Damian Davies: Pre-RDR ‘badass’ advisers probably need to rethink client segmentation

The way firms refer to centralised investment propositions and segmentation may be sending the wrong signal to the regulator

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Dec 12, 2019

It’s fair to say that, if you are giving advice today and you started giving advice at any point before the RDR was introduced at the end of 2012, you’re a badass.

You’ve been through it all and you’re still here. You’re harder to take down than a Terminator!

If our clients are a barometer reflecting the wider community, you haven’t just survived the changes since RDR – you are positively thriving.

Nonetheless, there is still some unease among a lot of firms around Mifid and Product Intervention and Product Governance.

These both came in at the start of 2018. To me, it does feel like Mifid and Prod served to create rules around what RDR had implied as outcomes six years before.

Here are questions to ponder:

  • Was the fact that too many firms paid lip service to annual servicing responsible for the interim suitability reporting rules in Mifid?
  • Was the fear of ‘shoehorning’ into centralised investment propositions responsible for the Prod rules?

To be fair, I can see why a lot of firms are still struggling with these, and I reckon there are two fixes. Notice I didn’t say easy fixes, as they are quite fundamental, but I think these two things will help any firm struggling with Mifid reviews and Prod.

Before outlining how to segment clients, I would like to outline the fixes which need to be in place.

Fix 1: Stop referring to your different service propositions
as segments

I know why it is a thing. Back before RDR came into effect, lots of consultants were running up and down the country telling advisers to deal with RDR by creating segments of clients, and the best way to segment was through the value of the client’s assets. These segments then had service proposition overlaid linked to the fees being levied (see chart).

The big risk in this is that, if you link your CIP to these propositions, you are telling whoever asks the question that everyone in that bracket has the same needs and can be given the same investment solution. This is really dangerous if the person asking the question is the regulator or the Financial Ombudsman Service.

Fix 2: Stop referring to your CIP as an outcome

Going to industry events, you often hear people talking about providers as their CIP – ‘Well, I have such and such discretionary fund manager as my CIP for high-value clients’ or ‘I only use such and such funds as the CIP for my lower-value clients.’

That framing is a sure-fire way to make the regulator worried you are shoehorning clients into a CIP. You and I both know you aren’t, but if you speak like that and get challenged by the regulator – if you can’t prove the CIP is a process – you can’t defend yourself.

This is the bomb in the basement for a lot of firms. Just because it hasn’t gone off yet, it doesn’t mean it won’t. Change your framing to putting clients through a CIP, not into a CIP.

Both of these fixes will help you stop thinking about segmentation as a list and start thinking of it as a matrix.

Damian Davies is director of The Timebank

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