A Financial Plan without wealth management is a bit like a car without an engine; nice to look at but unable to get you where you need to go.
Here at Informed Choice, we offer wealth management as part of our service to clients; although we refer to this as a slightly more friendly sounding investment management.
We are not however ‘wealth managers’.
This title is reserved for stockbroker-like investment managers, typically in the City or with regional offices, who manage mainly equity portfolios for their clients.
Where we operate on an advisory basis (in collaboration with our clients and seeking permission before making any changes to investment portfolios), wealth managers usually work on a discretionary basis.
And according to a new thematic review by the Financial Conduct Authority (FCA), many of them are doing things pretty poorly.
The FCA thematic review identified concerns about conflicts of interest, high portfolio turnover rates and significant suitability failings.
These problems are, according to the FCA, putting the clients of wealth management firms at risk.
The FCA reviewed unnamed 15 wealth management firms as part of their thematic review. They identified regulatory failings in two-thirds of this sample, with a third of them becoming subject to enforcement action due to the severity of their shortcomings.
On the subject of portfolio turnover, where frequent buys and sells are made within investment portfolios, the FCA identified one wealth management firm with turnover of up to 196% a year and commented it was “unclear why the frequency of transactions was necessary and whether these were executed in the best interests of customers”.
On a more positive note, the FCA found that a number of firms have taken steps to both improve and demonstrate the suitability of customer investment portfolios.
They did however find that many firms still have to make substantial improvements in gathering, recording and regularly updating customer information to support the investment portfolios they manage for customers
Wealth management firms also need to do more to ensure that the composition of the portfolios they manage truly reflects the investment needs and risk appetite of their customers, especially those who have a limited capacity for, or desire to expose themselves to the risk of, capital loss.
This is where financial planning plays such an important role.
Where wealth (or investment) management is delivered in isolation, it will always be difficult to ensure investors are taking a suitable level of risk.
Financial Planning can help wealth managers demonstrate the level of risk within the portfolios they are recommending are suitable in terms of the risk the investor wants, needs and is able to take.
We expect the answer to the challenges identified by the FCA in this thematic review will be the creation of financial planning services within all wealth management firms, so suitability can be proven, not only to customers but also to the regulator.