Independent financial advisors (IFAs) are increasingly setting up investment platforms. While these offer several advantages, their implementation requires a few risk management measures.
What are investment platforms?
Investment platforms provide a centralised hub for IFAs and their clients to easily access investment options and financial products. By consolidating these offerings in one place, IFAs can simplify the decision-making process for their clients, enabling them to make better-informed decisions that are tailored to their individual needs and objectives.
Although there will be nuances with each platform, they usually enable clients to monitor their portfolios, track performances and execute transactions with ease. This saves time and provides the client with a sense of ownership and control over their financial future.
How do platforms benefit IFAs
In an ever-changing financial landscape, investment platforms offer a crucial tool to help IFAs safeguard their clients’ wealth. Typical platforms are equipped with sophisticated risk assessment tools enabling IFAs to undertake thorough risk analysis and preserve clients’ capital against volatile market conditions.
The UK’s Consumer Duty rules (opens a new window), which sets the standards for consumer protection across financial services, has introduced a greater focus on IFAs to deliver the right outcomes for clients. Investment platforms can help IFAs to meet these regulatory requirements – for instance, by improving the transparency of fee structures. If implemented correctly, they can also increase efficiency and have a positive outcome on IFAs’ costs.
Risk considerations
IFAs need to understand the risk and insurance implications that setting up a platform may have for their business. Insurers will closely assess the risk exposure involved for underwriting purposes.
The risk level of a platform will vary depending on several factors, including their basis (white-labelled or not), and whether the platform service provider is retaining control, and therefore keeps regulatory responsibility over who provides custody, as well as dealing and settlement of the assets on the platform.
Potential risk sources can include:
Choosing the wrong platform – i.e. not a well-known provider or a trusted partner
Cybersecurity – data breaches, phishing attacks
Compliance and regulatory risks – e.g. adherence to GDPR
Insurers will want to see evidence that any potential issues have been addressed with the relevant risk management processes. For a positive risk assessment, IFAs should be able to show a broad understanding of the platform and be able to explain why it is a good fit. Staff should also be provided with the relevant training.
For further information on the risk implications and how to mitigate them, set up a meeting with your insurer, or reach out to your Lockton representative.
