Consumer Duty = Greater Diversification

The focus of the new Consumer Duty rules from the FCA is on improved customer outcomes. It is implicit in this that to achieve the best outcomes for the client, there should be an appropriate amount of diversification to spread risk.

Advisers that just use one company are likely to be at risk from failing to plan for the optimum outcomes for their client.

We asked three companies that can help advisers achieve greater diversification to let us have their views on what this means for advisers.

Brian Moretta at Hardman told us: we think about it in three ways. The first is asset allocation, getting the right exposure in aggregate. In our white paper on asset allocation in the EIS market, we showed that adding venture capital can improve expected portfolio returns without increasing portfolio risk. This requires looking at the asset allocation of an entire portfolio, not just any new investments. It’s hard to invest in venture capital through pension funds, so this means investors should start investing in EIS or VCTs alongside their pension, not waiting until the allowance for the latter is used up.

The second area is diversification within the venture capital portfolio. Venture capital delivers very skewed results: companies that do well give amazing returns, while those that fail often return little or nothing. To allow for the losses and increase the chances of great successes, investors should have greater number of investments in their portfolio than they would for a normal equity portfolio. The third way to think about diversification is by other factors, such as manager, sector, stage of development or temporal. Managers will have biases in style, sector or experience: getting a spread of those will improve diversification. While most venture capital companies are technology related, there are still many different areas such as fintech, SaaS or medtech. Getting exposure across these will bring diversification benefits.

And this is where Hardman & Co come in. Their independent EIS reviews, free to IFAs, will help advisers select a wider choice of Fund Managers to choose.

Spreading investments over different stages and investing progressively over time will help investors ride cycles and produce better results than possibly investing everything at a peak.

We then spoke to David Lovell at GrowthInvest, who added the following insight:

We have been pushing forward the benefits of diversification in venture capital portfolios for many years to advisers and their clients. The provision of a whole of market offering across differing product types, including EIS , VCTs and BR products on the GrowthInvest platform, acts as a great starting point. Bespoke Adviser panels, whether managed by themselves or by 3rd parties such as Hardman, can of course be implemented as required. The market can be further filtered by a range of criteria to a “short list”, and suitable offers compared on a set of clearly laid out, standardised product information, which is a big part of the Consumer Duty requirements.

GrowthInvest provides a single standardised approach to the presentation of client information for each selected offer, as well as a suite of supporting materials such as educational videos and collateral, product specific interviews and 3rd party analyst reports. In doing so, GrowthInvest is ideally positioned to ensure that clients have all the information they need to fully understand the investments and their entire portfolio throughout their investment journey.

Once invested, a range of reporting and analytical tools allow both adviser and clients to monitor and assess of performance across the client’s portfolio. As reporting is within a single secure portal against a standardised set of metrics, there is the ability to get a clear view of portfolio diversification across funds, fund managers, sectors and a number of other factors. This sits alongside investment updates, news, and all relevant documentation on the investment.

The majority of our clients have taken a major step towards ensuring diversification in their portfolios that by bringing onto the platform the clients’ existing portfolios. In doing so, both client and adviser have the best possible information and detail on their existing investments, and therefore a sound basis for make the next investment decision, and to monitor portfolio performance and diversity on an ongoing basis.

We work with our advisers and their clients to continually improve the customer journey, to aid their understanding, and to ensure that relevant additional materials and information are available and signposted throughout the platform.

We then turned to Lee Coates, from ESG Accord. His views on Consumer Duty are very clear. This new overarching regulation has, at its core, the principle of delivering best client outcomes. According to the FCA’s own research, 80% of consumers would like their money to “do good”, but this doesn’t match the very low levels of advised clients who invest in-line with this ‘do good ’objective.

As Consumer Duty requires advisers to understand client investment preferences and objectives, how can any adviser meet their Consumer Duty obligations without asking every client if they have any ESG/Sustainable investment preferences and objectives?

As the FCA has repeatedly confirmed, Consumer Duty references the COBS 9a rule relating to understanding client objectives AND that these objectives could include ESG and Sustainability. If advisers don’t ask, they can’t know. Put bluntly, if they don’t know, their advice isn’t compliant.

Then there’s the forthcoming Sustainable Label rules, which will sit complimentary with Consumer Duty obligations. Either funds will show one of three Sustainable Labels, or they will disclose that they have no sustainable investment strategy. Advisers will be required to provide information on each product/fund’s sustainability credentials direct to each client at the point of recommendation.

The Sustainable Labels regime will encompass Tax Efficient Vehicles (TEV), alongside conventional investment options. This is going to require TEV providers to address ESG and Sustainability aspects of their investment decisions or disclose that they don’t take any of these factors into account. If the latter is the case, then advisers need to decide if this introduces an extra level of risk to a provider’s offerings.

So what is my call to action? It is for all advisers to introduce investment preferences and objectives questions into their advice process now, and that will include asking if clients have any preference for ESG/Sustainability.

Please get in touch with ESG Accord to find out how your firm can access our full spectrum investment preferences and objectives compliance framework, which is free of charge to advisers.

Written by Martin Fox, Bulletin

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