The Model Office Blog

The missing link between advice suitability and appropriateness of product in meeting client needs was delivered for retail investment advice firms with the introduction of Product Governance and distribution rules i.e. PROD 3.3 in particular.

 This means adviser firms need to get their head around strategy for assessing client needs and marrying this with the product, platform and investment structure in taking account of the manufacturer’s identified target market and balancing this with ensuring products and platforms are distributed only when it is in the best interests of the client.

This all means that advisers need to get strategic with their client segmentation. Gone are the days where we just have the proverbial Gold Silver Bronze silo’s, which tended to be focused on transactional assets under management. Adviser firms now need to factor in client behaviours, their propensities to buy certain products, sensitivities to fees or market movements and off course aligning client risk profiling and capacity for loss with product risk profiles.

This requires plenty of focus and skill but if executed correctly, not only does it mean compliance with a vastly misinterpreted rule, it also means high competitive advantage. Why? Well because firms will ensure their clients are gaining maximum value in providing a bespoke service and advice process with the right products to meet their on-going needs.

How can advisers segment clients through behaviour?

The below client segmentation graph showcases 4 distinct behavioural traits an adviser firm clients portray based on surveys and long term engagement. We can see it is those clients who have the urge to delegate or are time poor who require a more hands on approach and those clients who are self directed who need less face-to-face and more instant information and control.

Table 1. Client segmentation by behavioural needs

These behavioural groups, with their distinctive needs and their place in the overall client journey, react well to understanding advisory, investment services and platform selection has been completed around their own unique requirements.

What about products and platforms?

With PROD replacing ‘Responsibilities of Product Providers and Distributers’ (RPPD) Adviser firms now need to apply research and due diligence like never before. Our on-going benchmark research across the criteria adviser firms use to choose products and platforms showcase (whilst financials, charges, costs and fees top each area) a trend for client needs to be met, which is great news.

TR 16/1 is a good place to start when reviewing the advice, service and investment propositions. This paper encourages firms to change the culture for inertia and sticking with providers just because they have used them for some time and introducing a culture for challenge to break any status quo bias attached to a wealth management committee or board who influence the on-going investment and advice proposition.

So firms now really need to keep focusing on their client’s needs and understand the client journey intimately and apply a 6 stage strategy across their client segmentation policy, which ESMA now define as their target market criteria:

1. Client type (Retail, Professional, Eligible counterparty)
2. Client knowledge and experience (Basic, Informed, Experienced)
3. Client ability to bear losses (No loss, up to 100%, over 100%)
4. Client objectives and needs (Return profile, time horizon, Holding period)
5. Client risk appetite (Attitude, required, capacity for loss against product profile)
6. Product distribution channel (advised, execution only, professional)

[1]Wealth Manager and Retail Investment Adviser benchmark study Engage Insight and Model Office March 2018

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