Quality of advice: Case study 1
Firm Q
Firm Q is an independent financial adviser (IFA) offering independent advice through a team of ten advisers. The firm does not specialise in any particular product area, reflecting the varied nature of the customers it provides services to. Firm Q has been in business for ten years and during this time has built up a solid, loyal customer base and, as such, does not proactively market its services.
The firm has embraced the Treating Customers Fairly (TCF) initiative. For some time, the firm's management have taken steps towards implementing TCF throughout its business, making changes in terms of both attitudes and, where necessary, practices and procedures. Using the 'Treating Customers Fairly Self Assessment Tool', Firm Q decided to undertake a stocktake of these changes to assess its ability to treat customers fairly throughout the advice process and identify areas for further improvement.
This case study looks at some of the findings of Firm Q's stocktake.
Management Oversight
How does the firm's management indicate their support of TCF?
The monthly board meeting includes a section on TCF, where directors discuss any risks or issues they feel affect Firm Q's ability to treat its customers fairly. Directors had not proactively communicated outcomes of these meetings to the advisers before the TCF stocktake. As part of the stocktake, the directors identified that Firm Q should do more by sharing these TCF messages. So now, when appropriate, directors attend the monthly adviser meetings.
One director has taken responsibility for overseeing the firm's systems and controls around the recruitment and monitoring of advisers, including developing appropriate MI indicators for adviser Training and Competence.
Issues to be considered
TCF Issues that Firm Q considered include:
- How does the firm ensure it cascades good TCF practice to all parts of the firm?
- How can the firm measure the understanding of TCF by its advisers?
- What management information is produced to help assess adviser ability and the quality of advice provided by the firm to its customers?
Quality of Advisers
How is the firm engaging, motivating and training its entire staff on TCF?
Recruitment
The management of Firm Q are focused on recruiting the right calibre of staff and have what they consider to be high standards in the recruitment process. The firm's recruitment process for a prospective adviser both considers technical ability and requires employment references for the previous five years (where applicable), as well as running credit checks.
Firm Q understands that, as it provides a complete financial planning service to its customers, advisers need to be competent in all product areas. All new advisers undergo a probationary period during which the firm identifies any gaps in their knowledge in a particular product area. The adviser then undergoes training and is not permitted to provide advice on that area until the firm reassesses them and deems them competent.
Issues to be considered
TCF issues Firm Q considered as part of the stocktake include:
- What are the qualification requirements for new entrants? Are these suitable for the area of advice which that particular adviser will provide to customers?
- What other checks does the firm undertake in terms of references from previous employers and credit checks? Are they sufficient and appropriate?
- What induction process does the firm have in place and does this differ depending on the level of experience of the new entrant? Does it ensure advisers are sufficiently competent before advising?
- Is the monitoring of new entrants robust enough to highlight any issues regarding the quality of their advice?
Training and Competence
Firm Q's management have always fully supported continuous professional development. This has included advisers attending external training courses and seminars, taking ongoing professional qualifications (as evidenced by advisers completing additional training in preparation for A-Day changes) and feeding back learning points to others in the firm.
One-to-one meetings between each adviser and their supervisor are held on a regular basis. These meetings include discussion of detailed monthly sales records and adviser training needs. Supervisors use these records to identify any trend, such as limited business mix or the unsubstantiated use of only one provider for particular product lines. Once a trend is identified, supervisors take appropriate action. This may include discussion at one-to-one meetings, increased supervision and/or the creation of a learning and development plan that is reviewed on a regular basis. In addition, if these records identify an issue which may have caused detriment to any of Firm Q's customers, then it takes appropriate remedial action.
Issues to be considered
TCF issues considered include:
- Is the Training and Competence scheme up-to-date and does it demonstrate a TCF approach?
- Are training needs identified on a pro-active basis and in a timely manner?
- How does relevant management information (such as level of qualifications held, incidence and type of training, adviser file reviews and customer feedback) feed into each individual adviser's training and development plan?
- Does the firm uphold consistent standards in Training and Competence?
- Are one-to-one meetings held on a regular basis, in keeping with advisers' individual needs?
- Where learning takes place, is this assessed and tested for understanding and relevance?
- What relevant management information is gathered, such as on:
- products and providers recommended;
- outcome of file reviews;
- complaints;
- persistency;
- execution-only/ non-advised sales;
- identified areas of training needs;
- training and development plans?
Monitoring
Key Performance Indicator data from each adviser's monthly record, including product and provider spread is collated and fed back to the firm's management. In addition, the firm adopts a policy of checking files each month-end for completeness and additionally reviews a proportion of files each quarter for suitable advice, covering the whole range of products recommended by each adviser. Advisers are also required to submit 'high-risk' cases for pre-sale checking.
Issues to be considered
TCF issues considered as part of the stocktake include:
- How does the firm monitor quality of advice?
- Is the supervision and monitoring regime carried out on a risk-based approach? e.g.
- to identify those advisers with a history of suitability issues in their files;
- to track the numbers of 'high-risk' sales.
- Are file checkers adequately trained to effectively assess the overall quality of advice (rather than just adherence to rules and internal procedures) as well as the suitability of advice?
Impartiality of Advisers
How is the requirement to treat customers fairly included in performance measures, objective-setting and rewards for staff?
Firm Q's management understand that remuneration can be an important factor in the firm achieving its business objectives but also realise that a failure to manage and control the risks in remuneration structures could threaten its ability to treat its customers fairly. As part of the stocktake, the firm identified that some advisers were striving to meet business targets which drove the size of their bonus but not adequately considering the suitability of their advice. As a result, Firm Q amended its bonus system to take into account other factors, such as the suitability of advice given, persistency, complaints and meeting personal development objectives.
Issues to be considered
TCF issues Firm Q considered include:
- Does the firm have objectives for advisers and supervisors on treating customers fairly?
- What sales targets might undermine the fair treatment of customers?
- Do advisers recommend non-commission generating investments where this is appropriate to a customer's circumstances and objectives?
- How can wider reward and people management factors, such as promotion strategy and disciplinary procedures, support TCF?
Assessing Customer Needs
Firm Q understands that robust fact-finding is pivotal to providing suitable advice. The firm considers its approach to assessing customer needs to be comprehensive. Advisers conduct a full factfind, even when conducting reviews with existing customers, to ensure the information is as complete and up-to-date as possible.
As part of the factfind advisers explore each customer's attitude to risk through:
- explaining the meaning of risk in language the customer understands;
- talking the customer through their existing savings and investments and exploring their attitude towards them;
- exploring the customer's thoughts and feelings on their objectives for their money and over what period; and
- discussing the customer's attitude to risk, which may vary for different time horizons and objectives (for example, a customer may have a different risk appetite for different savings objectives).
From these discussions, they reach a joint agreement on the customer's attitude or attitudes to risk. This process is repeated at all subsequent reviews.
In addition to this, advisers sometimes use product providers' attitude to risk questions, where a customer's answers are scored to determine their attitude to risk. During the stocktake, Firm Q identified several instances where advisers applied this method but did not also take into account information learned from discussions with the customer, when deciding if the calculated attitude to risk was appropriate. The managers of Firm Q acknowledged that using a product provider's tool to determine attitude to risk is not a safe harbour and responsibility rests with the adviser. As a result, Firm Q provided further training and guidance to advisers on assessing customers' attitude to risk and in the appropriate use of product providers' risk questionnaires. The firm's management have requested that advisers' monthly records highlight this if it continues to be a problem.
The firm appreciates the value to its business in providing customers with full and long-term financial planning. This is reflected in the way advisers consider debt reduction or accumulation of realisable savings for emergencies, before advising customers to enter into long-term investment contracts.
Using information obtained during the factfind process, advisers then compare different product features, including aspects such as charging structures (e.g. personal pensions versus stakeholder pensions), early encashment penalties and tax implications to see how these fit the customer's circumstances and objectives to decide on a suitable product recommendation.
Advisers make sure that unnecessary product features do not form part of the reasons why a recommendation is made. So, for example, if someone has relatively simple retirement planning needs and does not require complex features, then a simple stakeholder pension may prove suitable and additional product features, such as those found in a personal pension, may be unsuitable or unlikely to add value. Advisers also take into account that if a product's features cannot be justified in relation to the additional costs that may be incurred, then the product is unlikely to be suitable for the customer. This could apply, for example, to additional features in a personal pension compared to a lower cost stakeholder pension.
Advisers take into account wider environmental issues when making their recommendations. For example, advisers take into account product features such as exit penalties that may apply for some private pensions, in light of the potential introduction of a new, low-cost national pension scheme. This process is documented in the suitability letter/ report which helps demonstrate why the advice is appropriate.
To research suitable providers, Firm Q's management encourage advisers to conduct broad-based market research using technology-based systems. The criteria used depend on the customer's circumstances and investment objectives. In selecting a product and provider, advisers may consider factors such as product features, price, service levels, underwriting criteria and reputation. The firm requires each sale file to evidence the adviser's research and part of the file-check includes ensuring the suitability letter/ report is clear as to why a particular product and provider are suitable for that customer. It makes sure that the adviser has not sold a product on the grounds of features which are not central to the customer's needs.
Issues to be considered
TCF issues Firm Q considered include:
- Does the factfind process enable the capture of all pertinent customer details including:
- their financial situation and and investment objectives;
- their knowledge and experience; and
- other money the customer may be entitled to (e.g. state and occupational benefits)?
- Does the customer information support the recommendation made?
- Does product and provider research evidence why a recommendation is suitable?
- Are the product features necessary for the customer and in accordance with the customer's objectives?
Customer Communications
How do advisers ensure customers understand the risk and limitations of a product as well as its benefits?
When first implementing TCF into the advice process, management identified issues about the standard of suitability letters/ reports from management information collected during file checks. A review of Firm Q's complaints data also pointed to these issues. These included letters/ reports:
- not written in jargon-free, plain language;
- that often resembled 'reason what' letters rather than 'reason why', with no linkage between the customer's objectives and the recommendation made; and
- with standard paragraphs incorrectly used.
As a result, the firm issued further training and guidance to advisers and agreed a standard approach across the firm on quality and key content.
As part of the stocktake, Firm Q looked at whether the standard of suitability letters/ reports had improved and concluded that it had. Firm Q also considered whether they could take any further steps in implementing TCF into the way in which advisers communicate recommendations to its customers. The management implemented an approach of issuing suitability letters/ reports to customers before a second meeting with the adviser, as they believed it important to allow the customer time to appreciate the content before agreeing to any recommendations. The two-meeting approach is seen by advisers as a positive measure in its customer care strategy, as it allows the customer to clarify and question aspects of the recommendations they are unclear on, which in turn leads to a better understanding of how the products recommended meet their objectives.
Issues to be considered
TCF issues Firm Q considered include:
- Are customer communications, including suitability letters/ reports, written in a manner the customer understands?
- Are suitability letters/ reports tailored to individual customers?
- Does the suitability letter/ report demonstrate why the adviser recommended a particular product and provider and how they meet the customer's circumstances and objectives?
- Does the suitability letter/ report document the customer's attitude to risk? Does this then link into the adviser's recommendations?
- Does the suitability letter/ report contain a summary of the main consequences and any possible disadvantages of the transaction?
- Does the firm regularly review customer communications?
Post-Sale
What steps does the firm take to understand, manage and, where appropriate, fulfil customers' expectations of the firm after the point of sale?
Firm Q makes a commitment in writing to offer every customer an annual review. Firm Q's management understand it is important, having made this commitment, to meet it.
Issues to be considered
TCF issues considered include:
- Is it an appropriate policy for the firm to offer an annual review to all its customers?
- How does the firm ensure services are being delivered in accordance with the customer's need and wishes?
- Does the firm ensure that information obtained between reviews (e.g. ad-hoc conversations and phone calls) is adequately recorded on the customer's file?
TCF Going Forward
Going forward, Firm Q's management are keen to ensure it continually monitors these positive results and takes further steps to identify and implement TCF measures in its advice process, when necessary and appropriate. This will include acting upon feedback from staff and customers (including any complaints data). In addition, the management of Firm Q are committed to repeating the stocktake periodically to ensure it continues to treat its customers fairly.