying cost of the fund. And it will be a point that we touch on later is the fact is that markets have changed so significantly over the last 10 years and the types of products available, I've changed much as well. So that cost is becoming even more highlighted for many, many people. And again, I'm sure it will be a point that touches on it, but it's about the philosophy of the business as well. Where do they think the value for money in the market place might be? Um, so that that that's a real kind of key issue for for people when they're deciding what that centralized investment proposition might actually look like? And carl, you mentioned product regulation a minute or two ago, Could you just unpack that a little bit more detail. How does that dovetail with centralized investment propositions? Yeah, product governance is is has been in the handbook for a very, very long, long time, maybe even probably beginning um and in its purest form, dare I say, it's probably governance is dope in the sense that it could be a box ticking exercise and we don't really want to do that as an industry because if you go down that route then everything seems like a chore and it doesn't have any end result. However, if you take product governance and you put it at the center of the C. I. P, it actually becomes very useful and it drives it forward and it becomes very flexible as well because this three main elements from product governance, which is segmenting your clients, but segmenting based on particular client circumstances rather than how much the worst to affirm all their assets on the management. So it's looking at particular life events, for instance, such as pre and post retirement and segmenting on that basis. The second part is to look at the relevant financial instruments that a firm has to enable them to do their job. And we're looking at the wider picture here. So we're looking at all the relevant financial instruments right away from cash and deposits to multi manager funds. Active passes the FMS NPS is up to and including all the various different sorts of bonds and including products and platforms, although strictly not within the true sense of product governance, it's still a really good methodology in order to sort that out. So, once you sorted out a client bank and you've sorted out everything you've got out there in the big wide world to uh to do your job? The last thing is to then associate the most appropriate relevant financial instruments with the most appropriate segment of the client bank and then do some filtering in order to find best of breed within each of the relevant financial instruments. It then becomes a really logical process in order to sort your client out, sort stuff out there in the world that you can actually use and then finding the best ones. And Greg, given that backdrop as you're out talking to financial advisors, how do you bring all of this together? Is it a question of software and computing power can solve it? Or do you need to put an awful lot more manpower and resources in that? I've seen quite a number of advisers very recently doing it and it has not taken any more manpower than they already have uh at their hands. So most advisors will have some sort of crm system that that will hold it kind of database of their clients and some people have just been looking at it simply um what are the age groups that they have within their client bank? Um And that might be your every 10 years. So your twenties to thirties, thirties and forties and it'll be really interesting to see what types of products they have, What times of assets, types of assets they have. Are they related to other members of their own, of their own client banks. So are they the Children of the baby boomers. And it's really quite essential is that you then start to find out what what are those needs of those, certain elements, where are they on those, that that stages, is it pre retirement, post retirement etcetera. So something that can actually be quite relatively inexpensive thing to do is look back in, analyze on that level and it begins to kind of show what the characteristics are. Obviously you can spend a lot more time and get more people in. But essentially, I think that's a really good starting point for people. I go back to what what carl was saying is that probably kind of came under the under the visual of kind of benefit to came in. So a lot of people probably didn't pay the attention that might it might have been required at that particular time, but it was two years ago and I think before that and going back to 2012 and the conversations and investment houses we were having with advisory firms that time, it was very much a model based on assets under management and I think that's been a real challenge for advisors to take away from move away from that model into something that's based around the kind of client needs the client charas characteristics and that's becoming a fundamental part that we need to look at now. Well I'd like to drill down into that in a bit more detail in a second grand. But before I do I would have come back to this point you're making right at the start that CP is a proposition, not a product. What are the implications of that? Because if I think back over the years, even when some of this first came in, there was a sense that if you had the right kind of multi manager or multi asset fund at its core, pretty much job done. Yeah. Again, we get this now when we do consultancy firms is that you need to look at a wider picture rather than a narrow relevant financial instruments. When we were confirmed as we get them to send through our document their documents to us. And it's pretty common for firms to say, well, I've already got C. I. P. Because I use this particular D. FMR, I use this particular mps. That in a restricted sense isn't the C. I. P. It's actually part of the wider picture. Because what you're doing is you're identifying one particular relevant financial instrument that you have at your disposal, That being the mps or the DFm of choice. There is lots of other options which are open to to clients. When you give you advice process. As I mentioned before, cash, deposit, multi managers, active passes bonds etcetera etcetera. So when firms contours and say yes we've got C. I. P. Because we're using X. Y. Z. We encourage people to look at the wider picture and that's when it becomes a proposition because then looking at all the moving parts of the mechanics of these moving parts and ensuring that you build them all in together. Of course your mps of choice will be a function within that but it's only a small part of a bigger picture. So if I were looking to justify let's say I had one of funds at BMO for for sake of argument balanced fund and I said you know carl it's great how much documentation inside of a four do I need not just to show that the BMO funds the one I want and it's right for me but also how much documentation to show that the others from that great range that's out there from all the other providers weren't the right ones for that for that particular client. This is where the crowd works. This is where product governments comes into its own. And funny enough, whenever we get any more complex questions, we always come back to prod seems to be the answer to sort it out. What we're talking about here is okay then how do we ensure that we've got the most appropriate solution for the client says such as the PM or fund? The starting point is to say this is our client and this is their needs and their wants and they're in this particular segment. We have all these relevant financial instruments out there of which we've got risk created multi manager funds either active or passive. Um, if we've got risk weighted multi manager funds active and passive, it's around about 18.5 1000 of them out there. Then you have filtering process in order to get the 18.5 1000 down to a smaller, more manageable number. And that set of filters is going to be unique to each firm. Now, right at the start of a particular multi manager is going to be in there and depending on the filters that, and I fear uses, they might be there at the end of the might not. And that's where Obama would come in to actually come down to this final at the end and that's where you would actually then select the most appropriate. But it's probably governance again. And how do you make sure call that whatever software you're using? Whatever filters you're using, um, if the regulator or a client came to you and said there's no sort of, even the merest hint of financial interest that, you know, an asset manager somewhere owns a bit of the software that you're using and that's why they're fun dropped out at the bottom. How do you make sure you're whiter than whiter there? Again, it's, it's basically down to ensuring that you're always outward facing rather than inward facing. Um, and you've got your eye firmly on the relationship between you and the client rather than you and the manufacturer. This is the whole point of why RDR came about in the first place, if you're using an Independent too um to assess your your market and then you use independent well thought out, justified due diligence and that's all documented and then within you C I. P. You're asking questions such as how and why are we going down a particular route and then you remove all mention of any particular manufacturer. It becomes this logical, independent process is logical. Independent process is backed up by stuff you can use in order to help you do your job such as research tools. But it's all about demonstrating demonstrating that there is no particular bias either from yourself or from influence from from manufacturers. If I if I can just add a point in there, is that I think what a lot of people say is that they've got research and then do diligence, it's they are distinctly different. So what what you've actually got here is that you'll end up with the research which is all about the the big big part of the marketplace. You'll end up with all the brochures, you'll end up with all the bits of information and it's through your filtering system. You can get down to those 20 companies or 20 fund groups etc, that you'll actually be able to say we have gone out, we've interviewed, we've we've got we've got all the different than granular detail that when you have that in file, you can say we discount to these for particular reasons. We went with these for particular reasons. So there is a real distinct difference between doing that research. Getting all the brochures together, you having those telephone calls and actually the due diligence part, which is really the granular element of the whole process. I think also sometimes the name centralist investment proposition gives that focus on the investment side as well. That investment product is just one part of the whole solution. It's not that this solution, it's got to be everything that sits, sits around that. So I don't want to corals points. We really made Graham. I would absolutely agree with everything you say that. It's all about quantum quote, it's all about looking at the hard facts which software is very good at sorting out. But where people industry there is ideas of looking at the particular philosophy of an investment house, how they manage their investments, you know, so it there is that human element in there as well and that should be written within your Crp documents, you know, where you do the hard research but then you have the due diligence to actually find unit and again, it shouldn't just be on a centralised basis because they're not to come down to how you actually deal with the client and then you would bring in the individual client element into there as well. We're actually right, well I'm going to pick up on that element of client segmentation Graham. There was always this sort of rather stereotyped for you that you divide clients into the sort of rich, meddling and poor or big assets, medium assets and small. Obviously that's not at all a suitable way of doing things. So how many clients segments should you be looking at if you're an adviser, what are some of the key things that, as you talk to advisors? They very sensibly cluster there, client types around? Yeah, I think we're all guilty of looking at that gold, silver, bronze type approach in the years gone by and I'm looking at that now, it doesn't look like something that's giving the client the best outcome. So what you're looking at is you could have just two stages, you could have that pre retirement and that that post retirement element of it, you can you can be as basic as that, But you can also break down that accumulated element of it. You can break down the accumulated element of that as well because in that stage of life, say post retirement is that that individual that might have been the target 60, they want to spend their pension part. They want to do lots of different things By the time they're 70, 80, what they want to do with their, their income might change significantly and the plans that they have that might change significantly. So I think there's gonna be lots and lots of acronyms we're going to see over the course of the next number of years chopping up these different elements of the marketplace. But I think what we've really seen as a difference between that accumulation stage to get to retirement and that post retirement or post working stage which which brings the different challenges for the advisor. Yeah. Just picking the one point graham as well just through experience and working with firms when we push on this idea of segmenting the client's firms usually end up with a situation where they look at the major life event which is retirement. So they do have this pre and the post what tends to happen is we'll have a little bit in the middle as well which is leading up to retirement to maybe five years from the start to think about different investment styles that we safer investments etcetera etcetera and different vehicles. Some firms will then split the post retirement world up as well into uh sort of an emphasis on capital protection and emphasis on income or even an emphasis on on I. H. T. Planning for instance. So you can get these little subsections, one of the most important things within the C. I. P. S. To always however many segments you have have one more. The last segment you should always have within the C. I. P. Is bespoke. In other words a segment where clients don't quite fit into say traditional pre op post retirement world just because of their circumstances, what you don't want to be doing is put them into that segment because then there's an element of shoe hauling in there because there is a particular outcome. If a client is a little bit odd for a little bit different to your normal run of the mill one put them into bespoke which means or better off. You will basically advise on the whole of the market and ensure that you get proper outcomes. So it's just basically demonstrating that you're removing this element of shoehorning from your investment proposition as well. And to just just to be clear from what you're saying. Call a C. I. P. Is something that's cradle to grave. It's not something purely for the accumulation phase and then all bets are off and you can do something very different with your clients age 65- 19. Interesting interesting question that Mark because um the development of centralist retirement propositions has come about from the marketing department of manufacturers basically seen a market which is aimed at a particular segment of a client bank. So you can look at it in two ways you can have a sip in the crp and there's not a problem with that. You can see two bottles into the show up quite often people do that or you can take one bottle into the shower and what I'm talking about there is if you think of a sip as its all encompassing proposition. One of the things you can do for clients is create a retirement proposition or retirement solution or retirement strategy which is in essence to crp. And you just have that within your hip as a set of relevant financial instruments. Now that's going to be aimed at a certain segment of your client bank which is those are leading up to in and out retirement. So this is product governance again where you're looking at your client segments and you're looking at the relevant financial instruments you have at your disposal. As I mentioned right at the beginning the regulator isn't going to prescribe what C. I. P. Should look like. So you could do it that way or alternatively you could keep them separate if you so wish. As long as this is logical process we're all individuals honestly said in the life of brian. So you know everyone can do whatever they want as long as you've got this logical process and you answer the questions how and why? Yeah I mean if I pick up on that then uh I think when I go into advisory offices that is one of the big big questions people do ask is that do I need both What's the difference And sometimes as carl alluded to if they have a segment that is very much in that post retirement stage already then it's all there front and they got all that already better than. So it's an interesting topic and I'm one of the things that we don't want to get away from is that if there's 10,000 advisors out there you might have 10,001 C. I. P. S. Everybody's different. Everybody's business is is different and that should be reflected and everybody being able to offer the services they want. Um Nobody is prescribed to offer any service to anyone. It's about giving the service that you want that meets the needs and the characteristics of the clients that you have that is individual to your business. And many reasons is that because the advisers may have gone for a particular part of the market And it might be that that's where they specialize in and that means that their businesses are 100% different from the chap that's doing advice down the road. So it can be such a big big marketplace in such a diverse marketplace and come from both of you got this really strong sense that this is this is a space that's in constant evolution. So what happens if you're an adviser watching this and it's been a few years since you've gone back over your proposition, you realize on reflection you perhaps got a bit your your service if you like is a bit too pointed towards product and not enough towards proposition and actually it's quite hard to get yourself out of some of those business relationships you're used to them. It's the way the firm works. It's the way the data the data is collected. How do you go about how often should you review products and your sip what can you do to extricate yourself if you think and I really need to update this mm. Um this all came about from thematic produced 61 from the regulator when they were looking to create a culture of challenge within the firm. It was specifically aimed at how firms with the research and due diligence on platforms but it's equally as valid for the investment solutions as well. Um How often should you review your C. I. P. It's not prescribed. Um So you know the rule of thumb for assessing the suitability of advice from them if it too is every 12 months. So the suggestion maybe to ensure that your C. I. P. S. Looked at least every 12 months as well. Um To coincide with that in order to make sure it's still fit for purpose To give you an example the framework that we use were up to version 26 of 28 of it now. Um So we've had 28 different iterations of our C. I. P. As things have been developed. 29 is going to be coming around the corner very soon when we hear more about what's happening with the A. S. G. Market for instance. So it is constantly evolving. Um definitely make sure that you look at it a regular period. I would imagine one year would be a good way of doing it as far as what happens with the particular investment propositions that you use within in that the relevant financial instruments. Again, that's a moving feast. Um if you look at from a high level, you may be looking at the DFS or Mps is now maybe sometime in the future, that model doesn't work for you and you want to move towards more multi manager funds for instance or whatever type of solution and that should be within the mix all the time. Is this idea of let's not rest on our laurels, let's not assume that we're always going to do it this way. Let's have this cultural challenge in order to extricate yourself from that, it should be a logical process. Say for instance, you decided that there was one particular solution that you weren't going to use anymore and you're moving over to another. One logic suggests that over a period of one year then all your clients would be gradually moved away from one solution and into another. So it's not a case of saying we're not using it anymore, we're going to start using this. It's a case of doing that gradually at each review with the client if you so wish to do it on that basis because as I go back to what I said before is there is no right to wrong, there's just a logical progression which is obviously the best interests of the crimes. Thank you. And great, we're beginning to run out of time, but I want to come back on something you were saying a little earlier, which is, you know, product providers aren't just providers of products. So what else can they provide to support advisors? Um, how do you make sure that whatever those provisions are they are if you like product agnostic. So you're not perhaps building up any undue influence that you shouldn't have? Yeah, I mean, what we do, uh, you know, is that we actually have a point part of the business called Advisor edge and that is product agnostic. We're we don't go out and speak to anybody about the products at that time. What we're trying to do is kind of give an overview about what's happening in kind of regulatory side, what's happening in the financial planning side and that can help support that overall business they have. We obviously do sell funds and and we hope that there will be that will help people become more aware of what BMO are and what we mean. But we're just trying to add a little value into into that marketplace and, and I think that the advisory marketplaces really appreciative of that because they are dealing with so many different moving parts and it must be a huge challenge to keep abreast of all the moving parts and, and as businesses, we've got a responsibility to make sure that they are aware of what's going on and use our size and expertise to allow that to happen. So we really want to be a partner of the firms that we work with and be able to support them in what they do and and the centralized investment proposition part of that is a big, big part for that philosophy of the business. It's about what they, what they want to achieve as a business, what they want to put forward as a philosophy to that to their clients and hopefully we can help and build on that. Well, we have to leave it there, we are out of time. So Carl Dines and grand finale, Thank you both very much indeed for joining us and thank you for watching. Do stay with us a couple of things. Our next piece around C I P S is going to be focused on E S G. So do keep an eye out for that. It's going to be on academia very soon. And also underneath the player, we have got little booklet that carl put together a while ago and that that goes through some of the issues that we discussed in more detail. So do keep an eye out for that from all of us here. Goodbye for now the development of the centralized investment proposition and the regulators intentions behind this. How to go about putting a sip together and the main pitfalls to avoid and the importance of having a well documented process for the firm and its clients? No. Yeah.