Once of the best parts of being an IFA is having freedom and options. Independence means being able to provide solutions to clients’ financial planning needs that you think work best. There is debate about the amount of detail provided to clients and the balance between simplicity and complexity. For example, some advisers provide advice reports that are very short and others longer, while others do a mixture.
Financial advice isn't easy
If financial advice were simple, it would be easy for retail investors to manage their own portfolios. However, the reality is that financial advice is a complex and multi-faceted discipline and, as such, financial advisers need to act as the translators of the financial services world, providing the key link to bridge the complexity divide.
One of the latest complexities to develop has been the incorporation of ESG and sustainable investment values into the advice process; so much so that advisers now need an additional toolkit to incorporate it effectively. One of the difficulties around this is that communication within the finance industry has been driven by asset managers who are often out of touch with the end investor, meaning that sophisticated language is often used in reporting or explaining investments. Most retail investors are understandably apprehensive when faced with the different and complex terminologies for responsible investment and can be put off from investing sustainably as a result.
Is simplification the answer?
Distilling down key concepts is important for clarity but going too far can be detrimental to achieving good client outcomes. While sustainable investment preferences are not yet mandatory, when they are imposed on the financial advice industry, consumer duty will enforce good outcomes in this context. Advisers need to match client values against outcome. For instance, a preference for low carbon emissions should be matched against a portfolio which has low carbon production. It is obvious but it can be obfuscated by ratings, jargon and poor quality or complicated reports.
There is a danger in simplicity as well. Too simple – choosing a portfolio that has a good general environment score according to a rating – and you may discover that it does not suit the client’s needs. It is possible that the good score is due to a low carbon production, but if the client’s key values focus on water pollution, the simplicity of the rating may lead an adviser astray into choosing a product that is unsuitable. So, too much generalisation might not deliver a good outcome because the detail lost in the simplification process hides the misalignment with client values.
So can complexity bring about better outcomes?
Whilst we have established complexity is generally something we try to manage; detail might be a useful tool. Bespoke responsible solutions exist for a reason and might be required by investors with a knowledge of certain ESG aspects or with a wider array of specific sustainable values. For these investors, they will still want to dig into some sustainable investment issues and a greater level of detail and complexity is required to cater for their needs. However, simplicity can still work for more sophisticated clients; start high and then dig deeper, but still keeping it conceptual. This client type will always want more engagement and good customer service can help handle their needs. Some less sophisticated clients will need extra levels of support too, so the issue of more information cannot be overlooked.
Why is it important to get the right approach?
Consumer Duty ties into the complexity issue, specifically the aspects of communication, value, and customer service, which are all key elements of the change to regulation. Leveraging the capabilities of a DFM can help simplify customer service and deliver high quality engagement. Secondary reports that delve deeper into the issues that clients enquire about, and investment specialists knowledgeable about those issues, can quickly and effectively satisfy client enquiries.
So, simple, or complex? We suspect many advisers will want to lean toward simplicity in most circumstances, with the ability to provide more information in additional reports for those clients with higher levels of sophistication. And for the questions that are not covered, it is important to leverage the capabilities of strategic partners, the DFMs. Not only does this mindset cover breadth and depth within your client base, it covers the Consumer Duty regulation, and also embraces PROD / target market assessment to help provide better client outcomes.
How can FE Investments help?
At FE Investments, we aim to provide advisers with the support they need to advise their clients effectively and suitably. All our portfolio ranges have aspects of responsible investment embedded in their investment processes, with clear reports produced to help advisers and their clients understand the positive impact they have made on the world, along with the negative impacts avoided.
Our portfolios cover a wide spectrum of outcomes to ensure clients have enough choice of the types of investments they’d like to make, along with choice over the amount of sustainable principles in their portfolio. Our Hybrid, Income and Mosaic portfolios emphasise risk management, where ESG factors are part of the process but the objective is not such a high priority. In contrast, the Responsibly Managed portfolios combine sustainable and impact funds together to deliver a more progressive outcome to do more good. By doing so, we can target a broad client base and help advisers advise their clients effectively.