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We often see management information around suitability that, in our view, isn’t effective at helping senior management understand whether clients’ investment portfolios and any advisory recommendations are suitable. Here are our top tips for effective suitability MI.
MI should evidence that front office management are driving higher suitability standards
MI reports and remedial actions should show evidence of ownership and engagement by front office line management in addressing any problems, and in driving higher standards among the teams and individuals they are responsible for. In too many cases, the only MI is produced by the compliance function and there’s little or no sign that front office senior management are driving the improvements needed, or that they see evidencing suitability as a core part of their job to deliver the best service to clients.
MI should focus on evidencing suitable outcomes – service/mandate and portfolio make-up
Is your suitability MI separately reported from process/procedure fails, or is it all mixed in to a broader pass/fail rating? Ask yourself whether your MI tells senior management what proportion of cases fail to evidence suitability of the selected service (for example, bespoke discretionary) and the selected investment strategy (for example, defensive)? And can you tell how many files fail because it’s not clear that the portfolio is being managed in line with the agreed strategy?
MI should pinpoint specific root causes of failure
Does the MI tell us what the most common reasons are for failure, and what we need to do to address them? Ideally, this should go into more detail than broad-brush fail reasons like ‘inadequate KYC information’. Examples could include: unclear or conflicting objectives; conflicting information about attitude to risk; insufficient financial information on file to assess capacity for loss; KYC information is manifestly out of date; portfolio turnover is outside normal parameters with no obvious explanation and so on.
Frequency of MI reporting should help you see trends and progress with remedial activity
Does your MI tell senior management whether things are getting better or worse, and whether the agreed remedial activities are on track and working as intended? The best frequency for reporting your suitability MI might depend on the size of your firm and the volumes of checks you’re doing. In our experience, the quality of MI sometimes suffers from being reported too frequently. You need enough time between reports to see trends from monitoring activity and the impact of remedial actions. Monthly might be too frequently if the results look the same from one month to the next or, alternatively, if they are very volatile and erratic due to very small monthly sample sizes. The risk is that senior management stops looking at the MI if it’s not really presenting them with a reliable and insightful picture of what’s going on. So it might be better to reduce the frequency of MI, but improve the quality.
MI should track progress with remedial actions from previous periods
Does your MI tell us what progress is being made with addressing previous remedial actions (for example, contacting clients to obtain missing KYC information), and does it tell you whether that remedial action has worked as intended (for example by moving an ‘unclear’ client file to ‘suitable’)?
Suitability MI should cover all relevant services and distinguish between them
Many firms will offer a variety of investment service options (bespoke discretionary, Managed Portfolio Service, advisory managed, advice & dealing, financial planning). We often find that results of suitability monitoring vary significantly from one service to the next, which is not surprising given that the challenges they pose in evidencing suitability are different. So it’s important that your suitability MI distinguishes between these services, and that none of them are being neglected by your suitability monitoring regime.
Our recent survey of wealth management firms found that many fall short when it comes to systems and controls around suitability. Get in touch to find out how to get your MI in order and make sure you’re helping senior management understand whether clients’ portfolios and any advisory recommendations are suitable.
