The firm has published a report titled Future of Financial Advice, which it says uses data and insights to highlight the ‘disruptive forces’ that are determining the future shape of the retail financial advice market.

First, small firms will continue to thrive. Nextwealth said firms with up to 100 employees and up to £10m in revenue will have defined a robust operating model and will have a partner for compliance support. Most will adopt a single source tech stack and they will focus on a client niche or local community.

Heather Hopkins (pictured), managing director, commented: “In spite of a long history of small and micro advice firms, our prediction that small firms will thrive in the future seems to fly in the face of existing views. However, our research highlights that while there is a high and sustained level of consolidation, this remains matched by the replacement rate of small advice firms spinning out of larger corporates and new registrations.”

See also: Vanguard rolls out hub for UK advisers

The second shift is that the number of clients served will grow by 30%. Hopkins said: “Firms will use segmentation models to define propositions, making clever use of tech and investment solutions to meet client needs. The concept of spending two or three hours at particular life moments face-to-face with a trusted adviser will not disappear, but where it suits client needs and preferences, they will increasingly self-service and interact with other members of their client service team.”

The next of the predicted changes is a gradual shift away from asset-based pricing. Hopkins commented: “As a result of the continued downward pressure on fees, combined with new service-based propositions and the greater focus on delivering value to clients, we expect a gradual shift away from asset-based pricing towards new fee structures.”

See also: Premier Miton’s David Jane: Reframing income as an output rather than a style

The fourth major shift detailed in the report is an expectation firm size will be measured differently.

“Measuring firm size based on assets and number of advisers is outdated,” noted Hopkins. “While data on employee numbers and revenue is harder to get, we think they are more important. Our report lists six adviser business segments which all go a step further to defining a variety of business and operating models, recognising some of the distinguishing features between advice firms.”

The final of the five disruptive shifts is AI playing a key role in compliance checking.

Hopkins explained: “We found that regulation is regarded as hindering the growth of the advice market, although everyone we spoke to emphasised the importance of a good regulatory regime and framework.

“The regulatory burden is felt acutely by the small firms that continue to be vital to the profession, and tighter regulatory oversight of significant numbers of such firms is currently a major challenge. We predict that AI will be used to support the scaling of compliance checking, which should help small firms to present a more manageable interface with the regulator.”

See also: Why investors need to take outlooks with a pinch of salt

In this situation, experienced financial advisers will use a variety approaches – simultaneously ascertaining the client’s risk appetite, financial aims and ESG concerns to make the most informed recommendations. Since many clients might not think to frame any ESG-related questions themselves at the fact-find stage, there is an onus on advisers to raise the subject in a manner to benefit them.

As the next step, advisers then need to consider how to integrate ESG considerations into their client’s portfolio. The UN-led Principles for Responsible Investment (PRI) network defines ESG integration as “the explicit and systematic inclusion of ESG in investment analysis and investment decisions”. This includes integrating ESG into risk assessments, an approach favoured by investment houses such as Royal London Asset Management, whose in-house team embeds ESG factors into their analysis and research.

Financial advisers can start to select the most appropriate ESG investments depending on the client’s preferences. There are many ways to do this – for example some clients prefer an exclusionary approach, which filters out so-called ‘sin sectors’ such as tobacco.

Engagement

Other clients might prefer ‘engagement’ – where investors buy into companies that may have been criticised for their environmental, social or governance practices in order to try and influence their behaviour. Sometimes advisers select portfolios because of their relevance to a particular concern of the client, such as deforestation. Clients can also opt for impact investing, which looks for companies to deliver a positive social or environmental impact in addition to returns.

These types of approaches will be very personal to individual clients but also potentially onerous for the adviser to oversee. Alternative approaches rely on the investment being ‘ESG-compliant’ – whether that means it is self-assessed or scores well on a respected ratings service such as that provided by data company MSCI.

A portfolio can then be constructed by selecting ‘best-in-class investments’ that combine ESG credentials with other metrics such as performance and risk. Given the personal nature of ESG preferences, there has been much criticism of scoring systems, including inconsistency and ‘greenwashing’ – where ESG a business exaggerates its ESG credentials – but this sector must surely have some merit when used appropriately.

Due-diligence

Advisers are of course expected by the regulator to conduct suitable due-diligence into their investors’ funds. In the context of ESG investments, this could mean meeting with representatives of the companies in the portfolio, analysing disclosures, evaluating ESG ratings and taking account of third-party research.

A variation on the approach that employs ESG ratings is to use investment vehicles tied to ESG indices, such as the indices created by MSCI, FTSE-Russell, S&P, Qontigo and others. One advantage here is these institutions have a strong research and data-backed approach and the resulting indices carry their brand values – providing comfort to the investor as well as a compliance audit trail. Often ESG versions of mainstream indices are created, such as the FTSE4Good or the S&P ESG series, which provide a tilt to an existing proven proposition.

More tailored solutions include the MSCI Climate Change and MSCI Global ex Tobacco Involvement indices. Advisers will have to explain the methodology of the index, whether it is efficient in achieving its goal and technical factors such as liquidity, rebalancing and dividend treatment. There is already a wide range of such solutions, which requires further study by the adviser.

Financial advisers can also directly select ESG-oriented funds for their clients. According to the FCA’s 2022 consultation paper, a fund claiming to pursue ESG or sustainable aims must have appropriate objectives and fund policies. Moreover, the fund should disclose data regarding its performance in ESG objectives in a clear format.

More flexibility

ESG themed funds provide more flexibility and variation since a fund manager can show more discretion than a rules-based ESG index. Funds might be selected for high ESG ratings or their perceived positive environmental, social or governance impact.

ESG investment portfolios can also include green bonds, which are used to finance climate-friendly projects. Green bonds diversify an ESG investment portfolio, raise awareness for the bond issuer’s green activities and provide finance to climate-friendly activities. Of related appeal to some investors are social bonds which create debt instruments used to support projects that deliver a social good.

There are many different ways for advisers to build ESG-compliant portfolios for their clients and the same principles of understanding client needs and performing suitable levels of due-diligence and research apply. As more clients become more aware of ESG-related considerations, the range of solutions will only grow and advisers will need to rise to the challenge of navigating this long-term investment theme.

This article was written for International Adviser by Alexandra Mortimer an analyst at FVC.

The Financial Conduct Authority (FCA) raised the issue in its latest Market Watch newsletter, where it encouraged advisers to refrain from using channels such as WhatsApp to share “potentially sensitive information connected with work”.

This is because the apps offer unmonitored and/or encrypted communication services, which could  compromise a company’s compliance obligations.

“Firms will need to ensure that, if such apps are used for in-scope activities on business devices, they are recorded and auditable,” the regulator warned.

Action

The FCA has already taken action against individuals for misconduct involving the use of WhatsApp and other social media platforms to arrange deals and provide investments advice.

The watchdog added: “It is important for firms to proactively review their recording policies and procedures every time the context and environment they operate in changes.

“We expect firms to have a rigorous monitoring regime, commensurate to the increased risks, where in-scope activities may be conducted outside the controlled office environment.

“As part of this, individual senior managers have an important part to play in establishing and embedding the right culture and governance within firms to continuously improve the standard of conduct at all levels.”

Covid financial changes

In other news, the FCA is also sending out its third covid-19 survey to gather information on advisory firm’s financial resilience.

Emails will be sent out between 13 and 19 January 2021, and the regulator said that the completion of the survey is mandatory.

The aim of the study is to understand changes in companies’ financial positions over time.

As a result, the FCA expects to repeat similar surveys in the future.

There have been many concerns about phishing and scam emails pretending to come from the watchdog as of lately, and the regulator said to only trust emails coming from either ‘FCA@fcanewsletters.org.uk’ or from an ‘@fca.org.uk’ email address.

The firm has added a set of risk-managed portfolios, comprising six multi-asset funds, available to pension, Isa or general investment account (GIA) investors using either Aegon Retirement Choices or the Aegon platform. 

Each offering has a different risk profile, and ongoing charges figures have been set at 0.25%, the pension provider said. They use low cost passive components, mainly provided by Blackrock 

The range will be managed by Richard Whitehall, head of portfolio management, who also works with Morningstar to determine the fund’s asset allocation.  

Compliance  

Aegon added that risk management and governance has been built into the investment vehicles to make it easier for advisers to meet Mifid II and Prod requirements. 

Tim Orton, managing director for investment solutions at Aegon, said: “We know that there is a demand for value-focussed investment strategies that offer a simpler way to invest, aiming to grow savings while taking account of their appetite for risk.  

“These funds also make it easier for advisers to meet their regulatory obligations and are designed to fit in many centralised investment propositions. 

“Aegon has a great deal of experience managing multi-asset funds. Through extending this to an open-ended investment company (Oeic) range, we’ve sought to extend this availability beyond pensions, to our Isa and GIA investors and make it easier for advisers to use for platform clients.” 

The idea was to hold individuals better to account, as key responsibilities were clearly outlined and monitored across the workforce.

In December 2019, the regime was extended to all FCA regulated firms, from insurers to claims management companies, as well as solo-regulated firms, writes Lucinda Carney, chief executive at performance management software firm Actus.

Many of these firms were truly challenged to introduce real cultural change in the way they work.

Compliance obligations which were previously dismissed as tick-box exercises in a business landscape focused on maximising financial gain now needed to be taken seriously if senior individuals were to avoid potentially huge personal ramifications.

Culture of compliance

SMCR was introduced to initiate culture change within the financial services industry, but the last four years seem to have introduced a minimal shift.

For any significant change to be seen, compliance needed to be embedded into existing processes such as performance management, bringing them all into the 21st century.

Yet, for an industry that is often seen to be at the cutting edge of technology and innovation, its approach to HR systems is worryingly old-school with many still relying on excel spreadsheets or paper.

So, with enforced home-working due to covid-19 thrust upon the City, what is the impact on SMCR compliance likely to be?

We have seen stock market volatility as traders and financial advisers are working individually from their kitchen tables without the subliminal benefits of a busy trading floor.

With people quite literally out of sight forced into working remotely, how confident can we be that accountability is being maintained and processes are followed?

Stuck in the Dark Ages

As the effects of the current pandemic are becoming more and more evident, the FCA and Prudential Regulation Authority (PRA) have announced guidelines on SMCR relief for some companies that may take longer than usual to submit any required certifications.

However, this doesn’t alleviate responsibilities completely, and with the likelihood that workplaces are going to have to maintain social distancing of some kind for the foreseeable future, surely now is the time for financial services to modernise?

Unfortunately, we know that many financial services organisations are still stuck in the dark-ages when it comes to people management, and having that on a remote footing, without visibility or auditability is only going to increase the risks.

Perhaps now is finally the time for financial services firms to embrace technology that can be used virtually to emphasise accountabilities and provide real-time visibility to those who require oversight, especially with more flexible regulations and HR softwares that can specifically manage SMCR compliance.

Overall technological evolution

Unlike paper, softwares provide real-time visibility of serving as a timely reminder to remote workers as to their responsibilities.

An integrated system can ensure that allocated responsibilities required by SMCR are accepted and evidenced, and that sufficient audit trails are created whilst also producing regulated statements of responsibilities. This data can be stored and managed on an ongoing basis to ensure that accountability is evidenced within the firm.

In normal times, the reduction of admin by leaving the spreadsheets and paper documents in the past where they belong would have been a main benefit, but perhaps not enough for such a traditional industry.

But now, covid-19 has forced change at pace. The financial services industry may be traditional but it is motivated to minimise risk.

Having a complete lack of visibility of their people in relation to fitness and propriety certification is a problem, as remote working continues to be enforced.

With increased fines and tighter regulations, the FCA introduced the motivation for financial services firms to bring about cultural change, but perhaps it has taken a novel virus to truly demonstrate what change can look like in this industry.

This article was written for International Adviser by Lucinda Carney, chief executive at performance management software firm Actus.