For over 20 years AKG has focused on the financial strength requirements of the market, particularly those of financial advisers who when acting on behalf of their clients need to ascertain a company's ability to deliver sustained provision.
Operational rather than group level of AKG assessment
From the customer perspective, the financial strength of companies needs to be focused at an operational level, specifically on the company that is effecting the product or service that a customer is selecting. This is important, because from the customer’s perspective it is that company (not some higher corporate entity) that needs to survive in a form that maintains the requisite operational characteristics to meet their fairly held requirements. And it is thus at this level that the selection needs of the customers’ advisers must be met.
AKG therefore adopts this level of focus on operational capability and does not seek to rate group / holding companies. Our assessment falls at a lower corporate level than typically considered in other types of rating, although consideration of such group and parental aspects remain very important contextual criteria.
This contrasts to credit rating, which will be undertaken at group or parent company level where investment or debt placement etc. is made. This is perfectly reasonable for credit rating, but it is unreasonable and inappropriate for customer oriented assessment.
It is also important to understand the sector approach (comparative peer groups) that is adopted in our financial strength assessment and rating process.
At AKG, this is again driven by the end customer perspective and the fact that assessment is designed solely for this purpose, i.e. as a component in helping customers’ advisers to select between comparable companies delivering a relevant product or service.
We feel that different company types need to be assessed in discreet peer groups based on how they compete to deliver customer propositions.
Is Financial Strength just about solvency or return of money to customers?
There are a couple of common, but understandable misconceptions associated with financial strength assessment.
Firstly, that financial strength is purely about solvency. It isn’t. Whilst solvency will always be important and a factor in financial strength assessment, it isn’t the whole picture.
The definition of customer oriented and operational financial strength is useful here and at AKG we believe that a financial strength assessment should include the following objective definition:
...to go beyond purely a consideration of solvency (albeit this will always be an important part of the mix) and consider in what format an organisation may be able to survive to meet the reasonable expectations of customers and their advisers. Expectations, which must include the experience encountered by these two groups, will therefore include ongoing operational abilities and performance.
This definition is then also relevant to the misconception of believing that financial strength is just about the recovery of client assets.
Recovery of assets is of course crucial, but to restrict financial strength consideration to this could be misleading and falls below the requirement to deliver a broader set of customer outcomes.
Many businesses such as platforms, DFMs, asset managers, or even financial advisers can sometimes make this mistake. Thinking ‘well, the assets sits with a custodian, or there is a policyholder protection scheme which will kick in, so my financial strength won’t matter.’
Is that good enough? Effectively saying that if that part of the customer value chain, somehow fails or is impaired, there will be no change in customer experience.
Unfortunately, that simply isn’t the case. The route to asset recovery or protection funds/compensation is not the experience the customer reasonably expected when they signed up. And the uncertainty, delay and distress cannot be so easily dismissed.
More information as to how AKG applies this financial strength analysis to assist the market through the provision of ratings and reports across a number of sectors is available via the Related Links.