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2022 - Q2

The Quiet Revolution

Financial markets enter a new paradigm

Research and due diligence: the bottom line

Matthew Howe
Account Manager, Synaptic

Synaptic logoThe bottom line is your system’s ability to produce an automated, compliant record of each investment recommendation made. There you go. Simple. This article reviews the context and significance of this ‘record’, referring to the two types of record in question, firstly a ‘new’ recommendation or ‘new money’, and secondly a ‘review’ recommendation (which may entail a recommendation to switch or transfer).

This fundamental attribute will determine whether your system is fit for purpose from a compliance point of view, including your firm’s ability to evidence the suitability of recommendations in support of financial planning objectives. The skill of the adviser relies on the quality of the research.

What about research?

FCA Cover ShotThis is also a view held by the regulator. In the Thematic Review (TR) paper ‘TR16/1: Assessing suitability: Research and due diligence of products and services’ this is made explicit. The document references ‘previous thematic work’ as showing ‘that quality of a firm’s research and due diligence is one of three root causes of poor consumer outcomes’. The other two qualities are ‘incorrect risk profiling (see FG11/53) and costs’. Synaptic believes the use of its research tools will address all three root causes.

‘Replacement business’ was the topic of another milestone FCA publication from July 2012: ‘Finalised guidance’ paper ‘FP: Assessing suitability: Replacement business and centralised investment propositions’.

A key feature of this document was discussion of the role of the ‘Centralised Investment Proposition’. This is the method of working that has since been taken on in MiFID II and PROD, forming a governance framework for advice where suitable investment solutions are configured and matched with client types or ‘target markets’. Uniquely, the new Synaptic Pathways software was designed post MiFID II and has the ability for firms to configure and work within a Centralised Investment Propositions (or CIP).

MiFID II is now ubiquitous

TR16/1 highlighted the importance of effective risk profiling and this was cemented into the advice process by MiFID II, whose article 25 re- centres suitability:

"When providing investment advice or portfolio management the investment firm shall obtain that person’s financial situation including his ability to bear losses, and his investment objectives including his risk tolerance so as to enable the investment firm to recommend to the client or potential client the investment services and financial instruments that are suitable for him and, in particular, are in accordance with his risk tolerance and ability to bear losses."

MiFID II Article 25/2: Assessment of suitability and appropriateness and reporting to clients.

Another point that cannot be re-iterated enough is the new requirement for a full suitability review to be made under MiFID II (referred to as ex-post). Without a robust research process, this is an impossible additional burden for advisers. Synaptic Pathways has an automated review process to ensure this requirement does not derail firms.

Proof of suitability is the key to research

Financial planning, research and suitability are therefore indivisible. A Synaptic research illustration and report captures the specific investment scenario (or scenarios) being recommended and provides a full illustration, including the likely investment outcome and full disclosure on cost and charges and an analysis of the impact on inflation.

Why a research record?

This can be shared with the client in order to ensure their ‘informed consent’ and is included in any proposal, fulfilling compliance obligations at point of sale, but it also remains an indelible record of the research and advice that was proffered. A complaint against an adviser will fail if there is a lack of evidence of research, including risk profiling and risk alignment of any investment.

Advisers live in a world where the authorities wish to hold the adviser liable for recommendations made FOREVER. So no longstop. Even when the conditions in which the advice was given have long since changed, the adviser may be challenged and accused of mis-selling. Having a Synaptic report on file is easy to achieve and may well represent the most effective and cheapest insurance against business risk available, including future complaints.

The alternative to Synaptic

The alternative to using Synaptic will involve subscription to various standalone tools, rekeying data into multiple systems, reliance on mis- aligned research methodologies and mis-matched data.

What opportunities does the bottom line provide for firms?

We have spoken in fairly dry terms about the importance of research and proof of suitability. Unfortunately it is a dry subject. However, more excitingly, research is the means by which an adviser is able to demonstrate their professionalism and expertise in financial planning.

The mega-trends in the industry are creating larger groups of financial advisers and greater overall professionalism. Quality research is a fundamental requirement for success in this area. Poor investment decisions and poor care could have catastrophic consequences. These trends are also promoting the value of financial planning, which can and should be charged over and above the traditional means of remuneration to advisers as a percentage of funds under advice. Good research makes it easy to demonstrate the value-of-advice, streamline and standardise the advice process and produce meaningful suitability reports and financial plans.

The new Synaptic Pathways tool includes an automatic ‘value-of- advice’ calculation – demonstrating the value-add of the adviser and putting inflation into context within advice. Extract from Synaptic report showing ‘value-of-advice’:

pathways screenshot

Synaptic Pathways is also net-native on Salesforce™. Every Synaptic license comes with a Salesforce license built in. Salesforce is the leading CRM platform in the global market, with built in security, usability, flexibility and powerful data capabilities. Firms have historically struggled to derive value from their technology and advisory tools investment. Synaptic is able to demonstrate a more effective way of making technology work to support the advice process and practice management. We call it ‘research-led digital transformation for firms’. The bottom line is that Synaptic research is a one-stop transformation for the quality of the advice you are able to deliver and the efficiency and viability of your business.

Get in touch

www.synaptic.co.uk

hello@synaptic.co.uk