7 min read 13 Jul 21
According to the lang cat’s latest research, the use of Centralised Investment Propositions (CIPs) by advice firms is near universal at 87%, up from 82% last year. So just about everyone uses a CIP, but what goes on under the bonnet? In our latest In Focus mini-series, we’re lifting the lid on CIPs, exploring the main approaches and areas of best practice. Starting by looking at a few basics, plus suitability and segmentation.
First up, what do we mean by a Centralised Investment Proposition? Broadly speaking, a CIP can be defined as a standardised method of selecting investments that are recommended to more than one client. In theory, having set, repeatable processes for client investment selection means firms can ensure consistency of advice across all their advisers, create business efficiencies, and deliver better client outcomes.
It’s important to note that while standardisation is good, this doesn’t mean one size fits all, especially if you have a diverse client bank. The Regulator is very clear that advice must be personalised to each client. Although clients can be grouped into similar segments, to comply with PROD and MIFID II rules, you need to ensure that the precise elements of the CIP are suitable for the client segments they are used with.
A key decision when setting up your CIP is whether to run your own proposition or outsource to a third party. With an in-house CIP, the firm takes full responsibility for all investment decisions from asset allocation to stock and fund selection. With outsourcing, while the advice firm remains responsible for suitability and setting the objectives, some or all of the investment decisions are handed to a third party, via a multi-asset or multi-manager fund, provider-specific packaged range, or DFM.
According to the lang cat, outsourcing via a multi-asset or multi-manager fund is the most popular type of CIP, but the number of advisers outsourcing to a DFM is on the rise. Interestingly, around 85% of firms currently use more than one of the four CIP approaches with at least some clients. There are pros and cons to each approach and which route the firm chooses depends on its business model and client base. Whatever your chosen approach, you need to be able to demonstrate suitability and value to both your clients and the Regulator.
So, when it comes to CIPs, ensuring that it is suitable for your target client segment(s) is key. The FCA’s original guidance on CIPs, its 2012 paper Assessing Suitability: Replacement business and centralised investment propositions stated:
If you operate a CIP in your firm then you need to ensure you:
This still stands and now PROD rules require firms to ensure their services are designed to meet the need of their clients. Although PROD doesn’t force firms to segment, you are required to think of clients in ‘target groups’ with similar needs. Our research last year with NextWealth found that of the 200 advisers surveyed, nearly three quarters (73%) did segment their client base in one or more ways, with nearly half (46%) segmenting by level of investible assets, just over a third (36%) by complexity of needs and a similar number (35%) by life stage.
Segmenting by value without further analysis is unlikely to meet PROD suitability rules as people with the same level of assets could have very different needs and those with different levels of assets could have similar requirements. While most firms are already doing this further analysis, recording your methodology is essential so you can demonstrate the suitability of your advice if required.
As there will also be some clients that don’t fit into your defined groups – that ‘shoehorning’ point above – it’s important to have an exception process and audit trail which recognises this and a process to deal with these exceptions to make sure the investment recommendation is personal and suitable.
According to our research with NextWealth, just over a quarter (27%) don’t segment at all. Many cite that they offer a personalised service to all clients, while some target a specific client niche and don’t feel they need to segment further. This is fine under PROD, as long as you can demonstrate suitability.
How you segment your client base and the investment decisions that leads you to, will depend on numerous factors. At the end of the day, there’s rarely one right answer, but clearly articulating your process so that both your client and the Regulator can understand the suitability and value of your advice is crucial. When it comes to investments, suitability is a tricky concept to pin down. Anything that pleases the client in terms of investment return could be said to be suitable in hindsight, but that of course isn’t the way it works.
When we’re thinking about CIPs for target client segments, or groups of clients, we need to consider not only the expected investment performance and volatility, but also the real-world day to day implications of both what is in the CIP and how the CIP works in an operational sense. So, for example, if the client group is likely to have holdings across multiple wrappers (and most are), then a CIP containing assets that aren’t ISA admissible doesn’t make much sense. If the client or target client segment is likely to need varying levels of income to support their lifestyle and the platform on which the CIP is housed can’t readily accommodate those changes and reflect them clearly back to the client, then that element of the CIP isn’t firing properly. It’s inside the bringing together of these two elements – the investment and the operational – that suitability resides.
Next time we’ll look in more detail at the investment side of CIPs and speak to some advice firms to find out more about their approach.
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