Wealth Management and Private Banking

15 November 2018

AdviceWealth Management and Private BankingWealth Management and Private Banking

Suitability is one of the issues that is at the top of the FCA’s agenda. It comes up time and again on their business plans. According to FCA findings, 96% of advice is suitable. However, even a small proportion of people not agreeing that they were given suitable advice would be a flag. ESMA issued a second paper on suitability recently, and it was aimed at the regulator and broadly in line with the previous paper. Although it isn’t aimed at firms, it is useful for them to see how the regulator will approach it. The FCA is scheduled to do another review in 2019, so now is a good time for firms to reassess and revamp their approach to suitability assessment.


  • Establishing education levels and the experience of investors was a particular area of interest to the participants.
  • Ongoing suitability assessment is an expensive exercise and firms are looking for ways to cut costs, and this may mean not providing advice at all.

Key themes

The session started with determining when suitability applies. Mainly, it applies when Investment Advice and / or Portfolio Management services are provided. Firms are required to obtain necessary information regarding the client’s knowledge and experience of the risks involved, financial situation including ability to bear losses and investment objective including risk tolerance.

The assessment of knowledge and experience includes establishing familiarity with services, transactions and instruments, experience of investing (nature, volume, frequency), and education (this includes level of education and profession or relevant former profession). To establish the financial situation, the firm is required to gather information on regular income (source and extent), assets (liquid, investments, real property) and regular financial commitments.

Lastly, to assess investment objective, the time horizon for investment needs to be taken into account, as well as risk taking preference, risk profile and purpose.

The assessment of the three components is necessary to recommend investment services, financial instruments or taking decisions to trade. The firm needs to determine which are suitable for the client, in particular in accordance with the client’s risk tolerance and ability to bear losses.

While the FCA and regulators give firms flexibility on the amount of information gathered within the three information buckets (knowledge, financial situation and investment objective), firms have got to cover all the things referenced.

Participants were particularly interested in discussing education as part of the suitability assessment. There are a few key principles to keep in mind to get it right. It is about documentation and a paper trail. If something is not documented, in the eyes of the controlling authorities it never happened. Next, the more complex the investment is, the more information the firm needs to get from the client, the more financial education or experience they need. It is also useful to keep in mind that largely, the suitability assessment is about protecting vulnerable clients. However, that is not always tied to their education.

Practically speaking, the level of education and experience requirements potentially need to be different when the firm is offering discretionary services compared to advisory.

Expanding on the topic of education and experience, the idea of profiling investors based on wealth came up. It was argued that on its own, net worth is not an indicator of investment sophistications of the client or their ability to bear risks. Net worth must be considered in the context of the investor’s personal profile. A similar argument was applied to situations when someone was classified as professional client. This should not lead the firm to assume that these investors can bear losses financially. Client can’t be opted up to professional client just based on wealth, the client has got to be knowledgeable and experienced in the investment field. One of the trends about clients’ knowledge and financial understanding discussed was that big firms with wealthy clients are educating their clients about products.

Related to this was the question of whether the regulator expects firms to push the clients for evidence or can firms rely on clients’ self-reported information? Anecdotes from participates included clients over- or under-estimating their worth significantly, sometimes refusing to provide the correct figures. Generally, it is expected that there is reasonable trust between the firm and the client. However, if information provided raises any doubts, the firm has an obligation to go back for correct information. Otherwise, it would not be able to provide suitable advice. This means that ultimately the firm cannot provide advice at all.

The next part of the conversation was centred around the costs of suitability assessment. This stems from the fact that every time the firm suggests a purchase or transaction, they are obliged to assess suitability, essentially making it an ongoing process. The key from the regulatory perspective is that the firm needs to prove all they really know about the client. It is expensive, especially for smaller firms, to go through this process each time.

Firms consider it expensive and onerous to provide advice and are not sure how much to charge, given ongoing monitoring costs. There is thus a significant regulatory and compliance burden to providing advice and record-keeping is key in this instance. This is especially important when client complaints rise as is typical in a market downturn. For instance, after 2008 there was a surge in complaints.

“If you don’t have all the documents to prove that you did research and assessment,            you’re in trouble.”

In an attempt to cut costs and time spent on suitability assessment, some firms resolve to use pre-filled suitability assessments. The regulator understands that processes become increasingly more automated as more technology is adopted. However, it is crucial that these systems are fit for purpose. This implies they should be able to flag issues in the same way as if it were done manually.

Following on from the cost-cutting via automation discussion was a query regarding what does the set of questions that will allow to firm to assess suitability look like. While there is no universal answer to that, the regulator is particularly concerned about how understandable the questions are, so that the information in the suitability report is reliable.

The consensus in the room was that suitability cannot be defined by a robot or algorithm, it requires human judgement. This could potentially affect robo-advice provision. Pressure on robo-advice originated from them failing around establishing investors’ knowledge and experience as part of suitability assessment. However, any technological solution involves an iterative process, so we will potentially see more robo-advisors refining their own processes.


  • The suitability assessment is an on-going process. Firms have an obligation to update information and maintain their knowledge of the clients’ circumstances.
  • Because of the need for suitability assessment, staff need to be trained to make sure they know what is and what is not advice.
  • From the regulator’s viewpoint there is a set of key principles and client outcomes that firms need to demonstrate, such as acting in a clients’ best interest. Suitability assessment should be done with these in mind.

Expert: Katy Ruddell, Farrer & Co