This article by ROBIN POWELL was originally published by the Suitable Advice Institute.
It’s easy to let our hearts rule our heads when discussing Neil Woodford. According to a new book, Woodford and his business partner extracted £11.5 million from his failed investment empire, and continued to charge fees even when his funds were suspended.
Many of his investors lost life-changing sums of money. Now he’s issued a semi-apology and is in the process of setting up a new investment business.
The words grotesque and shameless and barely do justice to the way Mr Woodford continues to conduct himself.
But, as financial professionals, we need to leave emotions aside, and ask: What is the rational response to this whole sorry saga? How can we all move on and start rebuilding public trust in the financial advice profession and the wider investment industry?
Forget advice versus guidance
The starting point, I would suggest, is to stop the endless debate on what constitutes advice and guidance. The distinction between the two just too blurred.
Does, for example, a piece in a Sunday newspaper about the latest “hot” funds or investment themes constitute advice? In a legal sense, of course, it doesn’t. But readers inevitably consider such articles as advice.
The same can be said of so-called best-buy fund lists. Platforms and brokers that issue these lists are careful, of course, to include disclaimers. But did investors who were bombarded with marketing material about Woodford’s stock-picking expertise seriously doubt that this was anything other than a strong recommendation from experts who had conducted the necessary research?
Suitability is easier to understand
Instead of advice and guidance, what we need to focus on is suitability.
The beauty of suitability is that both professionals and consumers can easily understand it. Either a financial product is suitable for a particular client or it’s not. Any attempt to encourage someone to buy a product that’s unsuitable, regardless of whether you call it advice or guidance, should be treated as a very serious matter.
It’s been a real privilege to work, over the last 18 months, with the Suitable Advice Institute. A global, not-for-profit organisation, the Institute exists to put financial suitability firmly on the agenda, and to help financial advice firms to incorporate suitability into their processes.
Woodford goes to the heart of suitability
For the Institute’s Convenor, FinaMetrica co-founder Paul Resnik, “the Neil Woodford/ Hargreaves Lansdown imbroglio goes to the heart of suitability”.
“What was in the mind of prospective investors when they read the best-buy list?” he asked in a recent tweet. “Did they believe that funds had been appropriately researched and likely to meet their needs? Were they mere opinion pieces or something more?”
For Resnik, the current regulatory regime gives platforms like Hargreaves an unfair advantage over genuine financial advisers. The solution, he believes, is to level the playing field and requiring all financial businesses to prioritise suitability.
“I don’t understand,” he says, “how everyone else who makes a recommendation has to meet a suitability standard, and direct-to-consumer platforms don’t. It’s not fair to those who take the obligation seriously, and it’s not fair to consumers. It’s even worse when funds on the buy list are patently not fit for purpose.”
A five-step process
Thankfully, suitability is playing an increasingly important role in financial regulation worldwide. But there remain significant gaps in the knowledge of most financial professionals about what they need to be doing.
For the Suitable Advice Institute, there are five important steps that firms should be taking if they’re serious about suitability:
1. Knowing the client: having a clear understanding of their circumstances, goals and individual risk profile
2. Knowing the product: having a through grasp of the risks involved, the likely returns, and the fees and charges, together with the specific market the product is intended for
3. Justifying the connection: being able to explain, in simple terms, what connects the client and the product
4. Informed consent: ensuring that the client fully understands and accepts the financial risks they are taking
5. Monitoring and maintenance: continually reviewing the client’s circumstances and goals, as well as the products they are using, and making any necessary adjustments
Sadly, the proportion of financial advice firms around the world that properly take all five steps is relatively small.
As for Hargreaves Lansdown and the many financial publications and other third parties that promoted Woodford’s funds, they clearly fail on all five counts. After all, how can you possibly suggest a particular product when you have no idea who’s going to be reading, and quite often acting on, your recommendation?
A human story
The bottom line for me is that Woodford underlines the need for genuinely independent, client-focused financial advice, underpinned by a robust financial plan.
I interviewed Alan Smith, founder of the London-based financial planning firm Capital Asset Management, the other day, and asked for his thoughts on the latest Woodford developments. His main observation was that there’s far too much attention on Woodford and the industry rather than the people who really matter, consumers.
“Behind all this,” Alan said, “are real people, real families, trying to fund their retirements, help their kids on the property ladder, fund their education and help their grandchildren.
“There’s a human story behind every penny invested, whether it’s with Woodford or anyone else.”
And that’s the crux of it. The likes of Hargreaves Lansdown don’t have a proper working relationship with, or sense of responsibility towards, those self-directed clients its best-by lists are aimed at.
A win-win for consumers and the industry
The answer, in Alan Smith’s view and in mine, is to put much more emphasis on those individual clients, what they really need, and, most of all, on ensuring that any product recommended to them is indeed suitable.
So forget advice versus guidance. Let’s focus on suitability instead. Get suitability right, and we can bring about a genuine win-win that serves the best interests of consumers and encourages the growth of a more ethical and sustainable investment industry.
ROBIN POWELL is the founding editor of The Evidence-Based Investor. He works as a journalist and consultant specialising in finance and investing, and as a campaigner for a fairer, more transparent asset management industry. He is the founder of Ember Television and Regis Media. You can find him here on LinkedIn and Twitter.
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Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
