1. The changing shape of advice
Aviva UK Life
The changing shape of advice
Introduction Slide

2. Learning outcomes The FCA’s expectations from a CIP
How to satisfy the regulator alongside enhancing your proposition
A due diligence checklist and industry best practice
Matching solutions to client needs; how to design your process
Implementation and investment due diligence
NEED TO STATE HERE – this session will cover both CIPS and due diligence:
We’ll start by looking at the regulation
Then talk about due diligence and the questions advisers could ask themselves
Then we’ll run through CIPS and some of the common areas and challenges
Finally we’ll bring this back together by consider how the CIP decisions can impact platform choice and resulting due diligence…

3. Regulation and thematic reviews
So firstly lets cover the subject of thematic reviews, as this subject is based on a couple of areas the regulator has looked into or is about to. The first was summarised in 2012 in GC12/16 where the FSA reviewed replacement business and centralised investment propositions. The one we are yet to see is the thematic review the FCA are now completing on investment suitability and due diligence.

4. Key Points – FG12/16
A firm either selling or intending to sell CIPs should:
consider the needs and objectives of its target clients when designing or adopting a CIP (page 16);
ensure that it is not ‘shoe-horning’ clients into the CIP (page 20); and
establish a robust risk identification and control system to mitigate risks which might arise from the specific characteristics of its CIP (page 22).
The first of those was FG12/16 which was issued in July but expect we’ll summarise with the statements on screen, basically this is what the FCA is expecting to see in CIP introduction. This was a decent length paper (26 pages) but in case you’ve misplaced your copy, here are the rough take out points:
Process, controls, record keeping and robust governance are all important, these need to be in place to effectively deliver a CIP
Consider the needs of the target client when adopting or designing a CIP, this may mean different CIPS are needed for different target segments
Clients must be individually assessed for suitability within the CIP, shoe horning is a no no and the CIP must be in the individual clients best interest and clearly explained to them
There was also more detailed areas such as the relationship needed when outsourcing to a DFM (around who the client was) and also a large section of the paper covered replacement business, and the types of considerations and challenges that exist when moving a client either from a legacy product to a platform or a platform to another platform.
Basically if you are looking to introduce a CIP with a new platform selection or not you need to demonstrate
That the needs and objectives of your different target segments have been taken into account in developing your CIP
Your approach is not likely to result in clients being shoe-homed into the CIP if it is not suitable for their individual circumstances
You will have robust systems and controls to mitigate any risks that might arise from the specific characteristics of your CIP (e.g. because you use ETFs, hedge funds or other more complex instruments)

5. Shoe-horning – Should I worry?
‘Shoe-horning’ – firms might recommend a ‘one size fits all’ solution which is not suitable for the individual needs and objectives of a client.
FG12/16
This slide references why they should worry about shoehorning, these examples were identified as poor practice by the FCA in 2012.
We can also refer to J11 as this being an element now part of the CII syllabus, this basically underlines the guidance in FG12/16 (page 6/16 of J11 text book).

6. Key Points – Due diligence review
Will include:
How advisers are ensuring they are selling suitable investment products and services to their clients
The due diligence being completed and documented in this process
Will assess how wealth managers and private banks control the conflicts of interests with their in-house funds
The next piece of news we expect is the outcome of the FCAs current review on due diligence. These are the three areas we anticipate being covered.
This has been expected a while, but we now expect this to land later this year and we expect it will identify a number of areas for further consideration. Due diligence has been a hot topic for some time and we expect the rigour around this to be challenged. Clearly we could second guess the areas but probably the most useful thing we could add here is to consider the files you keep and the processes you have in place around due diligence. It is likely the FCA will identify some areas where they are concerned.

7. Due diligence processes
Nine key areas of due diligence:
The platform provider
Terms and conditions of using the platform
Charges
The range of funds, tax wrappers and products
The range of asset classes
Functionality
Accessibility
Additional tools
Support services
With regards platforms specifically there are nine areas they have asked advisers and firms to consider. (We expect Zurich to have covered these).
The areas of investment products will be different in some areas but there will be many areas of similarity – such as considering financial strength of the provider being considered.
We (Aviva) have done a lot to support here, reference the white paper we could hand out, maybe think about some of the considerations here (in house or outsource, how to use tech in due diligence, how to document, etc.)

8. Key stages of the process
Platform due diligence process
Consider internal capability or outsourcing
List reasons for selecting or deselecting platforms
Document your outcomes
What research tools will you require?
List the key platform functionality requirements
Plan your next review date
Refer to PS11/9 and the nine key elements
Document the process

9. Useful pointers (1)
Things you’ll want to consider when looking at platform due diligence:
Prerequisites
Process and approach
Have you:
defined your client proposition?
assessed client suitability for platform?
assessed how the platform may fit into your business model and client needs?
considered internal capability or outsourcing?
defined a due diligence process?
Have you:
listed the key platform functionality requirements?
listed research tools required?
listed reasons for selecting or deselecting a platform?
documented outcomes?
planned your next review date?
captured the time requirement for due diligence?
considered internal capability or outsourcing?
assessed the market for outsourced due diligence providers?
considered technology support and assessed the market?
considered what automated services you could use?
defined your due diligence process?

10. Useful pointers (2) Detailed areas Regulatory responsibilities
Have you:
listed current and strategic platform objectives – do you know what you want platforms to do for future clients?
evaluated your due diligence process?
Have you:
reviewed and understood FCA guidance?
referred to FCA examples of good and poor practices in due diligence?
reviewed your process with your compliance team if necessary?
Working with Platforms
Support required
Have you:
established the right contacts and support?
clearly established the platform’s target market and proposition?
looked at what other support and assistance the platform could offer you?
Have you:
considered what kind of support you want?
established the right contacts within the platform provider to work with?
looked at whether there are any areas where you need further support?
Contact us For further support, please speak to your usual Aviva contact or us at

11. CIPS - Summary Investment Capital Service Level 1 Service Level 2
Transactional
Managed Fund
Multi-manager
Mass affluent
Model Portfolio
Discretionary service
HNW
Off platform
We’ll come back to due diligence at the end of this session to summarise but we’ll now step back a little and think around what a CIP is how these can be developed.
The screen shows how a range of CIPS could be developed and this is pretty typical of what we are seeing in the market today.
QUESTION – Something like who has a CIP within their business? More than one? We surveyed a number of advisers recently and found around 60% to having one in place and 40% either not having one or developing one. Two thirds of the firms having a CIP said they had more than one CIP to serve different client segments (so 40%) which means that 20% of the respondents only offer one CIP so in light of the FCA guidance, they must only serve one client segment or deem the CIP to be appropriate for all applicable clients.
A few other interesting stats from that research..
Only 20% have developed a CIP specifically for deaccumulation, we expect this to grow but it does appear that many of the propositions are designed around growth currently
53% of firms are using an in house model portfolio for some of their clients, 37% are using an outsourced model portfolio solution, 39% are using single fund solutions (multi asset/multi manager) for some of their clients and around 50% of respondents have at least one client with a bespoke solution of individual funds.
Anyway, back to topic.
Over the past few years we have seen many more firms complete the segmentation exercise around their clients and the results of this process may mean different levels of service are offered as part of the overall proposition. This has driven firms to consider a suitable and appropriate service to each client ‘type’. In many cases this has needed firms to consider whether more than one platform is needed to meet all their clients’ individual expectations, and whether there is no platform requirement at all for one or more clients, such as for more basic and transactional advice.
We know that some firms have 1 service level agreement but then different propositions based on client wealth. There no rights or wrongs with the segmentation unless clients for whom is it not appropriate are advised incorrectly. (our research told us around 53% firms segment on a value basis, but we also saw firms using lifestage alongside other needs based measures).
You will notice that we have added a section that says off platform or bespoke service. This is where you identify those scenarios where the normal service agreements or platform services might not be appropriate.
If there is time ask the audience what these may be? Cash only, someone requiring a certain degree of protection where a structured product may be appropriate that might not naturally fall into the categories above, tax advantageous investing within EIS or VCT. There needs to be a way of identifying these clients and you need to have written how these will be dealt with within your service proposition.
You then need to decide whether one platform or 2 or more are needed. A small number of firms will have a very exclusive client bank of high net worth individuals, all of whom would be appropriate for the same platform. All other advisory firms are likely to need more than one platform.
Assuming that you intend to use platforms you are required to identify the specific platforms that are likely to be suitable for each proposition by carrying out research and due diligence on them.
Centralised investment processes need to take account of on and off platform products

12. CIPS – Challenges for firms
Matching the proposition to client needs
The range of solutions
Risk Management
Outsourcing vs. In house (see next slide)
These are some of the challenges we are seeing when talking to firms around the development and implementation of a CIP.
We’ve worked with a number of firms around some of the considerations for firms when developing CIPS, these can be shared with you in another of our white papers but the headline areas were as follows:
Matching the solution to clients needs – so this one is very simple, but unless you have a deep understanding of what your clients need and aim to achieve, its difficult to develop a solution here. Research is often needed here, whether its specific conversations with clients or more generic testing but being able to document and evidence why a solution is put together will not only meet the regulatory demands but also help you deliver a better quality and more relevant solution to your clients.
The range of solutions – we touched on this before but firms are now faced with choices from single funds, bespoke models, in house model portfolios, out sourced models, and so on. Working through the implications of these for both your clients and your business is important. Its important to understand how the various solutions are constructed, where the risk lies for your firm in each solution and the amount and type of work required by your business on an ongoing basis.
There is a common misconception that outsourcing removes the risk from your firm, but in reality the risk is being moved from one area to another (so in simple terms instead of selecting and assessing a fund on an ongoing basis, you are assessing and assessing a DFM on an ongoing basis). We also have the issue around who the client is in an outsourced relationship, in many DFM relationships you (the adviser) are the client but need to make it clear to the client who is managing their money.
In terms of risk management, as I said before, different solutions can present different risks to your business, in all cases, these should be documented and assessed thoroughly in terms of what if scenarios.

13. Focus on outsourcing Benefits Considerations
Brings in specialist skills in key areas (e.g. fund research)
Allows adoption of a proven, robust process
Allows time to be focused in core areas (e.g. with clients)
Considerations
Cost and impact on your value chain
Maintaining control
Suitability remains your responsibility
These are some of the challenges we are seeing when talking to firms around the development and implementation of a CIP.
We’ve worked with a number of firms around some of the considerations for firms when developing CIPS, these can be shared with you in another of our white papers but the headline areas were as follows:
Matching the solution to clients needs – so this one is very simple, but unless you have a deep understanding of what your clients need and aim to achieve, its difficult to develop a solution here. Research is often needed here, whether its specific conversations with clients or more generic testing but being able to document and evidence why a solution is put together will not only meet the regulatory demands but also help you deliver a better quality and more relevant solution to your clients.
The range of solutions – we touched on this before but firms are now faced with choices from single funds, bespoke models, in house model portfolios, out sourced models, and so on. Working through the implications of these for both your clients and your business is important. Its important to understand how the various solutions are constructed, where the risk lies for your firm in each solution and the amount and type of work required by your business on an ongoing basis.
There is a common misconception that outsourcing removes the risk from your firm, but in reality the risk is being moved from one area to another (so in simple terms instead of selecting and assessing a fund on an ongoing basis, you are assessing and assessing a DFM on an ongoing basis). We also have the issue around who the client is in an outsourced relationship, in many DFM relationships you (the adviser) are the client but need to make it clear to the client who is managing their money.
In terms of risk management, as I said before, different solutions can present different risks to your business, in all cases, these should be documented and assessed thoroughly in terms of what if scenarios.

14. CIPS – Challenges for firms
Bespoke vs. ready made
Innovation
Discretionary considerations
Implementation
Just four more…
Bespoke vs. ready made – if we draw the analogy to suits, suits can be individually designed around the client but tailored suits can sometimes represent poor value against ready to wear offers. You need to work through this dynamic with the client and build a picture of what the most suitable product or service for them is. Clearly the FCA is keen not everyone is shoehorned into the CIP but you need to weigh this up against the challenge and resulting client cost of designing and maintaining a bespoke portfolio for a number of your clients.
Innovation – There are an increasing number of investment products on the market today and some of the new solutions drive genuine value ae client’s needs evolve. You need to work through where this innovation adds value and which areas are just innovation for innovation’s sake.
Implementation – Building a new proposition can often be the easy part but then moving clients into it (where justified and suitable) is more difficult and where we are seeing the issues arise. Its worth thinking through how you complete the analysis, contact and explain the changes to the client, project manage this, etc..
ANDY – it may be worth talking about the asset transition paper?
We’ll go through some of the implementation issues next…

15. CIPS – Other considerations
Platforms may not be appropriate for all clients or most cost effective
Existing products may have valuable guarantees or options that are no longer available on the market. This must be taken into consideration
DFM – model portfolios on platform/ segregated client portfolios on platform/ client money off platform in the DFM nominee accounts
Accessing NS&I or specialist funds
Stocks and shares – via personal portfolio or GIA
UK Equities, ETFs, Investment Trusts, VCTs, Gilts/ Bonds
Cash Deposits, Deposit Accounts, Notice Accounts, Cash ISA
There is significant complexity around the physical implementation of a CIP, particularly on platform…
…run through
The need to consider existing clients is paramount to the process.
Existing products are not “bad” just because they are not available on-line
Many have valuable guarantees that should not be jeopardised.
Give examples – annuities and With Profits.
Can your platform of choice accommodate an existing back book and offer on-line functionality – some can – A4A
Consider the cost of migration as well – often ignored by many platform providers – estimated to be circa £600 -£800 per case (Source Veracity)
* By packaged products, I am referring to retail investment and off platform products.
The recent budget may make many of these e.g. bonds more attractive once more as an investment medium – give examples and expand.
ANDY – maybe at this stage we could ask do these see about right? Any other areas firms have found difficult?

16. Investment advice requirements
Adviser business
Client needs
Regulator
Clarity of proposition, client suitability, reduce risk
Specific investment offerings for each identified client segment
Evidence required of a consistently executed investment process
Outsource
In-house
Investment solutions
outsourced
In-house investment
management
If we just reflect back now on some of the requirements set out by the FCA but also some of the guidance taking place around the industry in terms of offering investment advice.
The regulator is looking for a consistently executed investment process, they are looking for client needs to be identified and investment offerings to be selected to reflect this, and they are expecting the adviser to deliver this proposition and ensure ongoing client suitability.
The examples below show different approaches to this where an adviser can deliver this through outsourcing or through delivering more components in house. There’s no right or wrong answer here – but I would challenge firms to revisit the above three areas on a regular basis to ensure these are being met for each audience.
Critically though in both cases the adviser still needs to assess and ensure ongoing suitability – that can’t be outsourced!
Guided
Investment
process
3rd party
Model
portfolios
Multi
asset
Fund
Selection
Portfolio
construction
Asset
allocation
Governance and review

17. Implications on platform selection
Questions that Should influence your platform decision are:
Model portfolios on the platform?
DFM or Managed Portfolio Services on the platform?
ETFs, hedge funds, or other instruments?
Are there specific tax wrappers with specific product features?
Special discounts?
Systems and controls?
So if we bring this back full circle to platform due diligence but also platform decision. Its worth making sure you consider and document the following after working through your CIP proposition or propositions.
Questions that would influence your platform decision are:
Will you need to run model portfolios on the platform?
Do you require a DFM to manage money on the platform?
Do you use ETFs, hedge funds or other instruments which may not be available on all platforms?
Are there specific tax wrappers with specific product features e.g. income payment requirements, which you are likely to need?
Can you negotiate a special discount with a fund or solution commonly used off platform which will be reflected on the platform?
How will the platform help you manage the systems and controls you will need to help mitigate any client and business risks associated with your Investment Methodology?

18. Considering the solutions
Investment matrix - key areas for your business

19. Learning outcomes The FCA’s expectations from a CIP
How to satisfy the regulator alongside enhancing your proposition
A due diligence checklist and industry best practice
Matching solutions to client needs; how to design your process
Implementation and investment due diligence

20. Questions and close
Close out, reference papers, etc…