Consumer Duty: how wealth managers can meet alternatives challenge

For some investment firms, particularly those with straightforward propositions and services, this newly raised regulatory bar should, while still presenting challenges, be cleared relatively comfortably. But for advisers and wealth managers dealing with alternative investments, life is about to get significantly more complicated.

Meeting the duty of the duty

The consumer duty makes clear that firms must take a holistic approach to addressing the needs of their retail customers. In an investment context, that means individual products or asset classes should feed into the processes that underpin the approach to the overall portfolio – they should not be treated in isolation.

That presents a challenge in the alternatives space because some investments, such as private equity, structured products and even certain types of alternative credit, not only have sophisticated features but they do not usually sit within a wealth manager’s core system.

Meeting the principles of the consumer duty at the point of advice for new products is therefore difficult, particularly when the introduction of a new product must be considered in a wider portfolio context.

Compounding this challenge is the consumer duty’s enhanced focus on ongoing suitability: the requirement that firms are able to define, monitor, evidence and stand behind the outcomes their customers are experiencing.

For firms dealing largely with traditional investments such as equities, bonds and funds, the information to support lifecycle reviews – a critical component of the ongoing monitoring of outcomes – is easily available to advisers seeking to assess performance as the rules require.

But the data to support ongoing suitability of complex investments – and the FCA’s requirement that firms communicate in a way that ensures consumers understand what is happening to facilitate informed and timely decisions – is not as readily accessible.

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Some of this is simply attributable to the nature of the products. Alternative investments are often non-linear – a fall or rise in the underlying asset does not necessarily lead to a commensurate loss or gain for the investor – and some, like structured products, have embedded events that happen throughout their lifetime.

This means an adviser may have to consider whether a product has achieved its ‘maximum return’ at an early stage in its life and, if so, whether it would be in the client’s best interests to sell early and invest in another product.

While ultimately a boon for investors in terms of achieving good outcomes, this inherent complexity complicates the process of ensuring compliance with the consumer duty.

Given these challenges, how can advisers ensure they meet the new requirements, monitor the event-based performance and communicate this effectively with their customers?

Leveraging technology

Technology is really the only effective solution.

Today, most alternative products are treated on a standalone basis. Most advisers and wealth managers access them through processes that sit outside the core systems they use for mainstream asset classes. The result is that distributors quickly enter a ‘high touch’ manual world when they engage with alternatives, as their core tools are typically not designed with them in mind.

While this can add friction today, in a consumer duty environment this lack of integration will make life far more complex for those seeking better outcomes through the use of alternatives.

Technological progress here, however, has already been made. At the point of advice for new investments, for instance, tools are now available to help customise products to an investor’s specific needs. Even for highly complex investments, bespoke new products can be easily created using technology solutions, with outcomes very much at the forefront of the process.

Moreover, for manufacturers at the other end of the distribution chain, technology can help them meet the requirement to ensure that the design of the product meets the needs, characteristics and objectives of clients.

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Point of advice is, of course, only one facet of the consumer duty. Advisers and wealth managers will be required to consider new investments in the context of the wider portfolio, the performance of these investments and ongoing suitability. Here, technology has evolved to allow mainstream asset classes and alternatives to be tracked and monitored in a more consistent way.

In particular, solutions are now available to normalise some alternatives, aligning their lifecycle events with more traditional investments to provide advisers and investors with the data they need through integrations with existing governance systems.

That will be a critical help to those who seek to continue offering complex investments to their clients who, due to the difficulties in meeting the new obligations in an analogue world, might otherwise find themselves facing less choice and more vanilla options.

There is, of course, no ‘one-size-fits-all’. Distributors may be wary of additional technology costs, but implementation does not need to be expensive or complex. Supporting the consumer duty obligations can not only improve the experience and outcomes for customers, but also provide them with access to a wider range of investment solutions that could better serve their needs.

In the new regulatory environment, a more technology-driven approach to alternatives is very much aligned with the aims of the consumer duty and to the needs of customers in market conditions that could remain challenging for a long time to come.

David Wood, managing director of Luma Financial Technologies’ international business

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