At the Dynamic Planner Annual Conference at the end of January, reviewing clients’ portfolios to ensure ongoing suitability was high on the agenda. In a poll of delegates, 42% said they spent half a day or more preparing for a client’s annual investment review.

It’s probably true to say that most firms were still assessing the implications of MIFID II at that point. However, these new regulations, introduced at the beginning of January, bring in additional requirements regarding the breadth and frequency of the review. As such, the suitability review must consider, among other things:

  • Changes to the client’s circumstances (either personal or financial)
  • The client’s knowledge and experience in the investment field relevant to the specific type of product or service
  • That person’s financial situation including their ability to bear losses
  • Investment objectives including risk tolerance

Of even greater concern was the quality of the output to the client and how well, or otherwise, it helped the firm demonstrate the value they bring. 87% of respondents answered ‘Adequate’ or ‘Could do better’ in answer to the question; ‘How do your reports make you look in your clients’ eyes?

Finally, we asked whether firms used the same definition of risk throughout the investment review process. While the majority did, 29% said they did not.

So why is the annual review so challenging and what can you do to ensure you meet MIFID II’s requirements?

The following table shows the steps a review process needs to go through in order to ensure a portfolio remains suitable and the potential sources of error. Down the side are the list of sources or providers of information from which data or analysis has to be gathered.

    1. Client investment experience and attitude to risk, including their attitude towards risk-reward trade-offs
    2. Client capacity to take risk. Assessing the losses a client can withstand including changes in their financial situation. Best undertaken through cashflow with risk definitions aligned with the ATR
    3. Risk, return & correlation assumptions. These provide a consistent framework for the risk-reward trade-offs from investor to an investment
    4. Asset allocation, including asset class definitions. Here the risk the client is willing and able to take is translated into an asset allocation strategy which stands a high probability of delivering an acceptable range of returns for a given level of risk
    5. Classification of investments into asset classes. Information on individual holdings and their value needs to be gathered from the client’s portfolio, perhaps from a back office and/or across multiple platforms and translated into the right asset classes
    6. Investment risk profiling. Assessing the likely forward-looking risk that the portfolio represents against the client risk profile and asset allocation strategy. Assessing whether the investment is targeted at the risk profile and likely to stay suitable
    7. Investment performance rating versus risk benchmark. Whether the investment is delivering good risk-adjusted returns and likely to continue to do so

You can see that unless a consistent definition of risk is used throughout the investment process there is a high likelihood that suitability can get lost in translation.

Dynamic Planner has a 12-year track record of ensuring investment suitability using a consistent definition of risk throughout the review process that many thousands of firms now rely on. We gather data from back offices and the leading platforms and deep dive analysis on more than 1,200 multi-asset funds and portfolios in a joined-up process that’s simple and easy-to-use.

Our newly designed suite of reports helps you demonstrate the value you and your firm’s proposition are adding.

Please download our white paper on MIFID II or get in touch if you would like to know more.