The Benefits of Aligning your Process with your Target Markets

The FCA's Product Intervention & Product Governance Sourcebook (PROD) is 3 years old as of this month, but many adviser practices are still unclear about its implications or what it means for their business.

To recap, PROD was basically brought in to ensure that products are recommended to clients which:

• meet the needs of at least one identified target market;
• are distributed appropriately; and
• deliver appropriate client outcomes.

FCA regulation like this may feel like a burden initially, but in cases like this it actually presents an opportunity to become more efficient. By developing a formula to identify target markets you are able to profile your clients according to their needs, which can help simplify your advice process whilst also enabling you to demonstrate to the regulator that you are giving PROD-compliant recommendations.

How Should I Identify a Target Market?

In identifying target markets for the products and services your firm offers, it's important to consider:

1. How prospective products fit with a client’s needs and attitude to risk
   • e.g., would an EIS be appropriate for a "cautious" investor seeking tax relief?
2. The impact of any additional charges on your client
   • e.g., are the costs of a discretionary fund manager justifiable versus a risk-rated multi-asset fund?
3. The financial strength of the provider
   • i.e., you should factor in the security of your client's assets being invested
4. The level of service offered
   • e.g., what's the provider's track record of dealing well with the end client upon commencement of the new arrangements or if complaints arise?

Of course, the list of considerations is not limited to the above, and firms will no doubt down drill down into these as more details are considered during the client segmentation process.

Target market identification should go to a reasonably granular level, but firms aren't expected to have bespoke target markets for every client.

After all, TCF is still a thing. If two clients come to the same IFA with very similar needs and circumstances, why shouldn't they be assigned the same target markets? This, of course, assumes that the target market is evidently a suitable one and they haven't been forced into it. I like to think of this as essentially saying that profiling clients is a good idea, but "shoe-horning" them into categories is not.

How Does this Affect the Advice Process?

There's no escape from the fact that a CF10 needs to be able to demonstrate that the firm's product governance arrangements are appropriate and mitigate any risk of failure. Having a discrete set of target markets in which to operate and a documented, deterministic process for assigning them to clients makes this job much easier.

It's also true that the lucidity with which a client is profiled into an appropriate target market affects the efficiency and profitability of the whole advice business.

If the process is clear and deterministic then it can be followed quickly and easily, even automated to large extents. Moreover, compliance checks become simpler, as the target market profiling can be easily validated to lead to a more robust and efficient file checking operation.

What about the Suitability Report?

Your report writing process can benefit from the same product & service profiling as well.

At PowerPlanner, we can calibrate our software to produce suitability reports that reflect your recommendation process, selecting wording that reminds the client of your discussions and leading him/her through the decisions made, ultimately arriving at your recommendations. It becomes clear how your advice meets any identified needs and objectives, which both reassures the client and satisfies the FCA.

One of the conversations I like to have early on with new customers is about their advice process and how they arrive at the recommendations. Those with a clear, demonstrable process are those that we find easiest to work with and generally get the best out of our services. Indeed, I would even go as far as to say that those who do not have such a process are not suitable for working with PowerPlanner until they address this, although the PROD-compliance implications of that are certainly more serious than the fact they're missing out on the full benefits of our great service!

However you go about writing your suitability reports, there are significant productivity gains to be made by identifying your target markets and designing your process accordingly.

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