Centralised Investment Propositions

Question 1

Explain THREE centralised investment proposition approaches recognised by the FCA:

Answer 1

• Portfolio Advice Services
  
  • Involves the use of model portfolios to meet investment needs for different risk categories of clients.
• Discretionary Fund Management
  
  • May be in house or outsourced
  • Adviser has input into investment strategy
• Distributor influenced funds
  
  • These are open-ended funds where the adviser firm has a degree of control over the fund design and management.

Question 2

Briefly explain the difference between a centrlised and decentralised approach to investment management:

Answer 2

• Centralised
  
  • Firm has agreed investment policy that all investment managers must follow
• Decentralised
  
  • Firm will give a degree of discretion to investment managers to either operate freely, or within general constraints

Question 3

List THREE core considerations that firms need to take into account when designing a new CIP:

Answer 3

• What are the needs/ objectives of the firms clients
• Is a CIP appropriate to meet the needs of these clients
• If so, what type of CIP should be offered?

Question 4

List FIVE considerations that a firm must take into account when deciding whether or not to use a third party provided CIP:

Answer 4

• Terms and conditions
• Charges
• Provider reputation
• Provider financial strength
• Providers experience and track record
• Providers own due diligence and investment selection process
• Solutions adaptability to meet individual client needs/ objectives
• Underlying assets/ asset allocation models within the CIP

Question 5

Explain what is meant by the term “portfolio drift” in the context of a CIP, and how can it be mitigated?

Answer 5

• Over time, some constituents within the CIP will out/ underperform others, and this will result in the portfolio “drifting” away from the recommended asset allocation
• This can be mitigated by rebalancing on a regular basis

Question 6

Definte the term “replacement business” as per the FCA definition (2):

Answer 6

• Switching a client out of an existing investment solution
• Into a new investment solution

Question 7

Explain THREE advantages of a CIP (9):

Answer 7

• A consistent investment approch is achieved across the firm. This helps deliver efficiency, build client confidence and reduce risk.
• Ensures simplicity of administration, multiple client portfolios can be adjusted at once. No client portfolios will be “lost track of”, which can also reduce investment costs for clients.
• Allows advisers to focus on planning and advising rather than becoming sidetracked by investment management - CIP takes care of this.
• Segmentation can help offer a range of CIP solutions for diverse client banks. Clients with different needs (pre/post retirement, income/ growth) can be catered for with a CIP.

Question 8

Outline the main disadvantages of a CIP:

Answer 8

• In its most recent review of the advice market, the FCA found several flaws in firms’ CIP offerings.
• CIPs may not be suitable for all clients, some clients may require ethical or religious considerations not catered to via a CIP.
• CIPs may create conflicts of interest. For example, FCA found services that firms received from a platform where deemed more important than service received by clients.
• FCA found that some firms ack a structure in research and due diligence, meaning results were not always up to date and chaleneged. Some firms were not clear on criteria they used to assess suitability and products recommended.
• Some firms weren’t reviewing platform choice on a regular basis.
• CIP may not be available on all platforms, nor for all wrappers.