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PORTFOLIO MONITORING TECHNOLOGY - A REGULATORY MUST HAVE.

Portfolio Monitoring and Management

Clip the ticket and take a fee. Maybe it was possible once, but not anymore, as clients and regulators demand greater proactivity in portfolio monitoring and management.

In the direct aftermath of the GFC, the public eye was on the appropriateness of financial products recommended by advisers. Now there are signs the spotlight has shifted to advisers’ ongoing service obligations for monitoring and managing investments.

What are the signs?

The Financial Ombudsman Service’s archives abound with successful complaints against advisers who failed to warn clients about underperformance in their portfolios. These determinations make it clear that advisers who offer to provide an ongoing monitoring service will be liable if their client suffers a loss as a result of their failure to do so.

Advisers need to describe their ongoing service offerings carefully. They may be contractually obliged to provide continuous monitoring unless their agreement specifically states otherwise, i.e. on a quarterly basis. Regardless of the wording of service agreements, it is not unreasonable for clients who pay an ongoing fee to expect their adviser will tell them if the market is dropping. Failure to do so could result in hefty compensation payments.

Monitoring makes sense anyway

Robust monitoring systems help ensure investments are aligned to pre-agreed asset allocations and investment strategies. This is particularly the case for MDA service providers, who are entirely responsible for selecting and monitoring client investments. Significant variants to performances can occur if agreed asset allocations are not adhered to.

FOFA reforms highlight adviser fees

When investment commissions were banned in 2013 most advisers switched to charging percentage of assets under management. This offset the drop in commission revenue but has significantly increased the transparency surrounding ongoing advice fees.

Not only do advisers need to provide FSGs and SoAs; they now must provide an annual fee disclosure statement specifying the services the adviser agreed to provide during the previous 12 months. They must confirm which of those services were actually provided, and set out the fees that were paid for those services. Clients now have more opportunity to scrutinise and object to ongoing advice fees. And, by law, clients can terminate ongoing fee arrangements with little or no advance notice.

Technology can help

Happily, one of the outputs of the fintech revolution is that portfolio monitoring technologies are more accessible. Using these systems, financial advisers can quickly access portfolios to ensure they are within required asset allocations, and adjust if necessary. While specific technologies are unlikely to become mandatory, the standard expected of financial advisers is likely to reflect technological advancements. Advisers who are unable to demonstrate that they are proactively monitoring client portfolios could find it difficult to satisfy the regulator that they have appropriate systems in place.

Ongoing monitoring of clients’ investments is likely to be the subject of increased scrutiny going forward - by both clients and corporate regulators. It’s a complicated area – so when in doubt, seek legal advice. We’re always happy to help.

Author: Claire Wivell Plater

This blog highlights the key points in our White Paper, Portfolio Monitoring Technology - A Regulatory Must Have.

July 2016

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