Why should you have a TCF framework?

A TCF framework provides a useful structure for advisers to navigate RDR choices, writes David Norman of TCF Investments.

The growth of fee-based advice and the emergence of ‘new model advisers’ has been supported by new wrap platforms and supermarkets that offer almost unlimited access to funds, trusts, equities, ETFs and portfolio services. This will be accelerated by the FSA’s RDR, which will require fee-based advice for all investment product sales from the end of 2012.

Wider investment choice, improved services to clients and apparently clear pricing are great for new clients. But what about clients stuck in old-fashioned, inflexible plans with restricted investment choice?

How do advisers tackle Treating Customers Fairly (TCF) when transferring clients? Can previous clients in different plans continue with different product and risk profiles? Is poor service or lack of investment choice enough reason to move them? If advisers are running old and new clients on different platforms, does this require different charging structures?

TCF outcomes

A TCF outcome framework provides a useful framework to allow advisers to navigate these choices. For example, outcome five requires that: consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect. So switching funds to a more expensive platform in an attempt to get better performance will take some explaining and  require a clear, well-documented client conversation). In terms of regulatory guidance, the FSA published a discussion paper on platforms in 2007. A feedback statement was issued in March 2008 highlighting three areas of concern:

• Platforms can offer a layer of complexity and cost for clients;
• Conflicts may arise where the use of platforms is not in the client’s best interest;
• Advisers must be competent to advise on the investment services they offer via platforms.

It is also worth reflecting on the outcomes of the FSA review of pension transfers in 2008. The standards required on pension transfers will be little different for any other transfer. This review found that: ‘One-quarter of firms giving advice were assessed as giving unsuitable advice in a third or more of cases sampled.’ Of these cases, 79% had an unjustified increase in costs, while 40% of firms recommended unsuitable funds based on attitude to risk or personal circumstances alone.

Cost comparison is one of the key determinants of compliance with outcome three: consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.

Critical here is a full and complete cost comparison: the adviser will need to demonstrate the total platform, advice and product cost compared with a simple product (not on a platform). A simple RIY table showing existing total costs (TERs not just AMC) compared with potential new arrangements would seem good practice, as demonstrated in the hypothetical example in the box at the top of the page. There are some clear areas to be alert to:

• Fixed platform fees will have a disproportionate impact on smaller fund values;
• An adviser moving a client for consolidation benefits must be able to clearly demonstrate these benefits – any increase in cost is unlikely to be TCF;
• Loss of existing contractual benefits or impact of exit costs need to be explained to the client.

Outcome four states that: where consumers receive advice, the advice is suitable and takes account of their circumstances. The FSA has flagged concerns about the slavish use of attitude to risk (ATR) software without engaging in a discussion with the client. It is clear that ATR will drive the majority of asset allocation, but trying to shoe horn every client into a narrow set of default portfolios is likely to be inappropriate.

However, it would be entirely reasonable for a medium-risk client (as modelled by software) to adopt a more cautious portfolio if that was discussed with the client – perhaps a potential for early retirement and thus a shorter time horizon. Equally, a client needing to achieve a higher growth rate might take a higher risk portfolio once the impacts and options were explained. The FSA provides a one-page prompt for advisers when assessing and advising on attitude to risk:
www.fsa.gov.uk/smallfirms/resources/factsheets/pdfs/ATR_prompt.pdf

It is clear that an over-simplified adviser process with a narrow pre-determined set of outcomes will not achieve the TCF outcomes. A core process but with individual client flexibility is a better solution: a mix and match set of portfolios might be more appropriate.

The FSA will expect advisers to conduct ongoing due diligence on platform providers (as it would have done historically with product providers and portfolio managers). There are already about 20 platforms and it is rumoured that at least another four are on the way; a documented and regular review process would seem mandatory.

One issue is that of re-registration. Outcome six requires that: consumers do not face unreasonable post-sale barriers imposed by firms to change product. Failing to disclose or to take into account the lack of, or costs of re-registration may cause problems, but hopefully these will soon be consigned to history.

A word of caution about products, or portfolio management services, that contain ‘non-traditional investments’ such as traded life policies and hedge funds: the FSA will take a dim view of advisers recommending these without having appropriate adviser training and competence and customers not being fully aware of the risks. An investment committee with sufficient expertise to monitor these is part of the solution, but no substitute for proven adviser competence.

Final destination

Will this extra complexity increase pressure to move to restricted advice? Will the extra investment drive more passive product? Perhaps. What is clear, and has always been the case, is what is good for the firm must first be good for the customer. TCF outcome one requires: consumers can be confident they are dealing with firms where the fair treatment of customers is central to the corporate culture.