What is All the Fuss About Suitability?

Much has been written and spoken about on the topic of “suitability”, yet there are still a wide range of views on exactly what it is, why it is of interest, how it will affect financial advisors and, most important, how it will benefit consumers. Here is our perspective.

At PlanPlus Global, our clients, financial advisors and the enterprises and institutions with whom they are associated, provide financial advice and products to consumers and, as such, are under increasing scrutiny from regulators, consumer groups, and the media regarding the appropriateness of their recommendations. The general concern is that some advisors may make (or have made) recommendations to aid in the sale of a product, rather than in recognition of a client’s needs.

As a result, advisors are increasingly being asked to “prove” they have applied their knowledge, experience and professional judgment in making product recommendations that are in the best interests of their clients.

In some jurisdictions, notably the U.K. and Europe, regulators are already mandating that advisors use tools and methodologies, not only for initial recommendations, but also for ongoing supervision of the continued “suitability” of their recommendations.

Recently, Canada’s largest regulator, the Ontario Securities Commission (OSC) released a paper for industry comment that reflects a similar narrative around the subject of suitability, and how advisors are going to have to demonstrate the appropriateness of their investment advice. It is expected that the OSC’s recommendations will largely be accepted and eventually influence policy or regulation in other provinces across Canada.

Canada is just one example. Consequently, it is our overall belief that the issue of “suitability” will become increasingly important and of widespread interest among countries where financial planning and investment advisory industries are established or rapidly growing.

What determines “suitability”?

For advisors to determine the appropriateness or “suitability” of their recommendations, they must take into account individual client factors including:

Risk profile

  • Determined by a reliable process

Time horizon

  • Determined from client input

Financial needs and objectives

  • Determined from client input

They must also consider historical and projected performance characteristics of recommended portfolios in the context of the client factors above and apply their professional judgment as to the appropriate trade-off between risk and reward.

As noted, we expect this attention (and regulation) regarding suitability to heighten in all of our current markets over the next 2-3 years. Consequently, advisors (and their sponsoring firms, where applicable) will increasingly seek tools and methodologies that give them confidence that their client engagement process enables them to prove that their recommendations are the “best fit” for their clients and, therefore, meet both client requirements and regulatory obligations.

The PlanPlus Global Value Proposition

The combination of FinaMetrica’s risk profiling application and PlanPlus’ financial planning software into a single product that can be accessed at various levels presents a unique offer to the market. To the best of our knowledge, there is no other fully integrated suite of software tools to address the issue of suitability that is so academically sound and validated through actual use by advisors.