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Building Personal Financial Futures

A UK FIRST FOR TRANSPARENCY ACROSS MANAGED PORTFOLIOS

Managed portfolios and models have experienced a global rise in popularity. These investment vehicles offer a convenient and cost-effective way to deliver professional investment management and diversification. Managed Portfolios have become the fastest-growing UK investment solution, with on-platform Managed Portfolios estimated to have grown assets by almost a quarter over 2021.

In recent years Morningstar launched model portfolio databases in both the US and Australia, and we were keen to explore the UK opportunity. At the start of 2020, Morningstar started to assess the idea of creating a Managed Portfolio Database in the UK Market. We undertook research in the UK Adviser Market through a third-party provider, Next Wealth, to understand more about how advisers were working and where their pain points were. We also had a number of conversations with Managed Portfolio Service (MPS) providers to understand their perspective. The outcome of this research was clear; advisers faced challenges in comparing these services on a like for like basis and providers were equally challenged in being able to compare themselves with the market due to the different approach firms took in calculating and communicating their services.

MORNINGSTAR FELT THAT IT WAS AN IMPORTANT TASK TO CREATE A LEVEL PLAYING FIELD TO ALLOW THE SAME LEVEL OF COMPARISONS AND ANALYSIS FOR MANAGED PORTFOLIOS THAT WAS READILY AVAILABLE FOR FUNDS, INVESTMENT TRUSTS, AND ETFS.

To achieve this, we insist on providers delivering their full holdings history since inception and developed a holdingsbased return calculation to run performance both net and gross of fees. In addition, the portfolios are categorised by Morningstar for easy comparison both across the MPS ranges and multi-Asset funds.

The Morningstar Managed Portfolio database successfully launched in July 2022. The database now has over 65 providers and over 1,150 individual portfolios listed. Along the way and post launch there have been many learnings.

1. TRANSPARENCY

We found the majority of the MPS providers welcomed transparency and were happy to provide their data and holdings to the market. The lack of transparency was primarily related to no consistent performance calculation method being available to all and how adviser software systems were delivering the data to market, which required a licensing fee by the provider to be included within a software system.

2. WHAT’S UNDER THE BONNET?

At time of launch, with just under 900 portfolios available, in analysis of the holdings across the entire Managed Portfolio Database, we found just over 1,200 distinct underlying holdings are used across all portfolios. Looking more deeply into why the universe of funds might seem narrow relative to the potential universe of funds across the market, the need for platform availability has a part to play.

Layering on top of fund availability, quality of investments was a key find with most funds held within the portfolios well-rated by Morningstar and cost was also a crucial factor with 8 out of 10 of the most widely used funds being passive. With a relatively small number of funds covering the entire Managed Portfolio universe, with up to 70% of new advised flows going into these services, asset managers looking for advised assets are in competition for shelf-space.

3. PRICE

Often thought to be more expensive than their multiasset fund cousins, Managed Portfolios are cheaper; this has been helped by the removal of VAT for many MPS solutions. In comparing the overall costs of managed portfolios against those of open-end funds (taking into consideration the Ongoing Charges Figure (OCF) and Discretionary Fund Manager (DFM) fee for MPS and using the Clean Share class for funds) we found an overall cost advantage in favour of managed portfolios of around 2428 basis points depending on the Morningstar Category. However, it’s important to point out that managed portfolios held outside of a tax efficient wrapper such as a pension or ISA is subject to Capital Gains Tax.

factors such as market trends, government regulations, and economic conditions.

However, there are a few potential developments that could impact managed portfolios in the UK: We expect an increased demand for sustainable investing, especially related to Climate and Impact.

The use of technology to manage personalisation of portfolios in the Managed Portfolio space.

Increased focus on Exchange Traded Funds (EFT), already growing in popularity; we expect these to feature more heavily in Managed Portfolios in the future.

Overall, the future of managed portfolios in the UK will depend on a range of factors, including evolving investor preferences, regulatory changes, and technological advancements.

Given the growth of UK Managed Portfolio products and limited options for advisers to achieve whole of market comparisons, this database provides transparency, comparability, and a greater level of insight for financial advisers, who will have free access to view the data via the Adviser tab at www.morningstar.co.uk

4. SUSTAINABLE INVESTING

Just over a quarter (26%) of the UK Managed Portfolio database has a sustainable focus. Of these portfolios the majority score well on Morningstar’s Sustainable Globe Rating scale, with three out of a possible five Globe Rating being the lowest score. In addition, digging deeper to look at underlying holdings, sustainable active funds also feature prominently in these ranges, suggesting that many providers are turning to a handful of well-recognised managers when looking for active funds that meet sustainability requirements.

It’s difficult to predict the future of managed portfolios in the UK space as it can be influenced by a variety of

DIGITISING WEALTH MANAGEMENT IS CRUCIAL FOR CLIENT SATISFACTION AND EMPLOYEE WELLBEING

Like many others, the investment industry is dealing with significant changes driven by digital, social, and economic factors. The pandemic accelerated some of these influences, while others have gradually evolved. One trend shaping our future is online customer interaction.

In a business traditionally built on face-to-face contact, Covid proved that it was certainly possible for wealth managers to liaise with clients remotely. Since then, there has been a lot of focus on keeping online communication channels open. This is absolutely vital. However, there is a much broader picture to consider. If firms want to thrive in a new era of wealth and asset management, the sector as a whole must embrace a holistic approach to digitisation.

Investors are calling for personalisation, democratisation, and transparency. And pressure to meet these demands is mounting fast against a backdrop of high interest rates and economic uncertainty. Satisfying expectations requires innovative thinking and the clever use of data to deliver customer-centric experiences tailored to the individual.

Wealth management may have been relatively slow to adopt digital transformation, but we can learn from segments that have advanced faster to facilitate a smoother transition. One is healthcare, where the benefits of digitisation for both clients and industry professionals are clear.

PUTTING INVESTORS IN THE DRIVING SEAT

Healthcare had to harness digital technology as part of the immediate response to Covid, but the sudden shift also helped to address longer-term dissatisfaction. Even pre-pandemic, care pathways were not cohesive and too little attention was paid to improving the patient experience.

The gap was especially apparent at a time when lifestyle brands were investing heavily in digital tools to deepen connections with customers as they moved seamlessly between channels. With technology being used to create comprehensive journeys and hyper-personalised services in sectors such as retail, patients were becoming frustrated, and health outcomes were being jeopardised.

As innovators from technology, telecom, and consumer industries entered the healthcare market, they recognised that patient portals weren’t doing enough to streamline multiple touchpoints and consolidate massive amounts of data – all of which would help put the patient in control. That’s when the digital front door was developed, engaging patients at each stage using everyday technology. It gave people a gateway to their care that was clear, convenient, and accessible.

Investors want to be in the driving seat of their financial future in a similar way. Wealth management client portals are far from delivering a holistic view of an individual’s financial wellbeing independently of where and what those investments may be. As end-to-end care pathways have emerged, we need a digital front door that allows us to create comprehensive wealth pathways that federate identities, and unifies Know Your Customer (KYC) and Anti-Money Laundering (AML) processes, connecting all of a person’s assets in a single-pane-of-glass solution.

A consolidated view of data also means we can move from focusing on products to concentrating on hyperpersonalisation of wealth pathways and customer outcomes. It will allow wealth managers to develop bespoke risk profiles and custom portfolios aligned with investors’ Environmental, Social and Governance (ESG) preferences and structured for their personal values, based on a customised 360-degree picture incorporating different facets of their personal life.

With so much to consider, rapid transformation can be overwhelming, which is why no entity, regardless of their size, should expect to digitise systems and processes alone. Savvy healthcare providers saw that ground-breaking innovation could only come from successful partnerships. Similarly, it’s important for the wealth management firms to keep an open mind and be on the lookout for synergies. Competitors can also be valuable collaborators, and it’s better to move forward in a stronger position together rather than risk losing your place in the market.

MAKING WELLBEING A STRATEGIC FOCUS THROUGH TECHNOLOGY

Integrating new technologies isn’t only about elevating client experiences; it’s fundamental for employee wellbeing. In healthcare, there is the concept of clinical decision support systems (CDSS). This data-driven software is designed to improve healthcare delivery, supporting clinicians in complex decision-making processes by ensuring they have the right information to improve patient outcomes.

As a result, healthcare practitioners get more time to spend with patients helping them to make informed choices about their care. As these systems became more widespread, they had a significant positive impact by reducing the time it took to properly understand a patient’s needs at a specific stage in the care pathway.

It also helped to improve the overall patient experience by reducing misdiagnosis, side effects and potential drug interactions early, which in turn provided better peace of mind for medical workers. Of course, improvements can still be made, which will happen as technologies and processes evolve.

In wealth and asset management, we have the capability to develop wealth decision support systems, which will provide the same type of benefits as clinical decision support systems. Applications that analyse financial data to provide real-time impacts on a client’s portfolio, show how decisions and recommendations align with investor preferences, and minimise risk will certainly reduce stress and improve work/life balance.

Meanwhile automating repetitive manual tasks, like analysing numerous data points to provide the best investment options, allows client managers to focus more on cultivating customer relationships.

We can also unlock further potential in areas by leveraging the power of technology and generative Artificial Intelligence (AI), enabling us to simplify the personalisation of investments and eliminate cognitive bias from investment decisions. We’re seeing examples of this already with the rise in robo-advisors or using ChatGPT for personalised customer communicationsnew possibilities are emerging all the time.

When we look at the biggest stress factors, KYC/AML, risk management, impact analysis, rebalancing, tax management, market volatility, and governance are all very high on the list. A digital-first approach will help to alleviate these stressors, resulting in a healthier, more productive environment.

It’s an exciting time for wealth and asset management firms that are willing to leave their comfort zones and integrate digital capabilities to keep pace with change. In an environment where innovation and collaboration are crucial, Industrial Thought Ltd. is committed to working with the industry to develop effective strategies, so companies can stand out from the crowd, deliver superior experiences for investors, and build a legacy of innovation and collaboration that will benefit future generations. We believe that by working together, we can deliver exceptional experiences for our clients, our industry, and our planet which will pave the way towards a more sustainable, equitable, and prosperous world.

NUNO GODINHO GROUP CEO INDUSTRIAL THOUGHT LTD. INFO@INDUSTRIALTHOUGHT.GROUP

FROM ONE-TIME BUYERS TO LIFELONG CUSTOMERS: INCREASING AFTER-PURCHASE ENGAGEMENT IN WEALTH

Introducing digital channels within private wealth and DIY investment management brought a fresh perspective to customer communication. Interaction with customers became more measurable, fast, and affordable, creating useful feedback loops supporting the continuous development of new features and services.

However, many innovative financial journeys emphasise engagement in the onboarding and prepurchase stages of the experiences, leaving customers with simplistic monitoring tools after they execute. In our experience, there is significant potential to engage your customers on an ongoing basis after they have committed to your services. Unlike gamification engagement practices, data-driven financial analytics suggests alternative strategies to achieve your customers’ financial goals, generating more demand for your services through responsible and relevant interactions that build trust in the long-term.

IS GAMIFICATION ALWAYS THE RIGHT STRATEGY TO PURSUE?

There are several ways to foster engagement in a digital environment. Gamification often comes to mind due to its simplicity and efficiency. This set of practices uses game design principles and mechanics to make non-game contexts more engaging and enjoyable. In the financial context, gamification can be used to highlight milestones as the user navigates the journey.

For example, DIY investment apps can shoot fireworks in the interface when the user purchases financial instruments or compare the financial performance of users’ holdings to encourage competition. In recent years, regulators have become increasingly concerned about the introduction of gamification practices in the financial space. The American Securities and Exchanges Commission (SEC) suggests that while these developments have lowered entry barriers and increased access to financial markets for investors with limited means, the downside of gamification is that it can induce trading that is more frequent or higher risk than an investor would choose in the absence of these gamification engagement practices. Our recent blog investigated the potential issues and alternatives to such an approach.

THE POWER OF VISUAL AND INTERACTIVE FINANCIAL-DECISION MAKING

Another way to make financial experiences more engaging is by offering analytical tools that could help your customers demystify the impact of macroeconomic phenomena on their financial position or visualise how the investment risk levels influence the time it takes to achieve their goals.

This strategy brings engagement practices into the domain of your financial institution – your digital and hybrid journeys would serve your customers’ understanding of their available options, rather than entertainment. Besides, leveraging financial simulation engines like OutRank® would enable your customers to visualise and forecast the impact of their economic decisions on a holistic, balance sheet level, scaling the efforts of your financial advisers to serve more customers than previously possible.

For example, armed with this technology, your customers can analyse the impact of selecting their pension provider, while considering all the other dimensions of their economy, such as investments, mortgages, savings and taxes. After incorporating a financial simulation engine to power your financial journeys, your institution will become a go-to platform for evaluating the broadest range of financial decisions, from the pursuit of additional training to boost one’s income to saving for retirement.

PROVIDING PERSONALIZED SERVICE THROUGH PROACTIVE NOTIFICATIONS

You can also encourage your customers to learn more about their financial situation by sending them relevant and actionable notifications, recommending personalised strategies to achieve their financial goals. For instance, you could use this engagement tool to inform your customers if their investments have drifted from their desired risk levels over time. We designed our simulation

engine to analyse the entire personal balance sheet of wealth management customers, as well as their risk preferences and goals, so it can create and send relevant and actionable adjustment suggestions at scale. In addition, we equipped OutRank® with proprietary machine learningdriven clustering functionality that can enable banks, insurers and wealth managers to provide their customers with better deals regarding their investments.

By analysing customer preferences data, this technology can recommend financial products similar to their existing holdings but with a more sustainable profile, managed by a different manager or, if relevant, having lower fees. Providing your customers with these alternatives via proactive and responsible notifications on how they can improve their economy would encourage them to deepen their relationship with your firm and reach their goals faster.

INCREASE THE RELEVANCY OF YOUR MARKETING EFFORTS

Due to its highly regulated nature, the financial industry is a problematic space for innovative demand generation techniques such as gamification or machine-learning driven recommendations. When it comes to marketing, financial institutions rarely act as early adopters, especially in comparison to Big Tech, choosing tried and tested strategies to avoid bias and manage risks.

However, today’s financial sector can leverage their own analytical capabilities to personalise their marketing. This can be done, for example, by using simulation engines like OutRank® to recommend educational resources based on the customers’ financial situation. Sending more relevant articles, videos, and other resources on personal finance, investing, and retirement planning will nurture your relationship with customers and encourage repeat business.

DATA-DRIVEN AFTER-PURCHASE ENGAGEMENT: CUSTOMER LOYALTY, REPEAT BUSINESS AND MARKETING AT SCALE

After-purchase engagement driven by financial analytics offers a range of benefits to financial institutions. First and foremost, by leveraging this technology, institutions can foster relationships with their customers at scale, building trust and educating them about financial strategies to achieve their goals. Fostering engagement based on customers’ needs will improve customer satisfaction and loyalty.

Second, with an in-depth holistic analysis of your customers’ economies and machine learningdriven clustering functionality, you can recommend portfolio improvements, better deals, or increased recurring investments to meet goals leading to more repeat business and increased revenue.

Third, you can leverage your analytical capabilities to recommend more relevant marketing and resources based on the customers’ financial situation, continuously nurturing the relationship with them. This targeted, data-driven strategy will not only lead to a significant increase in the efficiency of your wealth business, but also help you capture demand across all channels.

ZALIIA GINDULLINA HEAD OF BUSINESS DEVELOPMENT KIDBROOKE

ZALIIA.GINDULLINA@KIDBROOKE.COM

CYBER RISK MANAGEMENT: 6 REASONS WHY YOU NEED INDEPENDENT ASSURANCE

Cyber breaches are not acts of God. They are preventable, provided you have taken the right steps to protect your business from attack. The central theme of this article is that the only way to prove to yourself and your senior leadership team that you have put the right defences in place, is to obtain independent assurance.

WHAT IS ASSURANCE?

Assurance is the process by which you require an independent expert to give a professional opinion on a subject – in this case your cybersecurity measures, because information that is business critical needs to be reliable.

There are two key aspects.

Independence: The more independent the review, the more confidence you can have in it. Having your IT providers mark their own homework is simply a non-starter in terms of good risk management.

Expertise: Cybersecurity is complex and ever-changing. Whoever you instruct must be a cybersecurity specialist (not an IT generalist), who understands your business structure and the market in which you operate, be acutely aware of the current methods of attack, as well as your legal and regulatory obligations.

It is important to be clear that we are not talking here about certifications such as CE and CE+. They cover no more than 5 of what the Information Commissioner’s Office (ICO) describes as “basic” technical requirements and do not provide proper security, nor does either satisfy legal obligations for the security of personal data.

WHAT DOES IT LOOK LIKE?

Your assurance should be in writing and intelligible to those who are not experts in cyber risk management, including those responsible at board level for managing the big risks in your business. The work should be carried out carefully using a high quality, reliable process, designed for your sector. Doing some defined scope penetration testing is not good enough. The assurance should provide you with a proper cyber risk assessment, clear visibility on your cyber vulnerabilities and risks, and specify the means to control them. This includes all necessary measures as regards technology configurations, people competence, and policies and governance. It should also address the process for regularly reviewing and testing the effectiveness of these measures.

WHY DO YOU NEED IT?

Peace of mind that you are protected. The process will identify gaps and allow you to close them – and enable you to build trust in your regime for controlling cyber risks.

Keep your proprietary and client data safe and become operationally resilient to attack. The disastrous consequences of a ransomware or other cyber breach are well known.

Satisfy your legal and regulatory obligations

Cyber risk assessments, technology configurations, governance, staff training, ongoing reviews (all of which need to be documented) are just some of your legal obligations under UK General Data Protection Regulation (GDPR) which the ICO would look at in the event of a breach. Financial Conduct Authority (FCA) regulatory obligations as regards confidentiality, governance, managing material risks, operational resilience etc. add another layer. And bear in mind that the ICO has made it clear that it will have regard to “relevant industry standards of good practice” such as the ISO 27001 series; the National Institutes of Standards and Technology; the various guidance from the ICO itself, from the National Cyber Security Centre and from the FCA.

Better management decisions.

Spending ever more money on technology is rarely the way to get protection. We see lots of businesses being given poor advice and wasting money after being persuaded to buy technology solutions, which they do not actually need, which are incorrectly configured, and which do not give them the protection they expected.

Shows your clients and other parties that you have cyber risks under control.

Clients, colleagues, investors and other third parties are increasingly aware of the risks of cyberattacks and the serious damage they can inflict on their own affairs or businesses. Your security matters to them.

Insurance.

Evidence of good assurance in this area will help characterise your business as well managed and a better risk in the eyes of professional indemnity (and cyber) underwriters.

QUESTIONS TO ASK BEFORE YOU APPOINT SOMEONE TO UNDERTAKE YOUR ASSURANCE

Are they genuinely independent from your IT providers?

Are they cybersecurity specialists with a highquality process for assessing and testing for cybersecurity risks?

Do they operate within your sector and are they up to date with the latest methods of attack?

Do they know your legal and regulatory obligations and related guidance?

Do they also sell any security technology, which could give them a conflicting financial interest in their recommendations?

CONCLUSION

A serious cyber breach is hard to recover from and can result in irreparable business damage. With the stakes this high, surely it is time to stop hoping you are secure and start proving you are secure?

LINDSAY HILL CHIEF EXECUTIVE MITIGO GROUP PIMFA@MITIOGROUP.COM MITIGOGROUP.COM

MASTERING OPERATIONAL RESILIENCE: AN OUTLOOK IN TO 2025

In March 2021, the Bank of England (BoE), the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA) finalised their guidance and policies on operational resilience. The aim is to improve the operational resilience of firms by implementing requirements such as identification of Important Business Services and the setting of impact tolerances.

The implementation deadline passed on 31 March 2022, beginning a three-year transitional period for firms to remain within their impact tolerances as soon as reasonably practicable, but no later than 31 March 2025. In Ireland, the Central Bank of Ireland (CBI) has published its Cross Industry Guidance on Operational Resilience with an implementation date of 1 December 2023.

In November 2022, the EU published its Digital Operational Resilience Act (DORA) with obligations coming into effect in early 2025. Operational Resilience can be described as a firm’s (or market’s) ability to identify and prepare for, respond and adapt to, and recover and learn from operational disruptions.

WHAT DOES THIS MEAN FOR YOU?

The resilience mindset is the assumption and acceptance that disruptions will occur. Plans and controls to prevent disruptions are important, but focusing on prevention can come at the expense of building the ability to respond. Impact Tolerances are a measure of the maximum level or length of disruption to an Important Business Service before intolerable harm is realised.

Firms should recognise that not all services they provide may be classified as “Important Business Services” and a set of criteria and analyses should be applied to determine whether disruption to the service could cause intolerable levels of harm to clients, threaten the stability of the financial systems, orderly operation of markets, or pose a risk to the firm’s safety and soundness. Firms should demonstrate strong understanding of their clients and the markets in order to determine the impacts of disruptions.

KEY CHALLENGES

Impact tolerances are not business-as-usual metrics like Real Time Operating Systems (RTOS) and calibration of these thresholds is based on assumptions and estimates, including impact on clients and markets. Most firms will have limited real-life examples of disruptions which have lasted long enough to create the severity of impact envisioned by the regulators’ requirements.

Firms will need to determine how to test these severe yet plausible scenarios, often through tabletop exercises involving subject matter experts. Regulators will push firms to go beyond this approach during the transitional period and find ways to further test services, not only internally but also with third party service providers, service receivers and financial market infrastructures.

BENEFITS TO WEALTH MANAGERS AND ADVISORS

This body of work should result in firms not only gaining a deeper understanding of their own and their clients’ operational vulnerabilities but will also strengthen their capabilities to resolve disruptions that may occur, regardless of the cause. Wealth Managers can take added assurance from the implementation of impact tolerances and the improved resilience this brings to firms they conduct business with.

INDUSTRY CONSIDERATIONS

Operational Resilience requirements do not apply to all regulated firms. Pershing, as an “enhanced” Senior Manager & Certification Regime (SM&CR) firm (UK) and as a Regulated Financial Service Provider (Ireland), is in scope for these requirements. Firms who are in scope for the requirements may be deemed more resilient and therefore more appealing when considering the range of providers available.

Regulators make it clear that firms are required to consider and understand resiliency and impact tolerances of their third parties, even where some activities are outsourced. Recently, Pershing participated in a market-wide exercise, facilitated by Euroclear UK & International (EUI) and the BoE, which allowed them and other firms to understand the implications of significant outages on their business and to develop their business continuity and resilience arrangements within a controlled manner.

These types of exercises will ultimately make firms and the markets more resilient, and we view these as an important part of our commitment to impact tolerances.

THE PERSHING APPROACH

Pershing benefits from being part of the global BNY Mellon enterprise, which has well-defined and developed policies and procedures in relation to risk, business continuity, incident management and disaster recovery. This has enabled Pershing to efficiently implement UK regulatory requirements and position them well to react to any future requirements from other in-region regulators.

By identifying and understanding the people, processes, facilities, technologies, information and third parties which contribute to the delivery of their Important Business Services, and setting Impact Tolerances, Pershing has been able to prioritise plans and investments as required to build resilience and mitigate against large scale disruptions.

Pershing has communicated their approach throughout the implementation period and beyond to their clients through due-diligence events, webcasts, fact sheets and articles on their website. They have also had productive conversations with their clients, including those also in scope, around their approach and how they can work together in future.

NEXT STEPS

Now that the implementation deadline has passed, regulators may request self-assessment documentation at any stage and review where firms are against requirements to remain within impact tolerances. Regulators have stated that they anticipate seeing best practices emerge over time and should expect impact tolerances to evolve which should be reviewed at least annually.

Firms are not only expected to evidence that they can remain within impact tolerances by the end of March 2025 but also show how they have matured their approach and sophistication, especially around mapping and testing of important business services.

Read the full paper here

JONATHAN DAVIS; VICE PRESIDENT, OPERATIONAL RESILIENCE LEAD, EMEA PERSHING.CO.UK

HOW TO PLACE VALUE ON PROTECTION IN TOUGH TIMES

It’s inevitable that during the current cost of living crisis, people will be keeping a watchful eye on their budgets - making savings where they can, so they can still afford the things that are important to them.

In fact, our most recent cost-of-living research report explores the changes people are making to help with the crisis. When we asked UK adults about changes they’d made to their spending habits to pay for the cost of living, 87% of women and 82% of men said they’d made changes – with 25% of women and 16% of men confirming they’d reduced or stopped paying into savings. *

But with almost a fifth (17%) of people saying that they could only fund an unexpected expense of up to £100 from either their income or savings, this report also highlights the need to think about arranging a financial safety net. *

So, while the need for protection is as great as ever, clients may be put off - at least in the short term - by the thought of paying for something they may not use for many years, if ever. And clients with protection in place may be taking a closer look at their monthly direct debits to see if there are any outgoings they can cut back on.

We all appreciate it could be disastrous for a client if they decide to go against your advice, or cancel a policy, only to have something dreadful happen to them or their family.

SO, HOW CAN WE HELP CLIENTS APPRECIATE THE VALUE OF PROTECTION, ESPECIALLY IN TOUGH FINANCIAL TIMES LIKE THESE?

The first thing, for existing clients, is to remind them of exactly how the policy will help if they need to make a claim. Often a plan will have been taken out to protect their home, their family, or their lifestyle, and it is unlikely this need will have changed at all. In fact, in times of adversity clients may feel more vulnerable. So, reminding them of exactly how this policy can help protect them financially, will often be enough to help them recognise the importance and keep their cover in place.

*Source: Cost of living: a report on how the UK is coping with rising bills, Sarah Pennells, Consumer Finance Specialist, Royal London, Published 26 September 2022.

And when you talk to clients about taking out cover to protect their lifestyle - what does this mean now? Some clients may still want to ensure that if anything happens to them, their family will have enough of a financial cushion to be able to do things like maintain hobbies, go on holiday and have regular days and meals out. Others, who find monthly budgets getting tighter, might want to make sure their family’s most important needs can be covered, like paying their rent or mortgage and regular bills.

Of course, our menu plans offer your clients the ability to reduce cover or cut back on certain elements. And while this should ideally be avoided, keeping some cover is certainly a better option than cancelling a plan in full if budgets or priorities have changed.

Many clients will not appreciate the cost associated with cancelling their cover. So, talk to your clients about how their premium may increase with age and health issues – explaining how cover in years to come may turn out to be very expensive or it may not even be possible if they have suffered any serious health issues.

SO, HOW DO WE ENGAGE CLIENTS WITH PROTECTION PLANS IF BUDGETS ARE TIGHTER?

Most advisers will talk about the risk of premature death and sickness (either a critical illness, or a long-term illness or injury that requires time off work), but often it can be difficult to show clients the probability of these outcomes. So, for new and existing clients, perhaps run a personalised risk report to highlight their own chances of getting a critical illness or being off work for two months or more. And it’s likely that these risks are now even higher for existing clients than when they first took out their plan.

And on the flip-side - clients whose premiums were rated, such as smokers, those with a high Body Mass Index (BMI), or with a dangerous job, will have the option to review the terms of their plan. If they’ve improved or negated their health issues or changed their job or lifestyle, there might be an opportunity to decrease their monthly payment.

These days a lot of products and services available in the financial sector offer some form of tangible aspect, from being able to log into your current account online, to viewing the value of your pension on a mobile app.

Helping clients to see their protection policy might help them engage with what they’re paying for. Our new customer portal, My Royal London, means clients have access to their policy details online at any time, and they can make changes such as updating their address details.

Plus, many providers, including Royal London, offer access to some form of additional support services that can provide tangible benefits even if there’s no claim. For example, we offer clients, and their partner and children, access to personal support from dedicated nurses who can refer them on to receive additional therapies, or for a second medical opinion. And clients can also get independent advice from legal and career helplines.

Letting clients know their plan includes services that can add value to their lives, at no additional cost, might make a difference in their decision to go ahead with protection.

SHELLEY READ, SENIOR PROTECTION DEVELOPMENT AND TECHNICAL MANAGER, ROYAL LONDON ROYALLONDON.COM

DIGITAL TRANSFORMATION IN THE FINANCIAL SERVICES INDUSTRY: ADAPT OR GET LEFT BEHIND

The financial services sector is made up of a wide variety of organisations. Everything from digitally driven start-up, ‘app only’, exchange-traded fund (ETF) platforms targeting millennials, through to the more traditional commodities traders, operating open-outcry on the London Metal Exchange - both fall under the financial services umbrella.

Some of these firms are well ahead on their digital journey, many in fact have never been non-digital, while others are just at the beginning.

The one thing that unites them all is that digital change is on their board’s agenda. In a recent RSM survey exploring the current state of digital transformation across the middle market, 69% of respondents said that their digital investments will become more important over the next three years. In the financial services world, we know that this is a top priority.

SHIFT TO DIGITAL

The pandemic fast-tracked the growing digital transformation of the financial services sector, redefining customer behaviour and engagement. Firms are now looking to prioritise digital transformation and further innovation, with the growing application of automation, artificial intelligence, digital marketing, cloud solutions and blockchain.

Given the growing customer demand for digital interfaces, ease of use and speed of transactions, investing in digital transformation needs to be a priority for financial organisations if they are to remain competitive.

One of the biggest obstacles facing more traditional firms, and one that newer firms avoid, is the legacy infrastructure from decades of old business processes. This legacy infrastructure has made investment in core systems for digital services a strategic priority.

DISRUPTORS/ENABLERS

FinTechs are disrupting the financial services sector. They are driving innovation and are quickly adapting to changes in customer behaviour with use of their modern platforms, aided by the lack of any legacy systems to navigate.

Incumbents are increasingly viewing FinTechs as strategic partners and are seeking ways to collaborate and develop products with them to modernise their systems and offerings.

We are seeing FinTechs take advantage of the ubiquitous use of fingerprints and face recognition on smartphones, by increasing the ability to make payments simpler and more secure using biometrics, something more firm’s need to consider as they push toward digital transformation.

TALENT

Vacancies in financial services saw their highest spike last year since 2001, with vacancies per 100 employee jobs being over 50 consistently during 2022 and with an already squeezed labour market, attracting and retaining talent is paramount. Only now are vacancies within the sector reducing to the previous highs, as seen in mid-2007.

To win in the fight for talent the sector must consider using process intelligence to combat workforce challenges. Extending the scope to non-traditional pools of talent, such as apprenticeships or return-towork programmes will help boost diversity. In the book Loonshots, the author and trained physicist, Safi Bahcall, suggests that rather than focusing on a corporate culture, organisations should focus more on organisational structure that harnesses innovation, and where there is a need to have creative minds focussing on innovation separately from those responsible for the steady growth of an organisation. Bahcall also suggests the investment in a chief innovation or creative officer to manage the two and generate a collaborative and harmonious culture.

CYBER SECURITY

Given the financial services industry is a hot target for cyber criminals, a principal concern with all elements of digital transformation remains cyber security. The National Fraud Intelligence Bureau (NFIB) Fraud and Cybercrime dashboard, at the time of writing, showed that the number of reports relating to cybercrime in the last 13 months was 29,983 with reported losses of £7.6m, this reduces to 2,352 reports and £2.9m solely for organisational reports. The highest reported crimes related to hacking. Cyber security risk has risen due to various factors, inclusive of the current geopolitical uncertainty and rise in technology used to commit this type of crime. While cybercrime losses can damage an organisation financially and interfere with operations, reputational losses can be immeasurable.

During a macro-economic shift, it is essential that those operating within the financial services sphere reboot their digital transformation strategies for the next decade to keep pace with the change in technology and shifts in customer demand, attract and retain talent and maintain overall resilience. With the financial services industry going from not just creating financial instruments but to orchestrating a service in this digital transformation, organisations need to think about data privacy and protection, cyber resilience, bias within automated systems and disruptors.

ERIN SIMS FINANCIAL SERVICES SENIOR ANALYST RSM UK

RSMUK.COM

DEFINING A VULNERABLE CLIENT IN A CONSUMER DUTY WORLD

Both the cost of living crisis and the impending Consumer Duty highlight the need to identify a client’s vulnerabilities, determine those who are susceptible to harm, provide appropriate support, and both emphasise and require that advice firms act to deliver good outcomes for all retail customers, especially those in vulnerable circumstances. But how can firms do this?

ASKING CLIENTS IF THEY ARE VULNERABLE WILL NOT PRODUCE THE RIGHT ANSWERS

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The term ”vulnerable” may not be appreciated and should be avoided in conversation. Focus on the goal, which is to support clients, help them grow and elevate their levels of wellbeing.

Clients may struggle to express their emotions or fear how they may be perceived, particularly if recent events are sensitive in nature, and most certainly if no relationship has been established.

Our research shows that, although those who perceive themselves to be vulnerable have significantly more characteristics of vulnerability, people often underestimate their vulnerabilities. Only 14% of respondents completing the financial lives survey (2020) perceived themselves as being vulnerable, and a huge 76% of those who were deemed vulnerable, according to the algorithm, categorised themselves as being “not vulnerable”.

USE A WELL-DESIGNED ASSESSMENT TO ASK THE RIGHT QUESTIONS

When considering the four vulnerability drivers described by the Financial Conduct Authority (FCA) (Health, Life events, Resilience and Capability), certain aspects of the resilience and capability dimensions can be addressed through closed questions or once gaining insight into client’s income and expenditure, but there are subjective elements of these drivers which are often disregarded.

HEALTH LIFE EVENTS RESILIENCE CAPABILITY

GET TO KNOW YOUR CLIENT

Many of the characteristics of concern relating to health and life event drivers can be assessed during an initial fact-finding process or when discussing life changes during the investment journey. However, it is important that the presence of a vulnerability characteristic is not the only factor that is considered and reported but also the interference it causes for a client to carry out dayto-day activities and the impact it may have on life and investment challenges.

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Subjective characteristics are embedded within the FCA drivers broadly relating to emotional resilience and selfefficacy, but these areas require more of a psychometric approach. Validated psychological measures reflecting emotional resilience, financial self-efficacy, intolerance of uncertainty and emotion regulation already exist and our research that employed versions of these measures demonstrated that items such as “I worry about running out of money one day” and “I can handle whatever financial difficulty comes my way” were significant predictors of reactions to periods of market volatility, both in regards to decisions to disinvest or stay invested, and feelings of concern. This type of approach may not

be necessary for all drivers and characteristics, but they are essential if we are to examine subjective factors of vulnerability within a financial vulnerability assessment.

Subjective factors of vulnerability such as confidence and impulsivity have been suggested by researchers to be important; in fact, such abilities or a lack of, can impact the client’s capability to manage their emotions and therefore the level of distress experienced during a challenging life event. Attention should not only be placed on objective factors such as debt and savings.

Demographic information such as age, household income, household size, number of children, ethnicity, employment status, and marital status can be useful for understanding client needs, but they should not be used to categorise clients as vulnerable or not, as all clients are different, and any client can become vulnerable at any point in time.

EVERY CLIENT IS AN INDIVIDUAL

Current research exploring vulnerability and its impact specifically on advised clients is limited and more research is necessary to gain a better picture of client vulnerabilities, particularly as financial resilience is affected by wealth, support networks and financial knowledge.

Using a well-designed assessment that is in line with requirements of Consumer Duty can enable advisers to understand those clients who are highly vulnerable and susceptible to harm in order to provide them with appropriate support.

Characteristics relating to the vulnerability drivers listed by the FCA can differ for each client and this signifies the importance of understanding client’s individual differences, not classifying clients based on stereotypes or physical characteristics.

LOUIS WILLIAMS PHD FHEA HEAD OF PSYCHOLOGY & BEHAVIOURAL INSIGHTS DYNAMIC PLANNER DYNAMICPLANNER.COM

JOINT REVIEW OF THE SENIOR MANAGERS AND CERTIFICATION REGIME

In December 2022, the Government announced, as part of the Edinburgh Reforms, that the Treasury, the Financial Conduct Authority (FCA), and the Prudential Regulatory Authority (PRA) would review the Senior Manager & Certification regime (SM&CR), which has been in place since 2016 for dual-regulated firms and since 2019 for FCA solo-regulated firms. In April 2023 the FCA announced, in a joint Discussion Paper (DP) with the PRA, that it is seeking input on potential ways to improve the regime by asking the industry for views on its effectiveness, scope, and proportionality.

The regime currently applies to wealth management and financial firms, as FCA solo-regulated firms, and most firms in that category are classified as “core” firms for that purpose and so are required to meet only what the FCA terms as the “baseline requirements”.

The Edinburgh Reforms involve, in general terms, the Government taking action to maintain and build an agile and responsive UK ecosystem for financial services regulation following Brexit and so to drive growth and competitiveness in this sector. To take this forward, the Edinburgh Reforms involve the Government proceeding with the SM&CR review as well as undertaking various other steps, including reforming the ring-fencing regime for banks, the repeal and replacement of the Solvency II regime for insurance companies, issuing new remit letters for the PRA and FCA with clear, targeted recommendations on growth and international competitiveness, and publishing the plan for repealing and reforming EU law using powers within the Financial Services and Markets Bill.

The Treasury has, in parallel, launched a Call for Evidence and is also seeking feedback on the SM&CR regime. This DP, together with the Call for Evidence, is the first full review of the SM&CR, although the FCA had carried out what it calls a “stocktake” in 2019, covering implementation in the banking sector, and the PRA had carried out an evaluation in 2020.

Questions have been raised by some stakeholders about various aspects of the regime relevant to wealth management and financial advice firms, which are to be revisited as part of the review. These include:

• whether, as intended, the regime makes it easier to hold individuals to account

• whether the regime has improved conduct within firms

• whether the regime has a “deterrent effect” in relation to potential Senior Managers

• whether the regime is applied proportionately to firms and individuals

• the appropriateness of Statements of Responsibility, Prescribed Responsibilities, and Management Responsibilities Maps [the latter does not apply to “core” firms]

• the appropriateness of certification functions and the Conduct Rules

• challenges in completing regulatory references and the criteria for making conduct notifications

• the growth in new expectations on Senior Managers in respect of new and emerging risks

• the frequency of submitting SM&CR-related information, and

• delays in Senior Manager Function approvals and the requirements for criminal record checks

Concerning the growth in new expectations on senior managers in respect of new and emerging risks, the PRA has issued Supervisory Statements and letters calling on firms to assign responsibility for particular risks to one or more senior managers. This has been used to address the need for senior oversight of new and evolving risks, such as those arising from benchmark transition, climate change, and crypto assets. It is reasonable to expect that, once the current review is complete, both the PRA and the FCA will focus on this. The PRA will consider bringing together previously issued guidance on senior manager responsibility for new and emerging risks in a single inventory and will look to limit the growth of new Senior Management Functions in the future.

It is anticipated that any steps taken to improve the effectiveness and proportionality of the regime would be expected to have a favourable impact on the implementation of the Consumer Duty, which will come into force for current products and services on 31 July 2023.

The Consumer Duty will be highly relevant to wealth management and financial advice firms, which of course focuses on a retail client base. It will set higher and clearer standards of consumer protection across financial services and will require firms to put their customers’ needs first. To achieve this, the FCA anticipates that firms’ senior managers will need to have the necessary commitment to drive through the changes needed to bring about a wholesale commitment within firms to the well-being of their customers.

A future amended and strengthened SM&CR may well make this easier to achieve if it can drive up standards of managerial conduct and keep unsuitable individuals out of positions of influence within firms.

ALEX PASCHALIS DIRECTOR OF INVESTMENTS THISTLE INVESTMENTS THISTLEINITIATIVES.CO.UK

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Meet the moment.

Alongside updates from PIMFA, the Journal includes several useful inputs from our associate member firms. These articles are an excellent opportunity to gain interesting insights into the wider industry and to learn more about PIMFA associate members. If you are an associate member and you are interested in contributing to future editions of the Journal then please contact:

or

Ross-Scott, Copywriting & Publications Manager (NigelRS@pimfa.co.uk)

@PIMFA_UK www.pimfa.co.uk

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