A few years ago, I was asked to chair a committee on how to check that the target market for specific investment funds was matched with those who actually invested. This was an idea borne out of Mifid.
Given how few investment houses had created a ‘typical investor’ with suitability to match, we were clearly in a dangerous area. Ideally, the investor specification would include their risk profile, risk capacity and overall financial position. For example, we might be looking for medium- to high-risk investors who could permanently lose up to 30 per cent of their investment or cope with volatility, and with this fund being no more than 10 per cent of their investable assets.
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To carry out such a check would involve data imports from many sources, and that alone would lead to its own inaccuracies – possibly why this project lost traction.
When we consider what has happened with the Woodford funds, it is clear to me that we were taking completely the wrong approach on this project. It seems sensible that, when we were issuing key information documents, we should have issued them in a format that reflected the data we were trying to collate; in other words, creating an investor profile that set out the kind of person it would typically suit.
It is along the lines of what Amazon does when you are shopping, with various pop-ups at the foot of the screen saying ‘People like you bought the following.’
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This approach is well understood. We have had a lot of complaints recently that the regulators are acting only after something bad has actually happened, and prevention has to be seen as better than cure. I would therefore argue that what we should be doing is making the investor profile a central part of the key investment documents issued to clients on recommendation and on review.
It is important that whatever information we produce for the public is clear and unambiguous. I contend that best-buy lists are part of the obfuscation in the marketplace. If you are saying to people ‘Buy your funds through us but we won’t provide you with any advice,’ that’s a clear message. But if you then add ‘Oh, hang on, we can give you a list of some of the funds you should be thinking about,’ in the absence of the investor profile that I have just described I would argue you are giving advice.
In all things communicated in our sector, if we are to deliver an experience that is not just suitable but completely comfortable, we need to ensure the consumer is thought about first, last and always.
People had no clear view of the risk profile of the Woodford funds. Had Woodford IM been forced to produce the investor profile and compare it with the actual investors, this would have highlighted the mismatch that is now evident.
Rob Reid is principal of CanScot Solutions
A potential solution, so don’t hold your breath as it’s not an FCA preconceived shan consultation, it’s your idea so more like how they handle the too difficult complaints about themselves. Me cynical?