In the part that ties together the ‘why’ and the ‘what’, we look at the ‘how’ of putting together a Platform DD and CIP.
Before you start – Know your clients
If you haven’t already, you should begin by undertaking a more formalised assessment of who your clients are, and what kind of client you are looking to target. There are a range of ways you can segment, with some of the most common being:
- Those over 55 and at the point of retiring and requiring pension management and advice
– segmentation on assets possible here
- Business owners requiring a suite of advice areas [tax/pension/investment]
– Further segmentation possible on assets/age/business stage
- Younger clients (under 30/40 etc.) with simpler and generally only investment/pension accumulation needs
– Further segmentation possible depending on family situation
As mentioned in part 2 MIFID II, has created a requirement to formally identify client segments, and so as well as good practice, it’s also law!
Once you know what your current and prospective clients look like, you can begin to consider what your proposition, in terms of platform and investment proposition, will need to offer.
You may already have an informal CIP in place but the segmentation of clients appropriately will help formalise what you are offering and identify any gaps or anomalies in what you offer. You would typically start your considerations at a firm level:
- Will you look to develop and maintain an investment proposition in-house, or outsource this to third parties?
- Will your investment philosophy lead towards a more active or more passive investment approach – perhaps this will differ on segments (low starting values might support a passive approach whereas pension decumulation might support active management).
- How will cost impact, particularly if looking at active or outsourced investment solutions?
- How will performance/meeting objectives be determined and scrutinised? – The ongoing process for review and monitoring of the CIP options.
- How will an outsourced service assist in your client proposition (client communication/meetings/reporting)?
- How will any investment option tie in with a particular ongoing service (or lack thereof) being offered?
One option is to develop a framework from the various considerations, along these lines:
|Segment 1||Segment 2||Segment 3|
|Starting value nil
Low cost required
Simple multi-asset passive investment approach required
Light touch ongoing service offered
|Within 10-15 years of retirement
Invested pension/ISA/GIAs of £150,000 +
No/minimal debts and
Accumulating in the main, but looking at consolidating the value of portfolio
|At retirement individual
Suitable for Drawdown and looking to draw regular income
Range of £100,000 – £350,000 in pension funds invested
Closer review and management required
Annual review meetings provided
Range of index fund(s) widely available on insured Personal Pensions and Platforms
In-house range of portfolios focusing developed through selection of funds based on a range of investment metrics – Monitored and reviewed quarterly internally
Risk-rated range (10 portfolios) of Model Portfolio Service (MPS) investments widely available on platforms and SIPPs
Within all the identified segments, there is no reason why one approach for one segment might not work for another segment. It is not therefore about selecting a different CIP for every segment for the sake of it, but developing a formal assessment of detailing why you would recommend a particular solution for a particular type of client (and how you plan to review that on an ongoing basis).
With a formal client segment identified and a CIP to suit, you can consider what Platforms you might use for a typical client within a segment. Not all clients within the segmentation and the CIP process will require a Platform and it is important this is accounted for at that stage.
For each segment, identification of the features that are important in what you are trying to offer should be your first step. For example, a segment of high net worth clients with various tax management needs will demonstrably benefit from the functionality of a platform which provides efficient tax management tools, compared to a segment of clients under 30 making pension/ISA contributions from scratch, even if that platform is more expensive.
You also need to consider what is important in relation to what you are offering here. Some lighter touch and more focused ongoing service propositions will require different features of a platform.
Examples of areas to consider for both your service and the client segment in question include:
- Cost and how this might scale at thresholds
- Fee structure (percentage or fixed, trading costs if applicable, entry/exit charges, drawdown/benefit crystallisation charges)
- Flexibility of access (UFPLS limitations and flexibility to take PCLS monthly etc.)
- Financial strength of the platform and/or independence
- Ability to feed from/into a back office system
- Client usability and access limits
- Tax management tools
- Wrappers on/off platform available and cost considerations
- Investment access (DFM/MPS/ETFs/VCTs)
- Minimum regular/initial transfer or contribution limits
- Service and administrative standards/experiences
An effective assessment of a client segment and what is required to deliver your proposition can really help in avoiding the appearance of ‘shoehorning’ clients and give a real justification to your platform recommendations.
The following might be a scenario that occurs once formal Platform Due Diligence is in place:
You agree to advise 35 year old married John on his protection needs and the investment of surplus income. Your advice for the investment of surplus monthly income consists of £250 per month in pension contributions and £125 per month into an equity ISA.
Your segmentation puts John in the XXXX category, which you have identified as having the following requirements:
- Charges on a percentage basis, with no minimum fund value requirement
- Low/no regular contribution charges
- Low/no minimum monthly investment amounts
- Range of wrappers on platform – Pension/ISA/GIA
- Access to XXXX from your investment proposition
Your due diligence identifies platforms AAA and BBB as appropriate for these investors. After review of the client’s particular circumstances, you recommend platform BBB for his new contributions.
As mentioned in part 1 there are a number of benefits to completing effective Platform Due Diligence and Centralised Investment Proposition work (for the client and the firm not just for the regulatory reasons). As a result of the process, you may find you develop new ideas about the shape of your current client bank, the prospective clients you had in mind and how your overall service to each could be optimised and delivered more effectively.