Luma Insights:

How Technology Can Help Advisors Adapt to the Consumer Duty

In July 2021, the Consumer Duty report was put forward by the UK Financial Conduct Authority with the express purpose of increasing the protection given to customers who use companies that either distribute or manufacture products or services, including financial management firms. The report sets forth several proposals that businesses in these industries should undertake so that their clients are treated fairly and with their best interests as the primary priority. As it stands today, these proposals are simply recommendations, not yet full-fledged rules that companies must follow. The hope is that once these proposals do go into effect, the result will be stronger public trust in the companies that they rely on.

What does this mean for wealth management firms staffed by advisors who are paid by clients for the financial acumen and sound investment insights? The result is contingent upon the adoption of proposals from the report and the advisors’ specialization in precise financial services. For advisors and firms who deal in straightforward, traditional investment vehicles (i.e., equities, bonds and funds) the report’s parameters should be an easy hurdle to clear.

But for advisors who incorporate alternative investments into their clients’ portfolio allocations, business-as-usual might undergo a drastic change. As stated in the Consumer Duty report, the top aim of the report is to influence change that pushes firms “to act to deliver good outcomes for retail customers.” In an investment context, that means the influence that individual products or asset classes have on the entire portfolio need to be considered. Since many alternatives sit outside of an advisor’s core investment system, the impact they have in a wider portfolio context may be difficult to quantify.

The Consumer Duty report also emphasizes the need for firms to be able to clearly define, monitor, and prove the outcomes their customers are experiencing. In a word, suitability. The issue here is that there is no guarantee that the data needed to properly define suitability will be available.

By their very nature, some alternative investments are non-linear. For example, structured products have embedded events that happen throughout their journey to maturity. Defining when a product has hit its ‘maximum return’ ceiling can be difficult, especially if it shows favourable gains early on. Determining if a client should sell early to reap the biggest return in the investment’s lifecycle is almost impossible for an investment manager who can’t predict the future.

This is the conundrum posed by the Consumer Duty report. Financial advisors are stuck between a rock and a hard place. What is the solution?

The best solution lies in technology.

Most advisers and wealth managers access alternatives in a different way than they do traditional assets. The financial technology used for handling mainstream transactions is often not designed to also be able to transact alternatives. It’s as if they speak different languages. New ways to properly manage alternatives are needed and some, such as Luma’s award-winning fintech platform, can provide the insights needed to meet the rigors foreshadowed in the Consumer Duty report.

This is a key reason why Luma has been adopted by broker/dealer firms, RIA offices, and private banks around the world. It gives financial professionals a fully customizable, independent, buy-side technology platform that gives its users the ability to oversee the full, end-to-end process lifecycle by offering a suite of solutions.

Technology may be the best and only way to thread the needle of creating bespoke new products that also puts client outcomes at the forefront of the process. As for continual suitability, technology like Luma has engineered modules (such as Lifecycle Manager) that can monitor alternatives with proven consistency. These technological solutions open up the possibility of aligning the events of alternatives with traditional investments so advisors have the data they need to comply with regulatory systems.

In the end, this lessens the ‘complexity’ stigma some alternative investments carry. Fintech is rising to the demand so advisors who want more diversification in the portfolios are also able to meet new consumer-focused obligations without sacrificing their options.

The Consumer Duty report hasn’t been enacted yet, but firms should embrace new technology that would improve experiences and outcomes for their customers. Acquiescing now might provide them with earlier access to a wider range of investment solutions if and when the Consumer Duty proposals are passed.