Confirmation: Most advisers unready for DDO

Only a third of financial advisers feel prepared to meet the new requirements imposed as a result of the new Design and Distribution Obligations (DDO), according to new research released by Investment Trends.

The Investment Trends 2021 Adviser Product and Marketing Needs Report has revealed a significant gap in adviser understanding of the new regime to a degree where many believe that they would like assistance.

It reveals that close to four in five advisers rate their understanding of “significant dealings” in terms of DDO Target Market Determinations as average or below.

Notwithstanding continuing concerns around DDO and the general level of regulation, the Investment Trends report found that adviser optimism was on the rise on the back of strong asset price growth.

“As of October 2021, advisers expected local shares to deliver capital gains of 3.5% over the next 12 months, up from 1.3% in 2020,” the research said.

“Irrespective of their current market outlook, advisers are most often saying that the legacy of COVID-19 will impact how they set client expectations moving forward.”

“COVID-19 asset allocation changes are not expected to be enduring. Only one in five financial advisers believe that changes they’ve made to their process and recommendations will be for the long-term, and things are expected to return to some level of normality”, said Kurt Mayell, Associate Research Director at Investment Trends.

Diversification (68% rated as a priority), capital growth (37%), and liquidity (31%) remain the top three priorities for investment selection among advisers. Areas becoming increasingly important for advisers include protection from market downturns, and responsible investing (27% cite). Responsible investing is the fastest growing priority area for advisors, almost doubling in its importance in 2021 as investor interest in this asset class builds.”

In the last 12 months, advisers say that over 40% of clients have requested to buy or sell investments based on environmental issues, up from 24% in 2020. Almost two-thirds of advisers say that client demand would be the biggest driver for ESG investing. As a result, advisers report that they want to better understand the basics of responsible investments, including performance, cost, screening criteria, and the underlying mix of investments.

“Advisers who are prioritising ESG investments expect to use a wider range of products or increase their use of active management. To enable the growth of ESG investing, advisers believe that product providers should put as much effort into research and data analytics as they do on new product issuance”, said Mayell.

As far as new client inflows are concerned, the use of managed accounts and ETFs continues to rise among advisers.

In the lead up to the Design and Distribution Obligations (DDO) coming into effect, a third of advisers say they feel prepared to meet their new obligations.

To effectively fulfil their obligations, most financial advisers want support in general education on DDO regulation. Many would also like assistance on ‘Target Market Determination’ related issues, and practical implementation guidance.

“2021 was particularly prolific in terms of additional regulatory compliance burdens – Best financial interest, fee consent, DDO and IDII among the most prominent,” said Mayell.” In relation to DDO, there are significant opportunities for education, starting with the jargon itself. Close to 4 in 5 advisers rate their understanding of ‘significant dealings’ as average or below.”