IFA firms tend to use a Managed Portfolio Service as part of their CIP. Firms need to consider what makes the CIP likely to be suitable for its target clients and meets their needs and objectives. This could involve any or all the following issues:
- terms and conditions of using the CIP.
- CIP’s charges.
- CIP provider’s reputation and financial standing.
- range of tax wrappers that can invest in the CIP.
- type of underlying assets in which the CIP invests.
- CIP’s flexibility and whether it can be adapted to meet individual client’s needs and objectives and
- CIP provider’s approach to undertaking due diligence on the underlying investments.
A firm may also decide to refer investment selection to a third party. Where a firm refers investment selections to a discretionary manager, both the introducing firm and the discretionary management firm have obligations to ensure that a personal recommendation or a decision to trade is suitable for the client. The obligations on each party will depend upon the nature and extent of the respective service provided. Both parties should be clear on their respective service, and ensure they meet the corresponding suitability obligations. If either or both parties are not clear, there is a risk that clients may receive unsuitable advice and/or have their portfolios managed inappropriately.
There are three broad structures firms use when working with a third-party discretionary investment manager to provide a CIP. The advisory firm:
- arranges for the client to have a direct contractual relationship with the discretionary manager.
- holds the relevant permissions for managing investments and delegates the investment management to the discretionary manager; or
- arranges for the investment management to be carried out by the discretionary manager but on the basis that the client does not have a direct contractual relationship with the discretionary manager. Instead the discretionary manager treats the advisory firm as its client, which is acting as the agent of the end investor. In this case, the FCA expects the advisory firm to explain the position clearly to its clients. In particular, it should emphasise that it is not carrying out the investment management itself and that the discretionary manager in not treating the end investor as its client.
Ensuring a recommendation to switch existing investments into the CIP is suitable
Where a firm offers a CIP, it should not systematically transfer all its clients’ existing investments into the CIP without considering the individual needs and objectives of each client. Firms should consider whether a recommendation to a client to sell their existing investments is suitable.
A CIP will not be suitable for all clients. Even when a firm conducts adequate due diligence and designs its CIP to meet the needs and objectives of its target clients, a firm must take reasonable steps to ensure a personal recommendation is suitable for each client.
A firm must have a reasonable basis for believing that its clients have the necessary knowledge and experience to understand the nature of the risks of the underlying investments held in the CIP. The firm should explain these risks to its clients in a way that they are likely to understand. This is particularly important where the CIP uses non-traditional investments.
When the CIP solution is not suitable for an individual client, a firm must either recommend an alternative suitable solution or make no recommendation to the client. It is not acceptable to shoe-horn clients into the CIP solution.