If you ever hire a financial advisor (FA) in the U.K., one of the first things they’ll need to do is categorise you. Categorising you will allow them to make sure they communicate with you in the most appropriate way, offer you the right services and products, and meet their legal and regulatory obligations to treat you appropriately.
There are two main categories of investor, from the perspective of the financial advisor (and their regulator). They might sometimes go by different names, but the broad categories are clear:
- Retail client
- Professional client
Professional clients are typically entities that themselves are in the business of regulated financial services. For example, a pension fund, bank, charity, or corporate entity is likely to be a professional client. These types of professional clients are known as ‘per se’ professional clients.
Retail clients are most normal people, and individual investors will – in practice – be classified as retail clients by most FAs, by default. Some individuals, however, reasonably fit into the professional category, and so they can request that their FA reclassify them as professional clients. The request will have to be in writing, and the FA will have to satisfy themselves that the recategorisation is appropriate. Clients that get recategorised from retail to professional are known as ‘elective professional’ clients.
In order to make the assessment, your FA will carry out qualitative and quantitative tests. For the most part, you won’t necessarily know that they’re doing this (although you might now). Below are the things they’ll tend to look at.
Qualitative assessment
- The FA will consider your expertise, experience and knowledge about the products, services and investments that you’re discussing with them
- They may need to be fairly specific with respect to certain types of products, services and investments
- They will consider whether you are vulnerable, which may impair your ability to make sound decisions that are in your best interest
- They will make a judgement about whether you understand the risks involved with the products, services and investments that you may engage in
Quantitative assessment
- The Financial Conduct Authority, which is responsible for regulating the provision of financial advice, will generally require FAs to tick at least two of the following three boxes in order to categorise you as a professional client
- You have assets in excess of EUR500k
- You have carried out transactions in the relevant financial markets regularly and at considerable size over the past year
- You have worked in financial services in a professional capacity that required you to have an understanding of the products, services and investments that you’re discussing with your FA.
It is possible to fail these tests and still have yourself recategorised as elective professional, but your FA should clearly warn you of the risks of doing so. A (not necessarily exhaustive) list of those risks is below.
- Communication – your FA won’t have to explain certain terms and risks to you, and they can assume a certain level of understanding by you
- Suitability and appropriateness – they may discuss investments, products and services with you that are only suitable for professional clients
- Dealing – the actual execution of investment decisions can be done by your FA with slightly more autonomy
- Funds – again, some types of funds are only suitable for professional investors
- Reporting – your FA’s reporting obligations to you will be lower
- Client assets – the actual custody of your assets can be treated slightly differently, and you may lose certain protections that are afforded to retail investors
It is also possible for a per se professional client to request to be recategorised to retail status in order to gain the protections afforded to retail clients.
From your point of view, sticking with retail status is generally safest. Above all, it is critically important that you give your FA truthful information about your financial situation and that you don’t omit important details. This will allow them to guide you through the process and ensure that they’re acting in your best interests. You are paying them for their advice and their guidance; if you don’t give them the truthful information that they need, not only will you not be getting your money’s worth but you may be putting yourself at serious financial risk.
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