In February 2024, the FCA wrote to a number of financial advisory firms requesting information about their delivery of ongoing services for which their clients continue to be charged after advice has been given. In its survey, the FCA asked if firms had assessed their ongoing services in response to the introduction of the Consumer Duty, and whether they have made any changes as a result.
The survey also asked for data on the number of clients due a review of the ongoing suitability of the advice as part of the service, how many received that review, and how many paid for ongoing advice but whose fee was refunded as the suitability review did not happen.
When an advisory firm engages with a client, its Client Agreement, or Terms of Business invariably requires the adviser to provide the client with an annual review of their investments or other financial products that it manages. In return for the annual review, the client contracts to pay an ongoing adviser charge to the firm. This charge may be deducted from an investment, or it may be paid by the client on receipt of an invoice from the firm.
This is in line with the FCA’s expectation that not all clients will require an annual review and therefore pay an ongoing adviser charge
The purpose of the annual review is to assess the ongoing suitability of the financial products and the portfolio that the firm manages for the client in relation to the client’s goals and objectives and in the context of other assets the client owns, but the firm may not manage – for example cash deposits and property.
The adviser may also use the annual client review to assess if the client’s circumstances warrant continuing annual reviews. In which case, the adviser may suggest that future reviews are not necessary and will switch off ongoing fees, inviting the client to contact the firm for any future ad-hoc advice. This is in line with the FCA’s expectation that not all clients will require an annual review and therefore pay an ongoing adviser charge.
The suitability report issued to the client following the annual review should confirm ongoing suitability or recommended changes to a portfolio. Some firms use the report to confirm to the client the ongoing charges associated with the advice.
With reference to Consumer Duty, the annual review demonstrates the firm’s commitment to:
- supporting clients to achieve their goals and objectives;
- working to prevent foreseeable harm; and
- delivering good client outcomes.
In delivering a comprehensive annual client review, the firm demonstrates how it works to deliver the FCA’s four consumer outcomes of:
- consumers receiving fair value for the costs and charges levied;
- ensuring products and services remain suitable for clients;
- clients understanding the products and services they receive; and
- clients receive support throughout their relationship with the firm to achieve their financial goals and objectives.
What constitutes an annual review?
Your firm may define what it expects from an annual review with a client. The FCA expects that a client annual review is a face-to-face meeting with a client either in person or using a digital platform such as Teams to discuss their current situation, the portfolio that the firm manages, the values of any assets the adviser does not manage and whether the portfolio remains suitable. The list below is not definitive but highlights the issues that you may want to discuss with the client:
- if there have been any significant changes to the client’s personal or financial situation;
- if there are any changes to the client’s goals and objectives;
- if there have been any changes to the client’s attitude to risk or capacity for loss;
- how the portfolio that you manage has performed against the client’s expectations:
- if the portfolio remains suitable compared to their goals and objectives;
- if any changes to the portfolio are required, e.g. rebalancing;
- do you recommend ‘bed and ISA’ or ‘bed and pension’;
- are there any further monies available to be invested;
- any issues that you, as their adviser, want to draw to their attention – e.g. IHT liability, changes in a recent budget that affects the client’s financial planning.
This is the skeleton of an annual review meeting, the objective is to ensure your firm’s records are up to date, that the client is on track to achieve their goals and objectives and therefore, to confirm your advice remains suitable. You may want to recommend that the portfolio is rebalanced to keep it in line with the client’s ATR. You will want to:
- present an update of the client’s portfolio;
- discuss and update the factfind noting any changes to your client’s circumstances;
- discuss how any changes may impact ATR or capacity for loss;
- confirm that their goals and objectives are unchanged, if not, discuss the revised goals and objectives by reference to SMART (specific, measurable, achievable, realistic, and time-bound);
- confirm that the portfolio remains suitable, or advise the client of your proposed changes;
- recommend that your client takes advantage of the current year’s ISA allowance if appropriate and provide illustration;
- if your client is drawing income from pensions or other assets that this remains sustainable, you should use a cashflow model to demonstrate the outcome.
After the meeting
You should write to the client to confirm the outcome of the meeting. This letter may refer to your previous review meeting with the client. Here are the areas that you may wish to cover:
- the date of the meeting, whether by Teams or in person;
- confirmation of any changes to the client’s circumstances;
- a summary of the investments being re-assessed;
- the outcome of the periodic suitability assessment undertaken, for example, confirm continuing suitability or, for example, recommend rebalancing;
- confirm the client’s current objectives as discussed;
- confirmation that the periodic suitability assessment has been based on accurate and up dated information obtained from the client;
- consolidated table of aggregated costs and charges;
- details of the cumulative effect of costs and charges on the investment returns;
- if you recommend fund switches, confirmation of any differences in charges;
- aggregate costs and charges.
In summary, the FCA expects firms to deliver annual client reviews in accordance with client expectations. The reviews to confirm continued suitability or recommend changes to portfolios. If the adviser is of the opinion that continued annual reviews are no longer in the client’s best interest to confirm this and cease taking an annual adviser charge.
If you require an audit of your client annual review process, please contact us: contact@compliancematters.co.uk.
