How has a year of Consumer Duty affected advisers?

Consumer Duty is the latest in a long line of regulations that have aimed to improve transparency and confidence in the financial services industry, and our expectation was that advisers would adapt to the new regime just as they have adapted in the past.

In the spring and summer of 2023, we undertook some research with NextWealth to get a better understanding of why IFAs partner with external investment providers so we can better support existing partners through the process, and to support new partners when they come to select potential investment providers.

We've identified five key areas where the new Consumer Duty would impact advisers and their investment managers.

What impact is Consumer Duty having on advisers and investment managers?

1. The role of the adviser will have a renewed focus

Not surprisingly, being time poor remains a key theme for advisers. With increased record keeping, auditing and reporting requirements, Consumer Duty was never going to make that aspect of being in business easier.

Talking to clients, understanding their needs, and designing strategies to meet those needs is where advisers 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 the best use of an adviser’s valuable time. But it is costly to hire an additional resource to carry out that work in house.

We therefore predicted that the trend to outsource investments and back-office functions would increase at a faster rate if advisers were to remain free to focus on their core value-adding skills.

According to research from FE fundinfo, almost a third of advisers (31%) are now using DFMs for their investment proposition with 45% reporting an increase in the use of external investment solutions.

Looking deeper into the results highlights that the model has moved on. Rather than using the generic one-size-fits-all solutions of the past, there is an increased focus on customised MPS solutions. I can attest to that from personal experience, as the past nine months have seen increased interest in our own customised MPS proposition and our Tailored Discretionary Model Portfolios.

Requests for information on the Tailored Discretionary Management Service have also risen in response to the FCA’s thematic review of retirement income advice, especially from advisers who might have previously recommended a bespoke solution.

2. Fair value will dominate

Again, nothing new in this. Fair Value Assessments are a regular event in the fund management world with funds regularly closing or merging because an objective analysis of performance and other measures indicates they offer poor value to consumers.

But with Consumer Duty, this need to provide fair value extends to all parts of the client experience. Advisers now have to assess if their current costs – which ultimately have to be reflected in total client fees – represent fair value for those clients.

We therefore predicted that support functions would also be subject to a rigorous review of the return on cost with more of them becoming outsourced. This clearly brings the ability to share costs with other advisers, and the NextWealth report showed the average MPS management fee had fallen from 25bps to 19bps.

Lastly, the good providers will review their offering regularly to improve or enhance the quality of service to remain competitive and at the forefront of the market. And this can be evidenced as improving client outcomes.

3. IFAs will become more selective in their partnerships

Although the search for better value would achieve more attention, we felt the need to deliver the best client outcomes would still be the main focus. Quality would still rank higher than cost. In this scenario, Target Market Disclosures and Fair Value Assessments would lead to the use of fewer DFMs, but which had broader capabilities to deliver a range of solutions to meet the needs of a range of clients.

Again, nothing particularly new about that balance. But taking a wider view than just delivering an investment product for a decent cost, advisers would need to improve their MI and reporting abilities to show how their processes and checks and balances led to each client receiving the appropriate outcome(s) for them. This would prove to be an additional focus for advisers to consider.

Just before Consumer Duty launched, research from NextWealth shows the number of DFMs each IFA practice worked with peaked at around 2.5 in 2020 then declined following the COVID-19 pandemic. Following Consumer Duty coming into effect, the 2024 FE fundinfo adviser survey found only 3% of advisers have reduced the number of DFMs they work with, although this may reflect the low number of relationships they already had.

4. Due diligence will be heightened

We predicted that advisers would revisit their existing DFM relationships if they thought they could find better value or better targeted solutions elsewhere. Annual reviews would have to switch focus from “did we make the right choice last time” to “is this still the right of existing managers will have to focus not so much on “are we confident we’ve made the right choice” but on “is this still the most appropriate solution available in the current environment?”.

Processes for assessing, monitoring, and measuring quality and cost would have to be robust, repeatable, scalable, and evidenced in full. IFAs would need to stand up to higher levels of scrutiny and audit. Looking at the FE fundinfo research advisers appear to be embracing AI and other technologies to improve analysis and reporting in this area with 40% saying they’ve increased the use of technology when carrying out due diligence.

5. Data will be king

With a heightened need for thorough record keeping in all areas that touch on the client experience, the ability to manage, and analyse, the breadth and depth of that data becomes essential if advisers are to effectively demonstrate which outcomes have been met, and the degree to which others have been missed.

This would also require an increased focus on oversight, audit and evidencing where areas of weakness are being addressed. Why is this better/cheaper/more efficient than the current solution or offering?

Where there is a large data field, AI is the natural fit. Advisers will either have to develop their in-house AI skills or find the right tools to help them prepare enhanced client and regulatory reports more accurately and more efficiently. And choosing that tool in itself will have to be evidenced.

The right partnerships will be the key to success

Ongoing best practice requires advisers to be more selective in their partners if they are to avoid repeated reselection reviews. These were time consuming enough before Consumer Duty.

In addition to delivering the solution to the client on behalf of the adviser, the right DFMs will be able to help advisers meet and comply with the new requirements including the level of detail and number of data points that need to be captured.

The right DFM partner needs to be able to demonstrate to the adviser that it has delivered the right outcomes and detail exactly how this was achieved. Resulting in the adviser being able to demonstrably evidence they have personally recommended the right product for the right client.

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