Diligence - Equitable Life, Arch Cru, Neil Woodford, who's next.....?
Written on 26/06/2019

Well we are still reporting every day it seems, on the Neil Woodford issue, many of you will have seen that the FCA is now “wading in”, perhaps in many people’s eyes a little too late as the horse has already bolted! 

Up until now there has been a massive level of withdrawal from his flagship Equity Income Fund before and after its suspension, heck, even St James’s Place terminated his contract to run three of their funds (those of you that had read my article on SJP will know that more than 80% of their funds are bottom quartile and some of the worst performers in their class but they get a huge kickback from Neil Woodford!) there has even been a knock on from this to Purple Bricks (Neil Woodford was a major investor and he pulled out of Purple Bricks after his fund was suspended) so it's all doom and gloom, certainly it seems for the many that SJP and Hargreaves Lansdown encouraged to invest into his funds! (there were a lot) 

Now I am no economist or financial analyst, I am a humble T&C Director with a mere 25 years’ experience in DB pensions but one of the questions, amongst several, that this has raised in the wider advisory community, is one of my favourite words, DILIGENCE. (don't groan, you love it really when I talk about this sort of thing!) 

Now one definition of this word is “careful and using a lot of work or effort” but I like to think of it as “doing the job as best you can” 

So where am I going here you ask? 

I am going to Adviser Diligence, in other words carrying out proper analysis and research for every investment recommendation, no exception. 

Now we see plenty of ISA and Pension switches and they are both very common in our industry, let’s face it there are lots of people sitting with Cash ISAs that took them with their bank often because they might have been scared of investment risk, only now to look at the returns and realise that they have been rather disappointing (one report I saw used the word “pitiful”) and then a helpful financial adviser has come along and shown them the virtues of a stocks and shares ISA and what it could offer (££££££) 

We also see plenty of Pension Switches where an existing contract is either consistently poorly performing or is perhaps out of date that it cannot offer all of the Pensions Freedoms that members could benefit from and so again our friendly financial adviser comes along and offers access to a “better” pension solution. 

So the financial adviser follows this process: (Say "Yes Niel we all do!") 

  1. Client meeting and fact find
  2. Establish clear client goals
  3. Gather data on existing schemes
  4. Analyse existing schemes
  5. Research on other options to meet client goals
  6. Compare existing schemes to new potential one
  7. Recommendation report
  8. Present to client
  9. Implement recommendations 

Ok so you can see that I have put four of these steps in BOLD this is because for the purpose of this article they are the most important and relevant. (but obviously the others are vital too) 

It is these four steps where I see so many advisers go astray and to be frank, make the job harder for themselves than it needs to be. 

But trust me this does link directly into Woodford! 

For example, Dynamic Planner rated the Equity income fund as 8/10 for risk and as a result, estimated that only 3% of the investors in the fund held that risk profile, even more than this, as the fund drifted more and more into smaller, higher risk, shares, the risk grade climbed to 9/10, here Dynamic Planner estimated that only 0.6% of investors held this risk profile. 

So many people invested into this fund and a large proportion of the investment was down to St James’s Place and Hargreaves Lansdown and it is claimed that these organisations did not know that the fund had drifted so far from its published and disclosed composition. In fact some claim that advisers on the whole were influenced by the “herd mentality” and because people like St James’s Place were rating positively the fund, they advised clients to invest too. 

“So what?” I hear you cry….. “I’m not recommending individual funds” 

True. You may not be advising on funds but as an adviser you should be analysing existing and proposed funds when looking at a switch and this is where your DILIGENCE has to come in. 

When you look at any switch for a client you must examine what they are in, what it does (or does not) and how it performs and you MUST compare this to specific client objectives. (so we are clear vague ones such as "capital growth" or “review my pension” don't count) 

Just because a pension plan does not have all the pension freedoms does not mean it is no good for a client, unless that client has objectives that can’t be met, then the plan cannot be said to be unsuitable, right? 

Just because a client has an ISA that sits in cash performing poorly does not mean it is no good, if that client does not have an objective that it is failing (performance above cash/inflation for example) and let’s be clear on this, a Cash ISA can give capital growth (just really, really low growth potential) 

Your client must have specific objectives and it is your job to find these out and document them (diligence right?) 

When you examine their existing fund(s) you need to show how it works, performs and charges and set that against a relevant benchmark. (not the FTSE 100!) 

Then comes the tricky part (or so it seems at times) comparing what they have to what they could have. Here you do your research….(and that is not a dirty word) 

I suggest that you carry out a direct comparison using something such as O&M systems and their Switch Report (though you can use anything you like as long as it is good and easy to understand) this will show you how what they have compares to what they could have and if you favour a particular provider or solution, how it stacks up. (more diligence right?) 

This should inevitably lead you to a logical conclusion, hopefully that what they have right now can’t meet their objectives and there is something out there that can….(look out I smell advice coming!) 

So how does this link back to Woodford you ask? Well I am glad that you asked that! 

The consensus is that there was insufficient scrutiny and diligence by advisers as a whole and that large advisers such as Hargreaves Lansdown (which was still writing to clients the week of the fund’s suspension to encourage them to invest!) and St James’s Place, fuelled the effect by continuing to positively rate the fund and the man himself. In simple terms advisers didn't bother carrying their their own diligence (well not of any depth) and relied upon the notion that "well if SJP think it's good it has to be right? WRONG.... 

There is evidence that things were going awry, as Woodford started to loose ratings for his funds. Citywire and Square Mile for example suspended the funds’ rating before the closure and in fact the Guernsey Stock Exchange suspended three recently listed Woodford holdings back in April 2019. 

Now I don’t suggest that IFAC members will be in this boat, in that they won’t be recommending individual funds but it does highlight a very real issue in the advisory community, DILIGENCE. 

On every piece of advice you must be carrying out the required level of diligence for your client where investments are concerned. (actually protection also requires appropriate diligence – think Vitality!) 

Think back further than Woodford to Equitable Life. Now mentioning their name to some is akin to saying the name Voldermort out loud, they recoil at the very sound of it. 

But it can be strongly argued that diligence by all was sorely lacking with them, advisers carried on advocating investments into them long after they became a concern, even some in-house AVCs attached to Statutory Pension Schemes, were still offering members the chance to put their money into Equitable Life right up to their collapse! 

So what I am saying here is that as a humble adviser looking after individual clients, you have a duty to give best advice, you can’t give best advice until you have carried out the right amount of diligence, diligence for you means the following: 

Gather every bit of data on the client that is relevant

Gather every morsel of information on their existing schemes

Analyse their existing investments, show how they work and perform it all adds to the credibility of your advice that is to follow

Research the market (within your permission level of course) and come up with the solution that best meets the client's needs

Write a report that shows clearly all of this and that will stand up on its own

Hey Presto! Best advice, BOOM! 

So in summary, just because SJP say it's good (and in time you’ll come to know my view on them), don't take it for granted that they actually know what they are talking about when it comes to your clients, they can't....only you can know that and you need to show that, simple. 

Go about your business, move along. 

End Transmission......

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