Adviser firms can benefit from using a Centralised Investment Proposition (CIP) to reduce business risk and operational overheads whilst increasing efficiency and oversight. Sounds great but in an industry where the client should be front and centre, where consumer duty is coming over the horizon and the regulator is keeping an ever-watchful eye, what are the downsides and how do we ensure we keep those clients at the heart of this?
How to build a CIP
First, let’s just go back to basics here and define what a CIP really is. They are a way for firms to define a proposition made of ‘model portfolios’ to meet the needs and objectives of clients with different risk profiles and investment styles. Model Portfolio Services (MPS) could be created in-house and also include outsourced Discretionary Fund Management (DFM).
This topic is deserving its own series of articles as any attempt to cover it in one would not do it justice, so we will be doing just that.
The starting point is a look back at what the regulator is looking for from our industry, and their final guidance is in the document linked here:
Replacement Business and Centralised Investment Propositions (fca.org.uk) from page 18.
Whilst its contents are no surprise, it provides very clear examples of good and bad practise.
Digesting the detail, it can be deduced that a “one size fits all” will only be accepted if, upon client segmentation, the adviser is left with a single segment of client. In almost all IFA firms, advisers have a range of clients so it would be advisable to have several solutions within the CIPs to match those ranges.
Section 4.4 and 4.5 in the above document read:
4.4 Where a firm has a diverse client bank, it may wish to consider segmenting its clients. This involves offering a range of CIP solutions to meet the needs and objectives of different client segments. This is in firms’ interests, as well as clients, as it is likely to increase the number of clients for whom a CIP solution is suitable.
4.5 Where a firm segments its client bank, it may offer different service levels and features to suit clients with different requirements. Where service levels differ, firms should inform clients of the services and their costs in a way that is fair, clear and not misleading.
Our series on CIPs will therefore look at the different routes available and draw out the key advantages and disadvantages of each.
Breaking it down
We will look at in-house solutions, both advisory model portfolios and discretionary. Within the in-house solutions we will focus on controlling costs, the expertise required, measuring performance, resource requirements, and the time required to do this well.
Next, we delve into having the above options outsourced to a third party DFM. The client has confidence in you, the adviser, and must also be made comfortable with another Company being introduced. This also adds a DFM fee but frees up time and resource within the firm. Due diligence is required on the MPS providers, with annual governance completed, and we will also look at the difference in an “Agent as Client” model comparing to the “Reliance on Others” model and revisiting the PFS/CII papers on this.
The series will then look at multi-manager/multi-asset funds, again both using external fund managers and where the adviser firm/wealth manager runs their own fund(s). The extension of this part will also cover the inclusion of these funds inside an MPS offering, addressing conflict of interest (if double charging) and also the obvious operational, tax and commercial benefits (if fund rebates are received and passed on to the client).
Look out for our blog on in-house CIPs coming soon.
