Four months on from the Consumer Duty’s implementation deadline, most adviser firms as ‘manufacturers’ of their service will be bedding in their plans.
Of course, the Consumer Duty not only highlights the role of the ‘manufacturer’ but of the ‘distributor’ and the different responsibilities of each. While there are considerable duties on a firm if it’s a distributor of others’ products and services, the burden at least doubles if it’s also a manufacturer.
Post deadline, and while bedding in plans, the breathing space gives firms a chance to review each part of their advice service to determine how they can keep compliant with the rules for the long term.
A good way to do this is to break down the service into the financial planning and the investment proposition parts and, for each, review whether the firm is a manufacturer or a distributor. This is an important process not least because non-compliance with the Consumer Duty brings significant risk for firms, with senior managers held personally accountable.
All adviser firms will be the manufacturer of the financial planning part. However, the investment proposition part may be a different story. Some firms will outsource the portfolio construction while others will continue to provide that service in-house, whether on a discretionary basis or not.
Whatever way firms choose to manage the investment proposition as part of their advice service, this is an area that needs special attention under the Consumer Duty rules.
Advisers, investment propositions and good outcomes
If an adviser firm offers a Model Portfolio Solution to clients - a cost-effective, investment choice when a full discretionary managed service may not be appropriate - it must carefully consider its responsibilities as a ‘manufacturer’ of that portfolio. If a firm is building portfolios itself, or has any influence over the asset allocation, tactical asset allocation, fund selection and rebalancing, then it is both the manufacturer and the ‘distributor’.
Given the amount of time and investment expertise needed to build a Model Portfolio Solution in-house, choosing to outsource this service to a discretionary manager is popular. A recent NextWealth survey finds that 52% of adviser firms choose to outsource their portfolio solutions to a discretionary manager.
And under the Consumer Duty, if an adviser firm does outsource the management of its Model Portfolio Solutions to a discretionary manager, it’s the ‘distributor’.
The Consumer Duty and the distributor role
For adviser firms, the long list of ‘distributor’ duties under the rules include:
- taking account of the outcome of the manufacturer’s value assessment
- undertaking a value assessment on the total cost of recommending the portfolio solution and the manufacturing cost of the advice process.
- ensuring the portfolio solution’s target market is aligned to the clients the adviser places with it
- considering whether the portfolio solution is suitable and meets the needs of vulnerable clients
- selecting a manufacturer that's aligned to a firm’s distribution strategy
- sharing information with the manufacturer where clients’ outcomes are not achieved.
Meanwhile, where adviser firms are building and managing their own Model Portfolio Solutions, then they’re defined as the ‘manufacturer’ as the solutions are part of their advice service. This holds true even when, as part of the investment process, firms are working with third party research tools and partners. In this scenario, it’s likely a firm would be classed as either a manufacturer choosing to make use of such tools or a co-manufacturer, which comes with all the same responsibilities as a manufacturer.
The Consumer Duty and the manufacturer role
For ‘manufacturers’, there’s an exhaustive list of requirements under the Consumer Duty, including the need to identify a target market that’s aligned with the distribution strategy. In other words, clients whose needs, characteristics and objectives are compatible with the Model Portfolio Solution – and this requires testing to ensure it meets these criteria.
In addition, the manufacturer should:
- regularly review the Model Portfolio Solution to ensure it’s still fit for purpose
- take all reasonable steps to ensure it’s only being distributed to the target market; this will include accounting for the additional needs of vulnerable clients
- set the price of the Model Portfolio Solution and conduct a full value assessment for this part of the service
- create a distribution strategy that allows distributors, likely to be the advisers within an advice firm, to understand how the Model Portfolio Solution fits the target market
- ensure all communication is designed so a client can understand; and offer appropriate client support.
From this list alone, it’s clear why compliance with the Consumer Duty is far more onerous for manufacturers than it is for distributors.
Reduce risk and free up time to spend with clients
Whether an adviser firm chooses to be a manufacturer or a distributor, or indeed both, there are no right or wrong answers.
The choice depends partly on a firm’s scale and its resource, and partly on how core the investment proposition part is to the advice service.
What’s clear, however, is how firms’ obligations under the Consumer Duty is accelerating thinking about outsourcing the management of Model Portfolio Solutions if they’re offered as part of the advice service. While advisers have a responsibility to their clients under the rules, working with a third-party Managed Portfolio Service manufacturer can not only reduce risk but free up their time to spend with clients.
Building a productive outsourcing partnership
When choosing a provider of a Managed Portfolio Service, advisers need to do their due diligence and consider whether it’s a good fit for their business and their clients: Can the provider offer support on target market and value assessments, as well as produce material and literature in client-friendly language?
Providers of a Managed Portfolio Service must also deliver ongoing investment committee meetings and regular, perhaps quarterly, due diligence support – and advisers must continually review their chosen provider to ensure it is meeting its obligations.
The Consumer Duty offers clients benefits in terms of transparency and peace of mind. For adviser firms, the rules give them the opportunity to review and choose the right investment proposition for their clients.
Establishing the right Managed Portfolio Service partnership with a provider can not only help to ensure good outcomes for both clients and an adviser business but can help clients to have a better understanding of the portfolio solution they’re investing in, and whether it provides value. With the Consumer Duty here to stay, this has never been more important.
abrdn’s Managed Portfolio Service 'aPSL' offers a range of portfolio strategies for adviser firms, with a choice of management styles and risk levels to meet clients’ investment needs. To find out more, go here.
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The value of investments can go down as well as up and your clients could get back less than they paid in
The views expressed in this blog should not be regarded as financial advice.