Early in my career I saw first-hand the harm that can result from selling the wrong product to the wrong group of clients.
In 1987, in my summer break from university, I got a job at an asset management firm selling funds over the phone.
People who had seen adverts for the firm’s smaller companies fund or south-east Asia ex Japan fund would ring up and I would read them a set of sales points from a script. On this basis, many people – a lot of them in retirement – invested four, five and even six-figure sums.
I was back at university by the time Black Monday hit. Over the following days and weeks, many people lost up to 40 per cent of the value of their investments.
Was it wrong to invest in UK smaller companies or Asia Pacific ex Japan back in 1987? Of course not. With a suitably long horizon, you could have done very well out of those investments: if you had held on for 10 years, you would have made an annualised 7 per cent from the former and 14 per cent from the latter, based on sector averages.
The damage came from selling these products to people who simply could not afford the losses they might experience along the way.
Of course, so much has changed in the intervening years, and there are already so many checks and balances in place that mean clients today are better protected.
Getting your market right
But with the emphasis the new consumer duty places on target markets, the Financial Conduct Authority is establishing a set of railway tracks from manufacturer, to distributor, to client that should formalise and clarify the process of matching product to investor.
Under consumer duty, everyone in the value chain must ensure products meet the "needs, characteristics and objectives" of the identified target market, and that they are distributed appropriately.
That means manufacturers must identify target markets for their products – and distributors must ensure the right products end up with the right target markets.
Some advice firms feel the work all lies with the manufacturer – ‘it doesn’t apply to us’, one adviser told me.
But many firms recognise that understanding the target markets in their client base will not only be vital to complying with the new regulation, but invaluable for their businesses and the whole value chain.
Designing products
Consider product design. When advice firms group their clients into target markets, they create a data set that can be shared with the investment manager – particularly useful for identifying gaps in product ranges, or client needs that are not currently being met.
For managers, this data-driven understanding of the end client enhances the ability to design, build and review products.
