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Delivering value in uncertain times

Published  31 July 2023
   45 min CPD

Join Ryan Medlock, Senior Investment Development Manager as he looks at how to articulate and evidence the value aspect of Consumer Duty, attributed to good customer outcomes.

CPD learning outcomes - 45 minutes

  • Have a better understanding of how to demonstrate value to your clients
  • Better identify some of the main implications of the Consumer Duty for the advice community
  • Develop a greater awareness of the FCAs intended purpose of the consumer Duty and it’s tangible link to the sustainable finance agenda

What’s covered

  • Deliver value in volatile markets
  • Consumer Duty and the suitable finance regulatory agenda
  • How the products and services outcome forms the building blocks for demonstrating value
  • Implications of the price and value outcome

Hello, everyone. My name is Ryan Medlock, and I'm Senior Investment Development Manager, here at Royal London, and welcome to Delivering Value in Uncertain Times.

And I think that's quite an apt title to explain where we are right now, given the ongoing cost of living crisis, given the heightened market volatility that we've experienced over the last 18 months and also the rate of regulatory change, which has obviously been spearheaded by the consumer duty and its focus on be more proactive in the pursuit of good customer outcomes.

And I think if I was a financial adviser right now, I might be starting to feel a little annoyed about all of this noise from across the industry about this impending need to comply with the consumer duty.

Because there's no point me sitting here today and telling you all to go away and put your clients front and centre of your business, because that is clearly preaching to the converted.

But I do think there is a broader challenge in how we go about evidencing that clients are front and centre of our businesses.

And I think in that respect, the consumer duty then becomes more around the transparency of good decision making, rather than the need to implement lots of new, additional processes.

So in regards to today’s session, what I really want to focus on is how we can go about articulating and documenting that value piece attributed to good customer outcomes. 

So, with that in mind, there are three learning objectives that I'm going to be covering in this session. They are, we're going to be looking to have a better understanding of how to demonstrate value to your clients.

We're going to be better identifying some of the main implications of the consumer duty for the advice community.

And we're also gonna look to develop a greater awareness of the regulators intended purpose of the consumer duty, and its tangible link to the sustainable finance agenda. 

Now, that roughly translates into an agenda of four distinct sections.

Now, the first one, we're gonna have a brief look at, the macro environment before, turning our attention to what the regulator has been saying about the consumer duty and the sustainable finance agenda. We're then gonna look at two of the four outcomes on the consumer duty.

So, the products and services outcome, which, as it says that, you know, I think, is all about getting those building blocks in place, in order to demonstrate value, and then the price and value outcome.

And I think that has proven to be one of the most challenging aspects of the duty. So, we're gonna look at some of the main implications for the advice community there.

Now, we have to start presentation with an investment chart, there's no other way, is there. So, what we're showing on this chart, Well, this is going back to the beginning of 2022. There are three lines on this chart. So, the Orange line is the FTSE all share.

The purple line is the benchmark for the Royal London's Multi-Asset Solutions, and that's really in there as, you know, a proxy for a well-diversified, balanced investment strategy, if you like, I think quite clearly see the impact of certain market events over the last 18 months and the impact that it's had on investments. You know, if we go back to the Q1 last year, we can see the impacts of the initial Russian invasion of Ukraine. We can see that the political turmoil in the UK of last summer, that was obviously a big focal point. There was the mini budget, which was announced at the end of Q freed up, raft of unfunded tax cut measures. We can see the banking wobble and the first quarter of this year. And, you know, I think this makes for a very, very uncertain environment and I think it reflects that we have now moved into this new phase of the business cycle which is being coined spikeflation.

So, periodic spikes and inflation, ranging from a number of structural drivers from geopolitical tension, through to government fiscal policy intervention.

The top line, obviously, I think we all know what this is going to be. This is headline CPI. We can see that this has really been ramping up since Q1 of last year.

It dropped slightly in Q1 of this year before picking back up again, and, you know, I think when we look at this environment now, I think one of the main questions I will ask all of you right now, and it's something that, as a theme I'm going to return to throughout this session, is: how robust are your products, your services, and your processes, to contend with a particular environment like this?

And how on Earth, do you go about weaving the impacts of inflation into your client conversations?

Now, what I want to do very briefly, is just let everyone's attention to that big drop you can see in the middle of the screen, this is around the period of the mini budget from last year. Now, around this point, we saw a lot of switching activity, including that of advised clients. 

We saw a lot of clients being switched into cash. Now, I'm not gonna get into the pros and cons of disinvesting into cash, that's for another day. But I think in Q3, last year, there was definitely instances of fear and emotion guiding that decision and going against that long term plan.

And I think getting your clients to stick to that long term plan is one of the best ways to demonstrate value going forward. And to add a bit of colour, to that, I'm going to use the example of the investment quilt. And hopefully, you're all familiar with this particular format.

If, you’re not, it's very, very basic, practical is showing you the last seven calendar years, and it's ranking different investment types in order of the best performing asset classes. Each colour resembles a specific investment type.

So, for example, in this instance, the orange box resembles commodities, teal is global equities, and so on and so on.

Now, what I want to do here is basically take us back to 2020, over 3.5 years ago, obviously a very, very different set of economic conditions.

We were very much in that disinflationary environment. And if we think about some of the early days of the global locked down, that first global locked down, some of the volatility that we experienced in the market, we saw some of the steepest drawdowns seen, not seen since the days of the global financial crisis. 

And if we think about the initial post COVID recovery in 2020, we can remember that it was very much led by US tech stocks, which benefited Global Equities, and also Government bonds, did very, very well, that particular year. but if you look at those assets that didn't perform as well, in 2020, it was those inflation hedging assets, so I'm talking about things like commodities, UK property, for example.

And in 2020, we also saw a lot of switching activity, but not just clients being switched into cash.

We also saw a lot of clients switched from well diversified, multi-asset solutions into more broad or more basic equity and bond type solutions off the back of those short-term market conditions. Of course, we all know what happened, over 2021, over 2022, and obviously into 2023. Inflation really started ramping up, and then you can quite clearly see those asset classes that perform better in that particular instance, and those asset classes which didn't perform as well in 2020. So those inflation hedging assets, which come to the fore.

And I think a lot of advice firms could probably look back at 2020 and say with hindsight the smart thing would have been to stay diversified, trust the process and perhaps engage more with clients around periods of heightened volatility.

Now, you might be sat there thinking, well, where am I going with all of this in relation to the consumer duty? Well, there's a couple of points.

And the first point is that making changes to your client's investment strategy off the back of short term market moves is not part of that long term plan. And that is particularly important in the context of the products and services outcome, that we're going to look at very shortly.

The second point is that engaging with clients around periods of heightened volatility is an excellent way to demonstrate value to them, because that is ultimately going to increase their chances of success over the long term by getting them to stick to that long term plan that you've put in place for them.

And then, the final point is that I think those examples I've used there, clearly demonstrate the consumer duty is much, much broader than just simple tick box compliance.

So, in terms of the consumer duty, I think we're all very, very familiar with this particular pyramid now.

I think we all appreciate the fact that you have to view the consumer duty as a package of these three components. So, the high level principle, which is basically elevating us from treating customers fairly, to treating customers well and proving it.

We have the free cross cutting rules so very much, behaviours that the regulator expects firms to exhibit, and then the four outcomes, very much detail expectations of conduct, which are going to be required going forward.

Now, I just briefly want to touch upon the cross-cutting rules because in my opinion, I think these are the most important component within that pyramid. And I think if we're unable to get the cross-cutting rules right, then I think the whole pyramid falls down.

Now the cross-cutting rules these have really been brought to the fore within consumer duty in terms of behaviours. It's not something completely new that the FCA is trying to push. In fact, you go back to 2013, that is when the regulator first published its first paper on behavioural economics.

But what they're effectively doing here is highlighting the fact that individuals tend to make decisions based on how information and data it's presented to them.

And what I wanted to do here is highlight the harm that certain actions can have on customers.

Now as this term, which has been branded the about quite a lot by the regulator at the moment, called behavioural bias, you know, you'll see a number of times repeated for the finalised guidance for the consumer duty.

And I think there's a number of ways that you can interpret and slice and dice behavioural bias up and, you know, to give you one example, I've had some very, very open and honest conversations with different advice firms over the last 12 months, and some advisers are very openly admitted to me that they have done zero preparation or groundwork for the consumer duty, and they'll continue to do that until they're fed the information from above. So be it, their compliance department or their network.

Whereas I think some of the crosscutting rules and the behaviours, they really want individuals to take more responsibility for their actions. So that includes me, includes all of you watching this webinar, and it also includes everyone right across the industry to sit up and think about the behaviours that we exhibit day-to-day within our roles and in our decision making as well. So, I just wanted to flag that with the crosscutting roles I think that's a very, very important part of the pyramid.

So what else is the FCA been talking about? Well, loads, actually, you may or may not have seen this but at the end of last year. They carried out a review of larger firm’s implementation plans.

Now, we all know how these reviews work don’t we, we know, they are never going to be a glowing endorsement of how the industry is operating, and this was no different.

As part of this findings, this set of findings, they felt they highlighted three specific areas that they would like firms to focus on in the run-up to the rules coming into effect, end of July 2023.

Now the first area was making firms go away and prioritise those changes, those actions which are going to have the biggest impact on their customers. That was the first area. 

The second area was going ahead and actually making those changes at a practical level, and the third area was in relation to distribution chains. Now, distribution chains can vary complexity, enormously, and we're gonna look at some of the implications in that respect later on in the session but the point the regulator was saying that it's really important that firms speak to other firms within the distribution chain to get the required level of information and data they need. 

Now we've also had an avalanche of Dear CEO letters, and the common recurring theme from a consumer duty perspective has been about the urgent need to review existing products and services to ensure that they meet fair value.

I'm sure you're all aware and sick to death of the trade press headlines that we've been having on consumer duty. And, you know, as we get closer to the end of July, I think we can expect this drumbeat to get louder and louder. I think it does reflect the fact that the regulator has some very tangible concerns about the readiness of some firms.

But I think we do have to take a step back and think about the fact that the consumer duty isn't just aimed at advice firms. It's aimed at all regulated firms, hence, why the regulator has concerns, in some of these areas.

A recent headline you may have seen that the regulator carried out a review, again, of larger firms as fair value assessment frameworks, and they actually found, or one of the key findings from this was the fact that a lot of firms were found to be asking uncomfortable questions. I'm not surprised by that. I think what we have to remember is that this is a new piece of regulation.

I think across the industry, there's gonna be a number of learning points. So, I wasn't too downhearted, I think, when I read that. I think there's some lot of positive stuff there which actually, the regulator pulled out in that review as well.

But of course, it isn't just the consumer duty that the FCA is banging the drum about at the moment. There's been some very vocal noise about their sustainable finance agenda. The one paper that I do want to draw to your attention today is CP22/20 - Sustainability Disclosure Requirements and Investment labels.

If you've read this document, brilliant, if you haven't don't worry, I'm gonna give you the very, very quick highlights and made implications for the advice community.

And I guess the first point to make is the bullet that you can see there on the screen the fact that the FCA and the Treasury are exploring how to introduce new sustainability based rules for advisers.

Now, if you sat there thinking, Oh, that's brilliant. I'm going to download this paper. I want to see what those rules and those requirements are, then I'm afraid you're going to be a little disappointed because that information isn't included in this paper. In fact, the FCA have admitted that is likely to be in the broader assessing suitability piece, which is expected late 2023. 

However, I think that's a bit of a red herring in itself because if I bring that pyramid back to the for the consumer duty pyramid, and if you look at a language which is used in this pyramid, you know, the fact a firm must act to deliver good outcomes for its customers. It must act in good faith. It must avoid foreseeable harm, enable, and support customers to pursue their financial objectives.

You know, I would argue that if you have any clients with any form of sustainability preferences, I would argue that the only way you're going to be able to fulfil those consumer duty obligations is by explicitly demonstrating that you have integrated sustainability considerations within existing advice processes.

Now, over pertinent points to flag up here, just to make you aware that there is a monster of a new disclosure regime heading our way titled SDR, so another acronym that we need to get familiar with, Sustainability Disclosure Requirements. This is the UK's version of SFDR which is in place in the European Union and that will have a number of implications, particularly for those advice firms which are going to be categorized as product manufacturers going forward. That's the first point.

Another point to flag to you is that we are going to be getting some new naming and marketing rules from the FCA in relation to how you can talk about sustainable investment strategies and how fund manufacturers can label their funds.

Now, underpinning that is a proposed labelling regime, and now this is an attempt not only to curtail the impact of greenwashing, but also arrest some of the terminology issues that exist within this field. You can see that there's actually been three labels being proposed by the regulator. The discussion paper had five labels. It was going to be a much broader piece of work. Whereas now, it's a much narrower piece of work, looking at exclusively sustainable investment strategies by identifying these three different approaches, so sustainable, improvers, sustainable focus, and sustainable impact. 

Now, these labels will be voluntary but it's not just the case that any old fund can, you know, stick this label on, on top of the can, so to speak. There will be a very detailed set of criteria and assessment, which fund managers will need to adhere to if they are going to use these labels going forward.

And, now, the policy statement on all of this was due end of June 2023, it was then pushed into Q3. As it stands now, the regulators indicates this is likely to, we've published into Q4 at some point, and that is based upon the sheer volume of feedback they have received from the industry on all this. 

I think it was over 240 pieces of individual feedback. A lot of implications to work through there. But I think from a consumer duty perspective, I think this is very much a watching brief and something that advice firms really, really do need to keep a close eye on. Because this will be particularly important in the context of the products and services outcome and making sure that those products and those services that are provided to their clients, are fully aligned with the needs. 

And on that point, we're now going to look at the product and services outcome. And I think a lot of the requirements in relation to the specific outcome actually came into effect when Prod was introduced, beginning of 2018. And I think those advice firms who have really good, robust processes in place, I think those firms are gonna be in a really strong position when it comes to this particular outcome. But we know there's still, across the industry, a little bit of work to be done in this particular area.

So, let's recap on some of the main requirements here. And I think if I was to highlight one of the main requirements from PROD, it would be this one, PROD 3.3.12 and I'm sure you can all recite this off the tip of your tongue. But if you can't, don't worry, as you can see there, it says the target market identified by distributors for each financial instrument should be identified at a sufficiently granular level. So, what does that mean?

Well, what this isn't about is individual suitability nor is it about the need to replace individual suitability. We know individual suitability remains king. What this is about collating needs, client needs and client characteristics at a very, very basic level.

Now those basic needs and those basic characteristics, need to be identified first at a cohort level. And then we need to go more granular into those basic needs and characteristics to identify specific target markets.

Now, I appreciate that sounds incredibly wishy washy, but because it is wishy washy, I think that presents a number of opportunities. And I think for advisers, it really allows firms to tailor identifiable target markets to their own client bank.

And because of that, I think there's lots of weird and wonderful ways that you can highlight target markets. So, let's have a look at a couple of a few examples here. And I want to start by looking at sustainability preferences, and now we can perhaps think about those in existing advice processes, because I've just talked a few moments there about the regulatory direction of travel here. 

And what would be useful to highlight some research that Royal London carried out recently. Because what we did, is we, we put an online survey out to 2000 of our customers, and  follow up qualitative interviews. So pretty substantial stuff, and we asked them a bunch of questions to do with various investment topics. And what we did is, from the responses, we were able to collate them into five distinct groups based on their overall levels of engagement, towards investment, and their overall preference for responsible investment. And I'm using responsible investment and broadest possible sense,

So to quickly take you through these different segments that we've got here, if you like.

Starting bomb left disengaged, now these are individuals who are very, very hard to engage in long-term savings -  Low confidence, low exposure, low knowledge, little experience when it comes to investment matters.

And therefore, you know, I think at this stage, they're probably unlikely to seek the services of a financial advice firm. Now, things get a bit more interesting when we move top left into this segment three category, because these are individuals who are really, really engaged when it comes to investment, but the primary focus is well and truly on that financial return.

Now, that's different to segment four, top right, because, again, these are individuals who are just like segment free, really, really engaged, but these individuals and this group actually see responsible investment as one of the most important factors when it comes to the investment decision making process. 

Segment of five good proportion of customers here, these are individuals who are hard to engage in long term savings, like segment one. But the key difference here is that the research highlighted that once they'd been educated, informed, and engaged around responsible investment, there was potential for that to be used as a vehicle or a mechanism to actually engage them in long-term savings.

Then, of course, we have segment two slap bang in the middle of the chart. You can see nearly a third of customers sat here with called this segment, the open minded, and we've called them the open minded, because these are individuals who, on the face of it, don't have the required level of knowledge or experience when it comes to making their own investment decisions. So, therefore, they are heavily guided by their financial adviser.

And what the research did highlight is that once they've been engaged and informed on responsible investment, there was potential actually for individuals to move from segment two into that top right segment for category. So, that's our very basic needs and characteristics.

What we were able to do from that is think about those broad needs and then think about what type of responsible investment approach could be applied here.

You can see that we've used some of the proposed FCA labels. And this was well some broader, responsible investment approach. And, I think it's very unlikely that you're going to have clients in all five of these segments. To be honest. I think it's probably unlikely that, you'll have clients in 3 or 4 of these segments. That might just be one of these segments where you identify specific clients.

But, again, I think, hopefully, it's just highlighting that, you know, when we start thinking about these groups is, you know, a quite broad, cohort level, first, before using that granular information to really drill down into the preferences. I think that's just highlights, how we can start thinking about those groups, and how we could start thinking about how products, how services, can be aligned to those very basic needs.

Now, taking that one step further, I might be useful using the example around client life stages.And I think segmenting clients into client life stages has been a very, very popular way of creating target markets since PROD was introduced. And I think part of the reason why that's the case is, is due to the simplicity of life stages, and it's a journey that we'll all inevitably go through, through life. 

So, here, we've got four client life stages, which we use, internally at Royal London. Very, very simple.

You can see the first life stage here is cold starting out, as the name suggests, in relation to starting out with your first home, your family, your marriage, your career. And to be honest, I think individuals in this particular life stage are less likely to seek the services of a financial adviser. 

Now, that, of course, changes, when you move into the next life stage, the building and growing. Because I think with the evolution of milestones and key life events here, becomes a greater desire for more financial resilience and stronger financial security.

We then have this very, very complex life stage, called to and through retirement. And I think it's very, very likely that you are likely to have many different profiles of retirees within this particular life stage, and I think with this life stage, I think it's actually really, really important to think about sub segment categories here just because there's a whole host of different things going in when you get into that granular level of detail.

And then, of course, we have the later life final stage, obviously, when you do your list, the key life events and key milestones here, it can look very, very bleak can’t it. But I think a general characteristic is that individuals, within this stage, there's a real strong desire to remain as independent for as long as possible.

So, that's our very basic sort of key life events milestones, If you will. What I want to do now, is focus on one of these life stages, and we're going to focus on the to and through retirement, because, as I mentioned a few moments ago, I think it's a very, very complex stage here. Obviously, we've talked about the milestones. We can now start thinking about what the typical age range is here. And you see there we've got an age range of between 50 and 69. We’ve listed some of the typical characteristics and the typical needs.

And I think a lot of different things going on here, because, you know, you're likely to have some clients who will be preparing for retirement needs, and, you know, will be requiring specific retirement income planning.

Whereas, you might have also some clients who are focused on receiving guidance and help on passing down wealth through the generation. And I think because of those different characteristics and different needs, there's potential for many different product solutions to be used here, and it's almost like we can take each of these product solutions and the type of clients and profiles that will be used here to actually create sub target markets within the stage.

So, if we think about a typical one here, we would think about decumulation clients. And it may well be that, within your business already, you have decumulation as a target market.

And if that's the case, what we need to think about is, what are the primary financial needs and the primary financial goals.  So individuals within the decumulation target market, you would say these have retired, they’ve taken income from that plan. Their primary goal or our primary focus may be the sustainability of income, but they may also be an additional considerations, such as the flexibility of income, which also be taken into account.

So, if that's the case, we then need to think about, OK. So, how does our centralised retirement proposition, our CRP align with these particular needs? And, you know, on Centralised Retirement Propositions, quite a mouthful. So, we're just gonna refer to them as CRPs now. As a bit of a misconception in the market, I think in relation to CRPs where I've had a lot of people speak of them purely as an investment strategy for the decumulation clients.

And, yes, it is highly likely that the investment strategy you use for your decumulation clients, is different to the strategy you use for your accumulation clients.

But I would argue that a CRP is the overall framework you use for retirement advice with your retirement clients.

Yes, the investment strategy is one part of that, but it also takes into account how you integrate longevity risk into your processes. It takes into account your withdrawal strategy, your cash flow planning, et cetera, et cetera.

And I think every single one of those cogs in that wheel can be used to demonstrate value to clients in this particular target market.

So, as I say, it's taught, starting with those very basic, high level client needs, at cohort level, and then, drilling into that in a more granular way, to get to identifiable target markets, such as decumulation. Now, as I say, financial life stages have proven to be very, very popular.

We also have a template on our website that can help you with that type of work, but just want to raise the fact that this is the only way you can go about creating target markets. You know, I've spoke to a lot of different firms over the last 12 months and beyond, actually, about different ways of establishing target markets.

I've heard some firms use occupation as a means, so having target markets for teachers, doctors. The most extreme example I actually heard was farmers, so distinct target markets for farmers. And I was really, really interested in this and actually found that the Department for Environment, Food and Rural Affairs, did a piece of research all the way back in 2008 where the segmented farmers into five distinct categories that you can see here.

Don't get worried, I'm not gonna go into each five of these characters and pad out the products and services, but what I will do is compare the two extreme scenarios here:

So, cause farming custodians, they were defined as those farmers who absolutely love the farming way of life. It's their main source of income, is their hobby, and quite frankly, you know, they don't see why anyone wouldn't want to be a farmer.

If you compare that, those and challenged enterprises, these have been identified as those farmers who are farming out of obligation rather than joy. And with obligation can potentially become a series of isolation issues.

And I think just by looking at those very two extreme examples, you can quite clearly see, that needs are going to be very, very different, and I think because the needs and characteristics are different, it is highly likely,  that the products and services are going to have to be different to align with those needs.

And that's the whole point of this particular outcome here. It's all about being able to demonstrate that the products and services you provide to your clients align with their needs.

And hopefully, the examples would just use the highlight that there is no set way or set formula of how you do this. But, you know, I think it's all about how your client bank is and tailoring it to your client bank.

And, as I said, a few moments ago, many different ways that you can go around doing that.

So, couple of planning points just to finish up there.

I think we all know the regulators mantra by now that if it isn't documented, it didn't happen. So, please do. Make sure it is document than the way that shows the needs, shows how the products and services align with those needs. 

As part of that, please do document what the client benefit is to those target markets, those products, and those services, and something that I've not spoke about so far, vulnerable customers, now, we know that is a focal part of consumer duty. It's been a focal part of the regulator for a while now, actually. But I think it's really, really important that you show you, have explicitly considered vulnerable customers within your target market processes.

So, that's products and services, where now we're going to move to the price and value outcome. And, you know, I think, once you've got the products and services in order, that is very much the building blocks to help with this particular outcome.

Now, one thing I'm going to say straight away here is that this isn't about the regulator talking about charging charge caps, or saying that the lowest price equals best value.

This is all about you, being able to demonstrate that the benefits you provide to your clients outweigh the overall cost they're paying, that is ultimately what this outcome is about.

Now, they have asked firms three specific questions in relation to this particular outcome. So, this isn't me speak, and it isn't Royal London speaking, this is direct from the regulator. 

And, you know, as you can see there, the first question, Can you demonstrate that your products and services are fair value for different groups of consumers, including those in vulnerable circumstances? 

So, again, having those building blocks in place will help you do that. Are you charging different prices to separate groups of consumers for the same product or service, and if so, are you satisfied? The Pricing is fair for each group,

And finally, have you gathered all relevant information from other firms in the distribution chain? 

There we go Distribution chain. Back to that point I mentioned earlier on, that was one of the three areas of focus that the regulator wants firms to think about in the run-up to rules coming into effect, really strong reliance on sharing information and data through our distribution chain. And as part of that, I think it's really important that advice firms consider what their status is on the consumer duty.

And by status, I'm talking about whether you're going to be a product manufacturer, a product, distributer, or potentially a bit of both. So let me expand on that point.

The first point to flag here, is that under consumer duty, all advice firms are manufacturers, because the definition captures services as well as product. So, i.e. the advice service you provide to your clients, makes you a manufacturer of services.

Hence, why you need to complete fair value assessments on the advice service you provide.

Now, in addition to that, advice firms can also be product manufacturers. And you're gonna be a product manufacturer. If, for example, you're providing your own in-house DFM services, or if you're designing and building, your own investment strategies.

Now, we have this more grey concepts of product co-manufacturer and you're gonna be a product co-manufacturer if you are deemed to be materially influencing a product manufacturer. So, for example, an advice firm working with a manufacturer to develop a bespoke set of investment strategies, for example.

Now, if you're a co-manufacturer, the same responsibilities and requirements that apply to product manufacturers will apply to product co-manufacturers. So, in that instance, is really, really important, that the advice for speaks to the product manufacturer and fully has a discussion around who is on the hook, for what particular requirement and responsibility and get that documented. That is really, really important. 

We didn't have this third point of product distributor, and this was a bit more of a slam dunk scenario. So, this is where an advice firm is basically distributing or recommending someone else as product.

Now in terms of fair value assessments, it's really important to stress that it isn't the distributor's responsibility to undo, redo or challenge. The product manufacturer is fair value assessment, but they do need to demonstrate that they've taken that into consideration within their own fair value assessment on the advice service.

Now, in terms of fair value assessment's a thing, right across the industry. We will welcome more clarity on the fair value assessments. And, you know, I think we will get to a more consistent approach across the industry. You know, it's very much down to each individual firm to assess what fair value looks like, and that poses a number of very interesting questions. Doesn't it? not least if, no. It's down to firm level to define fair value. Who actually defines value in the first place?

That might be a bit simpler to answer that, than it first appears, because, you know, it's very much, your clients, isn't it, that defines what value looks like, and it's down to clients that they find what value it looks like.

That's why value can look very, very different, not just across different advice firms, but across client banks. And, you know, if we think back to that decumulation target market example, I showed earlier, we talked, we looked at the financial needs of the financial goals. Value to clients is very much about, you know, you helping them meet those needs, and achieve those specific goals.

So again, in terms of fair value assessments, what we really need to demonstrate is that the overall benefits provided to clients in terms of meeting those needs and achieving those goals, all of that outweighs, the costs that they pay.

Now in terms of the advice survey, some value on the advice service, I talked right at the beginning of the session about how engaging with clients around periods of heightened volatility can be a great way to demonstrate value, because ultimately that is going to increase their chances of success over the long term. You know, getting them to stick to that long-term plan, You've worked with them to put in place.

And, you know, if you think about all the soft skills that you use on a daily basis with your clients, whether it's peace of mind, behavioural coaching, whatever, there's a lot of highly valuable stuff that. And I think in the past, this has probably been well, it's intangible, isn't it. And it can be quite hard to articulate the value with that.

Whereas, I think in a consumer duty world, I think it's really, really important that advice firms are able to articulate the value attributed to that because that will certainly help when it comes to documenting your advice charge and justifying your advice charge. 

And again, we go back to that decumulation target market example, to think about the wheel that we used about the CRP, and the different aspects within, the sustainability, the income sustainability reviews, the cash flow planning. All of that can be used to demonstrate the value you provide, or what you provide your clients with as part of that advice service.

So as part of that, please do think about articulating and documenting the value attributes of the services that will help you when it comes to just define your advice charge. In terms of other requirements, we know that all charges across the distribution chain needs to be documented, and we also know that, that needs to be repeated across all target markets. So, very specific requirements in there, and I think that just shows you that it's much, much broader than just a simple benchmarking exercise. 

Do we need, or do you need to know benchmark your advice fees, as part of that. Again, there's no requirement there, but I think there's possibly a number of advantages in doing that. And this piece of research is taken from a study that NextWealth did at the end of 2022.

They surveyed over 320 advisers asking them what total fees were. So, by total fees that you can see there is taken into account investments, taken into account platform, product, and ongoing advice.

You can see that the over a third of advice clients from this particular study, we're paying between in 140 basis points on 179 basis points. Now, the immediate question is, you know, how does your own fees compare to that?

Now, if your fees are at the top end of that scale, that, in itself may act as a catalyst or a trigger to review your existing products and services. On the flip side, if your fees are at the low end of that scale, does that suggest that you're perhaps underestimating the value you're providing to your clients. And you know, going forward, the more expensive the product, the more expensive the investment strategy, the higher the fees, the advice fees. Yes. It does make it harder to justify the overall value and the overall benefits, but again, remember that seesaw, as long as you can demonstrate the overall benefits you provide to your clients, outweighs the cost that they pay.

That is ultimately, what this outcome is all about. Now, obviously value is much, much broader than just the price being paid.

I think we've covered that to death within this particular session, but to end on, it might be worthwhile showing you, this extract from the NextWealth study. And we're going to end on a bit of a virtual, high or lower game. So, I want you to have a think about some of the figures that I'm going to draft open here.

This is basically a question that they put to think it was over 600 firms, so much broader piece of research. They asked these firms, how they were currently documenting value that gave them for options, as you can see, their client satisfaction, time spent, milestones and investment performance. 

These were available as multiple entries, so they do add up to more than 100%. Just in case anyone wants to try and put me out on that particular point. And I'm going to give you the first figure for free.

So 34% of advice firms at the point of the survey, at the end of 2022, we're using client satisfaction as a means of documenting value. So that might be, structured feedback, it might be ad hoc surveys, there’s a number of different ways that you could go around doing that. 

What by the next point, time spent. So have a think about it for a moment. You think that's higher, or lower, 34%? It was actually lower, 26%.

And, you know, I think part of the reason for that is, as we've talked about some of the soft skills but, you know, engaging with clients, a lot that could be intangible. So, I think historically, maybe certain firms have shied away from trying to justify value with that, because it's quite hard to prove. 

But I think going forward, and the consumer duty context and making sure products and services are aligned with their needs and particularly that engagement piece around periods volatility, I would expect that number to be much higher, I think going forward, when consumer duty becomes embedded, what about the next one?

Higher or lower than 26% milestones against client financial goals. It's higher - 42%. And again, I think once consumer duty is embedded, I can see how that figure potentially becomes higher in terms of linking outcomes to specific target markets and specific financial needs and goals. 

What about the last one, investment performance higher or lower than 42%? It's higher, quite a bit higher, 73%, and pretty much slap bang on the money of where I would expect it.

I guess in the consumer duty world, is it enough to disclose investment returns versus benchmark, risk adjusted return analysis, sector positioning. Is it enough to do that? I would argue probably not. I think, going forward in the consumer duty world, I think it's really, really important.

Obviously, we know that due diligence requirements are being elevated with consumer duty, and I think it's really, really imperative that advice, firms are able to demonstrate that they can lift the bonnet up on whatever investment strategies they are using and being able to demonstrate that they understand how that strategy works, particularly as you move through the business cycle. 

That will come to helping those client conversations in terms of the reassurance piece and getting them to stick to that long-term plan that I've talked about numerous times today. So, I think that's going to be important, really important going forward, actually.

So, here's the planning points from that particular section. I've spoken quite a bit about distribution chains in that section. There is a strong reliance on getting the right information from across the distribution chain in the consumer duty, so please do make sure you have spoken and are speaking to others within that chain. And as part of that, please do look into what your status as. I think, in most instances, it will be slam dunk in terms of what your status is. That might be a few instances that require a bit more dig in and speaking to us, but I think, a really important point.

And it goes without saying, If you are making changes of the back of any value assessment's, please, please, do get it documented.

So, here's a recap of the learning objectives that I put up right at the beginning of the session.

Hopefully, you all enjoyed that. Hopefully, it's given some of you a piece of food for thought in some particular areas, but other than that, thanks for watching, and I'll speak to you all again soon. Thanks.

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1. How many sustainable investment labels have been proposed in the FCA's SDR consultation?
2. How many cross-cutting rules are in the Consumer Duty?
3. Carrying out a fair value assessment on your advice services is a requirement of which Consumer Duty outcome?
4. Which of the following titles isn't a 'status' for advice firms under the Consumer Duty?
5. Which CD outcome is in relation to demonstrating that what the client is provided with fully aligns with their needs and goals?

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