The firms, which were not named, are licenced to provide both investment advice and discretionary investment management services.
They were visited during the second quarter of 2017 and on-site examinations were conducted. This was done in response to growing concerns around investment advice, the JFSC said.
The purpose of the visits was to assess compliance with the principle of having the highest regard for the interests of the client.
The on-site examinations reviewed:
- The investment firm’s documented knowledge of the client’s circumstances and investment objectives;
- Due diligence conducted by the investment firm on products and/or providers in terms of their suitability for its clients;
- The suitability of advice provided or discretion exercised by the investment firm for its clients; and,
- The effectiveness of the investment firm’s review processes in respect of all of the above.
In total, 19 different areas were assessed.
Client fact find
“It is disappointing that, in a number of investment firms examined, the fact find process was found to be deficient,” the report stated.
The ‘reasons why letter’ (RWL) provides comprehensive information in respect of the investment advice provided, with the aim of enabling the client to make an informed investment decision.
“It was of concern […] that a number of investment advisers failed to adequately document the rationale for selection of specific investment products in their ‘RWL’.”
Pension transfer problems
Of the various shortfalls identified in respect of DB pension transfers, the JFSC said it had seen evidence of a lack of in-depth assessment of client needs, a lack of financial projections and comparison of future investment returns and insufficient explanations of the impact on benefits at retirement.
It also found evidence that the income required in retirement and any potential longevity risk had not been established or considered.
Fee transparency lacking
With regard to fees, the JFSC uncovered evidence of inconsistent patterns of fee charges for different clients by different advisers within the same investment firm.
Additionally, correspondence to a client stated that the fund manager was charging an upfront fee when, in fact, the firm had negotiation that no front-end fees would be charged. The money was, instead, being paid to the investment firm.
Clients were also being charged a higher annual management fee than was recorded without any clear documentation as to why this was the case.
Good practice
The JFSC also highlighted areas of good practice that it had identified as part of the review.
In one instance, an investment adviser’s manager or supervisor attended at least one client meeting a month to understand if the advice provided is suitable and to offer feedback to the adviser.
One adviser inserted a disclaimer into the reasons why letter, outlining the adviser’s concern that transferring out of a DB pension was not in the best interests of the client and explicitly highlighted that the transfer was only being done at the insistence of the client.
The internal policies and procedures of one firm clearly set out that vulnerable clients should be offered the opportunity to have a close relative or trusted third party present.
