Consumer Duty launched in July last year, the latest in a long line of regulations aimed at improving transparency and confidence in the financial services industry. A year on, Sean Osborne, Group Head of Sales, Charles Stanley, reflects not only on what he and the team thought would happen, but also how advisers have responded and what the team at Charles Stanley has subsequently seen.
Last year, we partnered with NextWealth to conduct some research to better understand the reasons why IFAs work with external investment partners so we could better understand how the market has evolved. And also how we can support advisers when they are reviewing potential partners.
In the course of our research, we identified five key ways in which we thought the new Consumer Duty principles would impact advisers and investment managers as follows:
1. The role of the adviser will have a renewed focus
Financial planners are always time poor. Talking to clients, understanding their needs, and designing strategies to meet those needs can be where they add the most value. Administrating and rebalancing client portfolios, and monitoring income flows, are not central to delivering the financial plan and may not be a good use of an adviser’s valuable time.
Therefore, we predicted that the trend to outsource investments and back-office functions would not only continue, it would increase at pace, freeing advisers to focus on their core value-adding skills.
A recent report from FE fundinfo shows that almost a third of advisers (31%) are now using DFMs for their investment proposition with 45% of advisers reporting an increase in the use of external investment solutions. But the model has moved from the generic one-size fits-all of yesteryear to customized MPS solutions.
We ourselves have seen a surge in interest in our Tailored Discretionary Model Portfolios that combine the benefits of scale with some customisation. This is particularly true for clients who may have traditionally utilized a bespoke solution.
2. Fair value will dominate
This was not a new idea. Fair Value Assessments have been around for a while in the fund management world. It is quite common for funds to close or merge because an objective analysis of performance and other measures indicates they offer poor value to consumers.
But Consumer Duty extends this concept to all areas of the client experience asking advisers to assess whether their current costs – which are reflected in total client fees – provide fair value.
We therefore predicted that other areas of the business would also be subject to rigorous review of the return on cost with more functions being outsourced. Firstly, it has the potential to share costs with other advisers, and the NextWealth report showed average management fees falling from 25 bps to 19 bps. But it also increases the ability to scale your business, and specialist providers review and enhance their offering regularly to improve or enhance quality of service.
3. IFAs will become more selective in their partnerships
We believed the search for better value would not override the need to deliver the best client outcomes. We also believed that Target Market Disclosures and Fair Value Assessments would lead to the use of fewer DFMs but which had broader capabilities – ones with the ability to deliver specific rather than generic portfolios.
But broader than delivering an investment product, Consumer Duty would require advisers to improve their MI and reporting capabilities to show how clients have received appropriate outcomes. This would prove to be an additional focus for advisers to consider.
At the time, research from NextWealth showed that the number of DFMs each IFA practice worked with reached a peak in 2020 at an average of 2.5 and had declined over the period 2022/23. The 2024 FE fundinfo adviser survey found only 3% of advisers have reduced the number of DFMs they work with since the advent of Consumer Duty, although this may reflect the low number of relationships they already had.
4. Due diligence would be heightened
We predicted that existing DFM relationships would be reconsidered if the firm feels they can find better value and better targeted solutions elsewhere. Annual reviews of existing managers will have to focus not so much on “are we confident we’ve made the right choice” but pivot towards “is this still the most appropriate solution available in the current environment?”
Processes for assuring quality and cost would have to be robust, repeatable, and demonstrable. IFAs will need to demonstrate higher levels of scrutiny. And it appears that advisers are leaning into Al and other technologies to improve analysis and reporting in this area with 40% reporting an increased use of technology when carrying out due diligence.
5. Data will become king
Undoubtedly the biggest area of change would be in the need for efficient and effective record keeping for all business decisions that affected client outcomes. This would require an increase in the breadth of reporting needs and the depth of reporting quality. Overlaying this would be increased oversight, audit, and evidencing of all decisions made on the behalf of clients.
And where there is a large data field, Al is the natural tool to cut through the information to find the nuggets and trends of meaningful information. Advisers will either have to develop their in-house Al skills or find the right tools to help them prepare enhanced client and regulatory reports more accurately and more efficiently.
6. The right partnerships will be the key to success
To demonstrate continuing best practice advisers will need to be more selective in their partners, seeking out those that can help deliver appropriate solutions. But beyond that, we believe there would be a bigger role for DMs in helping advisers meet and comply with the heightened reporting standards including the depth and breadth of information the DFM could provide that evidenced how those outcomes had been met.
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About Sean Osborne
Sean started his financial services career over 25 years ago and held a number off sales and senior roles during at AVIVA, Aegon and Legal and General. In April 2011, Sean moved to Suffolk Life part of the L&G Group as a member of its Executive committee where ne worked as Head of Sales. In December 2018 Sean joined Charles Stanley as Head of National Accounts, before moving to his current role as Group Head of Sales in May 2021. Sean is responsible for driving Charles Stanley’s development and distribution across multiple channels of the Uk market Outside of work Seon is married with two children and enjoys spending time with his young family and exploring somewhere new.
