Centralised Investment Propositions: too cookie cutter?

Today I contributed to a panel discussion at the Money Marketing Live event in Harrogate to discuss the trends we’re seeing in centralised investment propositions (CIPs) and model portfolios (the session was aptly named CIPs and model portfolios under the microscope). Unlike most panels - and I guess it was unfortunate for those in the audience who wanted to see some controversy - all the panellists agreed on everything (yawn). However, I believe the insights gleaned are relevant for our readers so I've created this succinct summary of the key themes that emerged.

Latest trends in CIP usage

Since the introduction of the Retail Distribution Review we’ve seen an explosion in the use of CIPs. In fact, research indicates that 90% of firms now have a CIP and of those that do, around 80% of all new assets with be placed within it.

The primary drivers for CIP adoption have been to deliver consistent client outcomes, build scale and de-risk the advice business. However, the problem is that CIPs give rise to a ‘cookie cutter’ approach which might not work for all clients - leading to the regulator’s concerns around shoehorning.

Those of you who regularly read my content or have recently seen me present will know about PROD, the legislation that quietly came into force with MiFID II, which aims to address the issue of shoehorning. PROD requires advisers to completely re-think their approach to segmentation, moving away from segments driven by investible assets (for example, clients with less than £150k get a managed fund solution, clients with £150k-£500k are offered a managed portfolio service and those with £500k+ are recommended a bespoke discretionary portfolio), toward micro-segmentation by client need.

Essentially, the very nature of PROD means it will unwind the traditional CIP model adopted by most firms. However, to date I’ve seen very few firms implement PROD within their businesses (research indicates just 1% of firms have deployed a PROD strategy). Most likely because it involves tearing up the current CIP and rebuilding it from the ground up. Defining each client segment and sub-segment, then recreating the solution map (investment proposition, platform, product and advice service) using a blank piece of paper - a massive undertaking for advice firms of any size.

What we are seeing in the CIP area is a growing trend toward the development of Centralised Retirement Propositions (‘CRPs’). Essentially, a set of rules or principles adopted by a firm to meet the needs of those in drawdown. To address this market need, following the introduction of Pension Freedoms, we’ve also witnessed several providers come to market with ‘off the shelf’ CRP solutions.

Can you exist today, without a CIP?

This question was put to the panel and we unanimously agreed: absolutely. You can, without a doubt, run your business without a CIP.

Let's caveat that: you can, as long as you document your client discussions; the process you undertook to get to the recommendation; and the suitability of that solution. The key is to maintain an audit trail which will stand up to regulatory scrutiny, should the regulator undertake a file check or if a complaint arises.

An earlier session today, hosted by the FCA covered this issue. Debbie Gupta said:

“No matter how well you know the client and intuitively understand their needs; if it is not documented it will not stand up to scrutiny”.

Outsourcing versus running the investment proposition in house

There has been an increasing trend toward outsourcing, with most advisers electing to outsource some or all of their investment process (we would say that, wouldn’t we?).

The panel's view on this was enlightening. Matt Ward, communications director at AKG said (and I'm paraphrasing here, he was far more eloquent):

"Outsourcing is natural in every business. In our market, advisers are defining where their skills lie and if they don't have the capability or resource in-house, they will outsource to specialist providers. For example, some firms are okay to run their risk profiling or cash flow modelling processes in-house, others will outsource and use third-party software. Some will run model portfolios themselves, however what we've seen is that not all aspects of the investment proposition will remain within their remit. Many will use multi-asset funds or other solutions for certain segments."

In my experience, the business case for outsourcing is to improve business efficiency, create scale, access expert resources and deliver more to clients at the same (or a lower) cost.

A big mistake I see advisers make is that they under-estimate the cost of running their CIP in-house. When you add up the headcount, subscriptions (e.g. Bloomberg terminals, third-party research services, reporting and other software costs), as well as the administration, cost of buying retail funds and running an Investment Committee, the process is often more expensive than outsourcing. So while keeping say 40 bps in-house sounds attractive, it could be costing closer to 60 bps when all things are considered. This is a point we often raise with firms looking to outsource.

Trends in pricing and the cost of investment outsourcing

The panel agreed that overall, we're seeing costs decrease as firms across the value chain face downward price pressure. However, those firms using technology, which have systematised their processes can build scale and therefore offer their services at a lower cost.

I firmly believe we will see prices drop lower as technological advances continue to improve business efficiency. For example, introducing Blockchain for trading and settlement is predicted to wipe out around £3bn per year in fund costs - savings that will be passed on in lower overall charges.

Without a doubt, every business in our profession should be looking at technology deployment to drive greater efficiency and therefore decrease costs (I'll cover this in a future post, stayed tuned).

Today, however the yardstick should be: will this solution deliver what the client needs in order to achieve their goals or will the cost compromise their ability to achieve the gains that will allow them to achieve their objectives?

At the end of the day, no matter what you do - in-source, outsource or co-create your investment proposition - you need to be able to demonstrate value. Everything must be developed and delivered with your client in mind.

This article was originally created for the DISCUS website (Discretionary Investment Services Coming Under Scrutiny), an information resource for financial advisers interested in outsourced investing. The weekly DISCUS newsletter became Embark News on 31 October 2019.