Multiple financial and legal professionals contribute to the assessment of investment suitability, each playing an important role in achieving the best possible outcomes for their clients. However, recent updates to the Financial Conduct Authority’s Consumer Duty have placed suitability assessment under greater scrutiny, prompting closer consideration of how responsibilities are shared across investment managers, financial advisers and other professional parties.

In this article, we will provide an overview of investment suitability, including how it relates to Consumer Duty and investment performance, before reviewing who is responsible for ensuring products and arrangements are suitable for their clients.

What Is Investment Suitability?

Investment suitability is the process of determining whether an investment recommendation aligns with the financial circumstances, objectives and experience of a client. Financial advisers are obligated to make this assessment before recommending investment strategies or financial products to their clients. This is to ensure they are appropriate for their personal circumstances, rather than basing the investment purely on its profit potential.

In the Conduct of Business Sourcebook, the FCA outlines the following three criteria that financial professionals must consider when assessing the suitability of an investment for their clients:

• Knowledge and Experience: Clients must have the appropriate level of understanding needed for the recommended investment or service. In order to assess this, firms must consider how familiar their client is with different investment products, their previous investing experience and their ability to appreciate the potential risks involved.
• Financial Situation: Advisers must evaluate whether an investment is appropriate in light of their client’s financial circumstances. This includes considering their income, assets, liabilities, existing commitments and how much they can afford to lose.
• Investment Objectives: Recommendations should be based on a clear understanding of the client’s aims and the timeframe over which their objectives can be met. This assessment should consider their return expectations, income requirements, tolerance to risk and any personal or financial priorities that may influence their investment strategy.

What Is Consumer Duty?

FCA Consumer Duty is a regulatory framework that was introduced by the Financial Conduct Authority in July 2023 to

across the financial services industry. At its core is the Consumer Principle, which requires firms “to act to deliver good outcomes for retail customers.” This applies to firms involved in the manufacture, distribution and delivery of retail financial products and services, requiring them to consider the interests of customers at every stage of the customer journey, from product design and advice through to ongoing support.

In order to ensure firms meet these obligations, the FCA sets out its expectations across the following four consumer outcomes:
Products and Services: Financial products and services should be designed and distributed with a clear target market in mind, such that they meet the specific needs and objectives of the customers they are intended to serve.

• Price and Value: Firms must be able to demonstrate that the cost of their products and services is reasonable in relation to the benefits they provide to their customers.
• Consumer Understanding: Information should be presented in an accessible way so that customers can make informed financial decisions before committing to an investment strategy.
• Consumer Support: Firms must provide the appropriate level of support to their customers such that they can manage their investments or products without encountering unnecessary barriers.

For investment managers and advisers, Consumer Duty reinforces the standards that financial professionals must adhere to when considering the suitability of their investment products and services for retail clients.

How Does Investment Performance Relate to Suitability?

Investment performance refers to the financial returns generated by an investment portfolio, whereas suitability considers whether that portfolio is actually appropriate for its client. An expertly managed portfolio can:

• Deliver strong returns
• Outperform benchmarks
• Operate exactly in accordance with its mandate

However, suitability extends beyond performance alone and an investment or product that performs well may still fail to align with the financial circumstances or intended outcomes of its client. This misalignment may arise where:

• A portfolio is held within the wrong structure
• A withdrawal strategy is unsustainable
• A tax wrapper restricts future flexibility
• Future entitlement to means-tested benefits has not been considered

Consumer Duty encourages firms to look beyond technical competence and assess investment suitability relative to client outcomes. This distinction is particularly important for vulnerable clients, whose suitability must account for their broader needs and their long-term financial security.

Investment Management vs Independent Financial Advice

While the terms investment management and financial advice are often used interchangeably, they describe two complementary aspects of the financial planning process. Both contribute towards helping clients achieve their financial objectives, although they do so from different perspectives and with different areas of expertise.

What is investment management?

A discretionary investment manager is responsible for managing investment portfolios on behalf of clients or institutions, making investment decisions within an agreed mandate and responding to changes in financial markets as they arise. Their role focuses on constructing and maintaining a portfolio that reflects the strategy they agreed with their client and their risk tolerance. This typically involves responsibility for:

• Asset allocation
• Investment selection
• Portfolio construction
• Risk management
• Ongoing investment monitoring

While these functions are important to the effective management of an investment portfolio, they represent only one part of its suitability.

What is financial advice?

An independent financial adviser works with clients to understand their wider financial circumstances and develop recommendations that support their objectives. Rather than focusing purely on the management of investments, advisers assess the wider factors that influence whether an investment remains suitable as their clients’ financial circumstances change over time. This broader assessment may include:

• Assessing capacity for loss
• Reviewing trust arrangements
• Evaluating tax structures
• Protecting means-tested benefits
• Cashflow modelling
• Long-term care planning
• Reviewing withdrawal strategies
• Considering future family circumstances
• Inheritance Tax Planning

Investment management and financial advice are most effective when they work together. While an effective portfolio should support the broader considerations identified through financial planning, sound financial advice ultimately relies on an investment strategy that is capable of supporting the client’s long-term financial objectives.

How Does Investment Suitability Change Over Time?

The Office of the Public Guardian’s Professional Deputy Standards state that investment arrangements “should be regularly reviewed to consider their suitability and whether they should be varied accordingly” and that professional advice should be obtained where appropriate. This demonstrates that assessing investment suitability is an ongoing process, requiring arrangements to be reviewed as circumstances evolve rather than accepted as suitable indefinitely.

Personal and financial circumstances rarely remain the same over the lifetime of an investment. Families may change, legislation can alter the financial implications of an investment strategy, and changes to professional relationships may prompt clients to reconsider their existing arrangements. Any of these developments has the potential to affect whether an arrangement that is suitable today will continue to serve the client’s best interests in the future.

The structure used to hold investments should similarly be reviewed over time. While General Investment Accounts remain appropriate in some circumstances, reductions to the annual Capital Gains Tax exemption mean that accumulated gains may increasingly restrict the flexibility to restructure investments if they are not reviewed periodically.

For this reason, investment suitability should be assessed with the current and future needs of the client in mind. Historic planning decisions should not unnecessarily restrict future options and the most important question is not whether an investment was suitable when it was implemented, but whether it is still suitable today.

Who Is Responsible for Investment Suitability?

Assessing and maintaining investment suitability is a shared responsibility that may involve several financial and legal professionals, each contributing their own expertise to the decision-making process. Understanding where these responsibilities begin and end provides clarity to clients, while holding the relevant parties accountable should those arrangements need to be reviewed in the future. Some of the professionals who share this responsibility include:

• Independent Financial Aadvisers (IFA): Where a Deputy instructs an Independent Financial Adviser, the IFA is responsible for assessing the client’s overall financial circumstances, objectives, capacity for loss, attitude to risk and tax position, and for providing suitable regulated financial advice. The IFA will typically recommend an appropriate investment strategy and, where appropriate, appoint a Discretionary Fund Manager (DFM) to implement and manage the portfolio within the agreed mandate.
• Deputies: Deputies remain responsible for acting in the client’s best interests and for appointing and overseeing appropriate professional advisers. Where a Deputy appoints a DFM directly, without regulated financial advice from an IFA, responsibility for determining whether the overall financial arrangements and investment strategy are suitable is likely to rest with the Deputy rather than the DFM. Deputies should therefore ensure they fully understand these responsibilities and confirm that their professional indemnity insurance provides appropriate cover for decisions relating to the suitability of the client’s financial arrangements.

When reviewing financial arrangements, it is important to understand whether financial professionals are operating independently or are restricted to particular products, providers or investment strategies. Gaining clarity on whether recommendations genuinely reflect the client’s needs, whether suitable alternatives have been considered and whether any conflicts of interest exist is crucial for informed decision-making, especially in the case of vulnerable clients whose financial arrangements require a high standard of governance.

When the responsibility of each professional is clearly outlined, it becomes easier to evidence why investment decisions were made, identify who is responsible for different aspects of the arrangement and demonstrate that suitability has been the guiding consideration throughout. For more insights on the relationship between deputies, investment managers, DFM’s and financial advisers, or to arrange an independent review of an arrangement to gauge its suitability, please contact us today to discuss your requirements.