Why Compliance Firms Don’t Understand the Financial Planning model
In my opinion, there are several reasons why compliance firms don’t ‘get’ the Financial Planning model:
- A vast majority of compliance people come from ‘old school’ compliance backgrounds, which traditionally focus on regulating product sales. This would make sense as it was the prevailing regulatory environment over the last few decades. However, this means that they don’t really understand what many firms are now trying to deliver to clients: real financial planning advice. Like some of the old school advisers, they’re not really client-focused, they’re regulations-focused. The difference in mindset between these two approaches is huge.
- The truth is, there are at least two old school firms out there for every new model firm, therefore servicing the traditional market is where the money is at. Not only that, it fits perfectly with what they’ve been delivering for decades, so it’s easier work too. I understand the commercial reasoning behind that choice, but I do find it slightly disappointing.
- Most compliance firms seem to be responding reactively to output from the FCA and failing to interpret the spirit of the regulation, as it might apply to more client-focused financial planning firms. By necessity in a lot of cases, FCA output is aimed at the lowest common denominator. Clearly this needs to be applied sensibly to the different types of firms dealt with by compliance companies and I don’t often see this being done well.
- Sometimes the FCA guidance is less than perfect. Unfortunately, this creates room for a bit of a panicky ‘let’s cover all the bases’ approach from some compliance firms. That in itself, though, shows a lack of depth in the compliance firms’ thinking about these issues. In my experience with the FCA, they do ‘get’ what Financial Planning firms are about and give real credit to businesses that run this model. Many of my clients have been through FCA audits and the FCA has been in and out very quickly once they see the client-focused approach the business is taking.
Getting Ahead of the Game
So how do you get on the front foot with compliance? It all starts with your own mindset and business philosophy.
If your approach is truly client-focused (I’m talking the Fiduciary Standard here), then you’ll obviously be making good decisions for your clients. However because a lot of compliance issues will disappear under this approach, you’ll also be simplifying your compliance life. Much of the regulation exists to prevent firms doing things that aren’t really in the best interests of their clients.
Another approach to consider is using the My Mum Test. If your mum came to your firm for financial advice, would you be using the approach and the products you are recommending or could you perhaps find something simpler, cheaper or better for your mum?
If you’re not getting innovative solutions from your compliance provider, you can also push back harder and let them know that their current suggestion isn’t good enough – especially if you feel it’s not client friendly. Make your compliance provider work for their money a little bit and if their service doesn’t improve, you’ll know it’s time to get rid of them and find some compliance people who really know their stuff.
I’ll give the final say on the subject of Compliance to one of the professionals in that world. Mark Dennison of The Compliance Department is one of the most progressive and forward-thinking compliance people I know. He works with a large number of our clients, helping them simplify the compliance function and really adding value.
So, over to Mark.
The Compliance Department
The big regulatory issues for advisory firms are ultimately concentrated around investment recommendations. They boil down to: getting the right fact-find information (assets, liabilities, income, expenses, financial goals) and assessing risk properly. Get those right and the risk of something bad happening to a client goes away. Equally importantly, most of the risk of something bad happening to the adviser (or their firm) also goes away.To get the investment recommendation right, the regulator says the advisor needs to know a client’s financial goals, and how much risk needs to be taken to meet those goals. It really is that simple.The financial planner starts at the right place – by putting a number on the financial goals. Next is putting a number on the current financial assets of the client. The last number is the return needed to use the assets to deliver the goals.How easy is that? It only requires advisors to ask the right questions when fact finding, and using a tool (effectively discounting cash flows) to ensure the client only takes on the risk that is needed to deliver on the goals.OK the advisor also needs to understand how to build an asset mix to deliver the returns, but that’s a given, isn’t it?And the beauty of financial planning is all this needs to be re-visited yearly, to ensure the client stays on track (another big ticket regulatory requirement post RDR).
Not working the financial planning way just heaps unnecessary risk on advisers. There is no other prudent way to advise.
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