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Best Execution, Costs and Fraud among risks for the Wealth Management industry

In June, the FCA published a ‘Dear CEO’ letter aimed at the Wealth Management and Stockbroking industry. The letter covered a number of risks affecting wealth management customers. Beyond just poor performance and market abuse from their advisors, the FCA believes that customers also face risks related to the stockbrokers chosen by their wealth managers to handle client money and execute trades.

The FCA related multiple areas of interest that wealth managers should be aware of. Three main ones were:

  • Fraud, investment scams and market abuse - The FCA explained that firms have a responsibility to align client investments to their risk profile. They also need to ensure that investments offered to them aren’t ultimately scams or include fraudulent claims.
  • Best Execution - The FCA reiterated information they published in March 2019 that only 80% of transactions on Retail Service Provider platforms are at prices “at least as good as the best possible”. With many wealth managers directing clients to open accounts at specific stockbrokers, it is the managers responsibility to have a process in place to execute and oversee transaction prices. (More on Best Execution)
  • Costs and charges disclosures - The FCA found that investment firms were good at relating their own costs and charges. However, many companies aren’t disclosing third party costs very well.

Retail sector risks highlighted

Overall the message of the letter to wealth managers was clear, their responsibility to clients doesn’t end with their advisory services but includes oversight of their 3rd party service provider and stockbrokering partners.

Recent events in the retail sector have only enforced the need for wealth managers to assess risks with their stockbrokering partners. Due in part to low trading volatility and ESMA changes to CFD margins, European retail brokers have experienced a revenue drop over the last twelve months. This has caused a number of smaller firms to exit the market this year. Included in the list is SVS Securities which the FCA announced last week had gone into administration and Formax Prime last December.

While clients are expected to be issued withdrawals of their account balances, broker closures interrupt the overall implementation of investment strategies. Along with reviewing execution policies, transaction quality and costs, the recent profit crunch means wealth managers also have to be monitoring for solvency of their partners.

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Written By

Ron Finberg

Ron Finberg

Arriving to Cappitech with a journalist background, one of my goals with the Cappitech Blog is to simplify Financial Regulation.

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