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Suitability & Sustainability

In the responsible investment space, one area that creates a worrisome challenge is that of Sustainability versus Suitability. To clarify, this relates to ongoing product development processes, where funds and portfolios are created in the belief that they are what advisers and clients want, rather than actually delivering what is necessary to meet appropriate regulation, obligation, and most importantly the client’s best interests.

COBS 9.2 places an obligation on firms to assess suitability, this involves taking reasonable steps to guarantee that a personal recommendation, or a decision to trade, is suitable for its client. The suitability rule requires financial advisers to have a rational formulation that leads them to believe that a recommended transaction or investment strategy is suitable for their client. Suitability obligations are imperative to ensuring investor protection and promoting fair services to clients and ethical sales practices.

Suitability assessments must be based on diligently obtained information used to determine the client’s investment profile. The suitability assessment is constructed around three points: the financial situation of the customer, including their ability to bear losses; the customer's investment objectives, including his/her risk tolerance; and the customer's knowledge and experience in the product's investment arena.

However, sustainability and suitability are not unrelated or independent concepts, they are in fact part of the same obligation. On 2nd August 2021, a Commission Delegated Regulation was published in the Official Journal which amends the existing Delegated Regulation (EU) 2017/565 made under MiFID II. This amendment introduces provisions on integrating sustainability factors, risks, and preferences into certain requirements and conditions for MiFID investment firms, including in regard to suitability assessments.

So new client sustainability preference rules are in fact on the way and should be in place by 2nd August 2022. These anticipated changes will have an impact on advice firms, which will need to make changes to their advice processes, compliance procedures, and investment research. Questionnaires and client material will need to be updated to incorporate sustainability preferences. The Know Your Customer (KYC) requirements will go further than their knowledge and experience, financial situation, and investment objectives and advisory firms will need to be in a position to respond to a client who also has sustainability objectives.

So where does sustainability sit within the sphere of suitability, and can we find an investment solution that effectively serves both requirements. Alpha Beta has faced this very challenge and in doing so came up with the solution of the AB Sustainable range. A range that does fit an asset allocation process does fit a risk first approach and does conform to “sensible pricing” for ordinary investors whilst retaining sustainable characteristics. The range collaborates risk first and sustainability.

Responsible investing goes beyond the individual investment vehicles contained in the models and funds within the sustainable offerings of a company. Responsibility should lie at the core of the asset managers themselves, how they undertake all business, provide their services, their governance, and their treatment of stakeholders.

By offering a range of choices for all financial situations, sustainable appetites, and risk tolerances we can give people the real ability to match their financial needs with their values and principles, and thus increase the overall inflow into sustainable solutions, whilst still delivering on performance.

The inclusive effect from this solution is sustainable investing that is more accessible to everyone regardless of financial situation or specialist sustainability knowledge, and an increase in responsible investing. Here investors are still making a difference, getting a return, while having products that are suitable and in their best interests, as well as the world’s.

Responsible investing goes beyond the individual investment vehicles contained in the models and funds within the sustainable offerings of a company.


Important Information

This material is directed only at persons in the UK and is not an offer or invitation to buy or sell securities.

Opinions expressed, whether in general, on the performance of individual securities or in a wider context, represent the views of Alpha Beta Partners at the time of preparation. They are subject to change and should not be interpreted as investment advice.

You should remember that the value of investments and the income derived therefrom may fall as well as rise and you may not get back your original investment. Past performance is not a guide to future returns.

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