Target market assessments – checking your investment services
23 May 2019
If you’re a distributor of investment products and services, the product governance rules require you to review whether they are consistent with the needs of your identified target market. This not only covers specific investments, but also the investment services you offer – an area which is often overlooked.
It’s not just about new clients
For wealth managers and financial advisers who deal with retail clients, it’s important to test whether your clients are offered a service that continues to meet their needs. The rules don’t distinguish between existing and new clients so it’s important that you remember to review whether all your clients are still receiving the right service. If you find that they’re not, then you will need to take action to rectify this.
Using target market assessments to analyse client categories
Let’s assume that you’ve successfully created the target market assessments for the products and services that you offer. The next challenge is to use them in practice to make sure your clients are offered the service that best meets their needs. All too often they’re shoehorned into something that doesn’t really fit. For example, if you’re a traditional wealth management firm, you may well offer a number of services . These could include bespoke discretionary management, a managed portfolio service, an advisory managed service, an advice and dealing service and an execution-only dealing service. If you’re a financial planning firm, perhaps you offer transactional advice, several ongoing advice options and use a centralised investment proposition. You’ll have no doubt thought about which types of clients are best suited to each service option. If you’ve clearly defined your client segments, based on their characteristics and needs, then it should be possible to identify any instances of clients not receiving the right service.
Using target market assessments to meet individual needs
The key question to ask yourself is whether your Advisers and Investment Managers are using the target market assessments to help recommend the best service to meet each client’s needs. We’ve seen plenty of examples where this is not the case. For example, certain investment managers tend to recommend a bespoke discretionary service for everyone, regardless of whether the client is in the target market. This is either because that’s the service they want all their clients to have, or because it helps them to hit their targets. As well as making sure that the most suitable service is recommended to clients, as a distributor you’re responsible for regularly reviewing whether the products and services held by your existing clients remain consistent with the needs of the target market.
Testing whether your clients are getting the right service
There are a couple of ways in which you could test whether your clients are being offered the right service:
- As part of the annual review of your product governance arrangements – use this to ensure that you review all of your products and services and update your target market assessments. You should also review MI that tells you how many clients appear to be outside the target market for each of your service offerings. If you identify any issues then you’ll need to make changes to existing controls or introduce new controls.
- As part of first and second line testing of the effectiveness of your ongoing suitability reviews for existing clients. When your advisers or IMs are reviewing an existing client’s objectives and financial circumstances, they should also be considering whether they are in the best service for their ongoing needs. For example, is an advisory managed service still right for a client who rarely accepts investment recommendations? Why is a client whose portfolio has shrunk to £50,000 invested in a few collectives still in the bespoke discretionary service? Can you see evidence on the client files that your advisers are reviewing whether clients are still in the right service and, where appropriate, are they recommending a change of service?
How we can help?
Whether you’re a manufacturer or distributor, we can help you to apply the product governance rules to your business:
Target market assessment
The target market assessment needs to be detailed enough to allow you, as a manufacturer or distributor, to identify when a product or service is not compatible with a certain type of client. If you’ve not yet carried out a target market identification exercise for each of your products or services, we can help you get it done.
Target market validation
Where you’ve already completed one, we can help you to validate whether, in practice, the business is delivering into the target market, by assessing the controls you have in place as well as the products and services being distributed.
Product governance health check
Using our MiFID II health check tool we can review how you’ve implemented the product governance obligations using a set of questions that focus on key activities – including testing your compliance with the rules around target market identification. We’ll let you know how you’re doing against your peers and highlight any areas that need further work.