Having an Approved Product List (APL) may be valuable in today’s rigorous regulatory environment.
According to Aman Ramrakha, Director, Manager Research Ratings APAC with Morningstar, having a robust methodology for constructing an APL will prove of great value if registered financial advisers are questioned by a regulator.
“If a regulator comes knocking on your door, the first thing they will ask for is information. It’s important not to leave anything to chance – document what you’re doing, how you’re doing it and how those investments have ended up in your clients’ portfolios. Without that structure in place, it then becomes an interpretation issue,” says Aman.
Role of an Investment Committee in constructing an APL for registered financial advisers
According to Mr Ramrakha, being able to prove adequate research and knowledge of the products most relevant to your customer base, is important when compiling an APL for registered financial advisers.
“The length and breadth of your APL should be determined by the types of clients you service and the products that are relevant to them. You don’t need to have scoured the entire universe for the best product in every single category across every single asset class, but it must reflect the needs and objectives of your entire client base,” Aman says.
Investment committee makes the ultimate decision
Accordingly to Mr Ramrakha, the inclusion of products on an APL should be determined by an investment committee. Aman believes this structure should ensure that power is properly delegated across the organisation and that the committee carries enough breadth of expertise to be able to challenge proposals.
“When you think about the formation of an investment committee, it’s important to ask if there’s the depth of knowledge to actually challenge a proposal being placed upon the table. Being able to demonstrate that the committee has that robustness is important,” Aman says.
Set clear roles and responsibilities
Clear governance and written policies covering the rules, roles and responsibilities of the committee can potentially help establish appropriate operational procedures. For example, clear written policies and governance may better assist with the committee with managing potential conflicts or actual conflicts of interest, in addition to setting the procedures around record keeping.
A committee doesn’t have to be particularly big, according to Aman, who says that the expertise of those compiling the committee is more important and that six to eight people works well, meeting on a quarterly basis.
Keeping a registered financial advisers’ APL up-to-date
As well as setting out clear checks and balances around adding products to an approved list, registered financial advisers may also want to consider proper governance around monitoring and removal of products from the APL. Ongoing monitoring may need to be documented on every single product within an APL.
Aman believes the onus of ongoing monitoring is perhaps why the current trend is to move towards a smaller APL. If something is identified as no longer being investment grade, there may need to be processes that allow for it to be removed from both the product list and the client’s portfolio in a timely fashion.
Benchmarking tools may help to monitor product performance
Aman recommends using a benchmarking tool to help with ongoing performance monitoring.
“The industry doesn’t do a good job of benchmarking, but it’s necessary, particularly if a practice offers managed accounts or portfolios. If you’re providing objective based advice then it’s a bit different because that objective becomes your benchmark as opposed to, for example, what the ASX did.”
Benchmarking tools can run a product screen right cross the APL which looks at the return against a benchmark index or category. It can flag areas of concern and create opportunities to have a conversation with the fund manager about performance. Product volatility can also be run against standard volatility measures and Aman suggests running six-monthly performance reports.
How registered financial advisers can remain aware of industry changes
Using an external research provider can potentially help filter the product universe as well as keep up with changes in legislation and the industry for registered financial advisers.
“A lot of firms don’t have the scale and resources to dedicate to internal research. I sympathise with the breadth of what an adviser has to know and getting your head around the ever-expanding universe of products is a difficult exercise,” Aman says.
Aman points out that quantitative analysis is not enough when conducting investment research; it’s rare that a fund manager can maintain a top position for a prolonged period of time. Qualitative information is important to assess the organisation, the approach of the manager and the skill of the portfolio manager in order to get a complete picture.
Setting up alerts can also potentially help with the ongoing monitoring of a fund, what’s being upgraded or downgraded, fund movements, and what’s in the pipeline. A research house may meet with fund managers every day and it could be a good way to learn or share new market information.
Financial advice as a profession rather than industry
Aman believes that, historically, financial advice has evolved in a reactive, rather than proactive, way which can explain some of the challenges facing the industry.
The challenge for registered financial advisers in a cost conscious environment is to establish themselves as a profession, rather than an industry, which is reflected in the significant shift towards self-licensing. The move towards self-licensing renders a robust APL methodology more important than ever.
“The challenge of self-licensing for us will be how to service smaller more dispersed group of financial advisers. Historically our head office would deal with five hundred advisers through their licensor but this is still a face-to-face industry, and for us to be able to continue to do that with advisers is very important,” says Aman.
This article was prepared by BT, a part of Westpac Banking Corporation ABN 33 007 457 141, AFSL and Australian Credit Licence 233714. This information is current as at 2 July 2019.
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