The regulator’s third and final cycle of the thematic review into firms’ implementation of the Retail Distribution Review (RDR), found ongoing advice was an important element in clients seeking advice.
It said it had found only isolated examples of firms receiving an ongoing adviser charge and not providing a genuine service in return.
However, some firms needed to improve on some aspects of their ongoing service, such as charges disclosure, it added.
To aid firms, the FCA outlined in detail the good and bad designs of an ongoing advice service, how charges should be disclosed, how the service should be delivered and how a firm’s resources should be planned.
Designing an ongoing service
The regulator expects firms’ ongoing service to be a “genuine service”, and its scope to be properly explained to clients.
Firms should also consider whether the total cost of the service is “likely to be of value” to the client, the FCA said.
It said for most firms the core component of their service was a regular review of clients’ investments against their needs and circumstances.
But some firms were less able to explain how the design of their post-RDR ongoing service proposition was linked to the needs of their customers, it added.
Good practice: using client analysis to design and review the ongoing service model
The FCA found a firm which analysed its existing client base to inform its ongoing service model. It also consulted the clients on the design of the model and tested a preliminary version on a sample group.
The firm introduced two levels of service with tiered ongoing charges to meet the needs of the two client groups that it deemed would benefit from a form of ongoing service, and identified those who would not benefit.
For instance, the firm did not think it was appropriate to provide an ongoing service linked to personal recommendations for an annuity, the FCA said.
The firm then used its management information and client feedback to regularly review its ongoing service proposition, making changes where it felt it would improve the services to clients.
Good practice: providing clear information on the customer profile for ongoing service levels and monitoring how ongoing services were used in practice
One firm that impressed the FCA offered three levels of ongoing service distinguished by the type of investment solution and the level of interaction with its advisers.
The firm’s client-facing disclosure material was clear about the benefits and target market of each level.
The firm also captured the number of clients using each ongoing service level and its senior management monitored the distribution of clients across levels.
The firm reviewed arrangements on a regular basis and moved clients where appropriate.
Good practice: redesigning ongoing service in light of client experiences
One firm the FCA looked at had drawn up a “long list of the potential features” when designing its ongoing service.
But after the ongoing service had been in place a number of months, the firm reviewed how it was being delivered.
It redesigned the structure and charges according to the needs of the clients, concentrating on the “two or three main elements that clients found most valuable” and focused on delivering these to a high standard, the FCA said.
Poor practice: charging some clients an ongoing fee for administrative duties linked to the initial advice and general regulatory requirements
A firm, which did not meet the FCA’s requirements, charged those clients who had not signed up to the premium ongoing service for a retainer service that consisted of administrative services and a vague commitment to be available to answer minor client queries.
“We did not think this represented a genuine ongoing service,” the FCA said.
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Charging for an ongoing service
The FCA found the majority of firms charged for the cost of the ongoing service as a percentage of clients’ investable assets, based on the nature of the service provided, which allowed them to carry it out profitably.
Firms were able to articulate when it was not in the clients’ interest to charge for an ongoing service, however the consideration was not always documented in their advice processes and linked controls, the FCA said.
Good practice: ensuring the firm has adequate resources to deliver ongoing advice
A firm, which decided to redesign its ongoing service proposition in the run up to the RDR, identified the key factors it felt would contribute to the quality
of the new service: number of clients advisers have the capacity to service; wider resources needed; and wider infrastructure necessary.
It included ensuring its existing back-office system had the functionality to provide diary management and case management.
The firm used the information to identify how much it cost to deliver its ongoing service for different types of client. It used this analysis to help inform the pricing model for the service.
Disclosing an ongoing service
The format in which firms disclosed their ongoing charges varied considerably, the FCA said, with some firms being very clear about which advisory services were included within the ongoing adviser charge and some firms less so.
It said it was worried about risks to clients as well as firms in understanding the level of service agreed on.
Good practice: providing clear disclosure of ongoing charges to clients
A good practice client fee agreement provided a detailed breakdown of the features included within the ongoing service, the frequency with which they would
take place and whether they were instigated proactively or following a prompt from the client.
It also described the potential outcomes that could arise from an ongoing review with the client and whether they were included within the ongoing adviser charge or not. Where they were not, there was a clear breakdown of the costs of these additional services displayed in cash terms.
Poor practice: not providing clear information on the delivery of an ongoing service
A poorly behaving firm offered three levels of service to its clients, mainly based on the frequency of aspects of the client service.
The literature the firm used to describe its ongoing services did not provide clients with clear information on how often the features of each service level would be delivered and who was responsible for triggering their delivery.
The FCA said it was concerned about a mis-match between clients’ expectations of the service and the delivery, as well as a commercial impact on the firm.
It was also worried the firm would not be able to deliver the service in practice due to the lack of detail.
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Delivering an ongoing service
The FCA said it expected firms to deliver ongoing advice in practice when they have committed to it.
Firms should also have appropriate systems and controls in place to ensure good client outcomes, it said.
It had looked at the delivery of ongoing advice in a sample of 12 firms.
Key drivers for good practice identified by firms were:
- Diary and resource planning;
- Formal review processes;
- Management information.
Good practice diary and resource planning: using a diary system to drive an ongoing review process
A firm used a diary system to help deliver its ongoing review process, including identifying clients due a review; highlighting who would carry it out; scheduling preparatory tasks; and prompting the production of letters notifying clients that a review was due.
Good practice formal review process: using the back-office system to track and record the output from client reviews
A good firm’s back-office system allowed it to track the progress of the client review process through its different stages and keep a record of the outcome.
The system included file notes documenting client meetings/telephone calls, as well as client letters.
It also captured client authorisation to proceed with recommended amendments and rebalancing of their investments.
Good practice formal review process: asking clients to supply updated information ahead of the review meeting
The FCA wants firms to ensure client reviews are as productive as possible by asking clients to undertake some preparatory work.
One firm asked clients to complete and return a ‘fact-find update’ ahead of the meeting and to indicate any specific areas that they wanted to discuss.
“This approach meant the adviser was aware of any significant changes to the client’s circumstances that could impact upon their preparation for, and delivery of, the review,” the FCA said.
Good practice monitoring and management information: using management information to improve ongoing service
A firm, which impressed the FCA, was able to use its management information to identify that its new ongoing review service was taking longer to deliver than anticipated.
As a result, it detected it did not have enough resource to meet the commitments it had made to the existing group of clients who had agreed to the service and was able to recruit resources to make up the shortfall.