Composite Consumer Investments and Consumer Duty: 2025 Regulatory Landscape

Miggins Lab · 2025-01-15

The FCA's Consumer Duty has fundamentally changed how firms must approach composite consumer investments — multi-asset portfolios designed for retail investors. As we enter 2025, regulatory expectations for these blended investment solutions continue to evolve.

What Are Composite Consumer Investments?

Composite Consumer Investments (CCI) are investment products that blend multiple asset classes within a single portfolio to serve retail investors. These include:

  • Multi-asset funds combining equities, bonds, and alternatives
  • Balanced portfolios with strategic asset allocation
  • Target-date funds adjusting allocation over time
  • Risk-targeted solutions (e.g., cautious, balanced, adventurous)
  • Model portfolios used by platforms and advisers

The Consumer Duty Challenge for Composite Funds

Consumer Duty sets a higher standard, requiring firms to deliver good outcomes for retail consumers. For composite investments, this creates unique challenges:

1. Fair Value Across Mixed Holdings

Demonstrating fair value becomes complex when portfolios hold diverse assets:

The Challenge:

  • Different asset classes have varying cost structures
  • Platform fees, fund charges, and transaction costs layer differently
  • Performance varies across holdings
  • Rebalancing creates additional costs

Consumer Duty Expectations:

  • Assess total cost relative to total value delivered
  • Consider whether simpler alternatives might better serve some customers
  • Evidence that blended approach justifies combined costs
  • Show value of active management/rebalancing versus passive alternatives

2. Consumer Understanding of Blended Strategies

Many retail investors struggle to understand multi-asset approaches:

Common Understanding Gaps:

  • Why hold bonds when returns are lower than equities?
  • How diversification benefits work
  • What "balanced" or "moderate risk" actually means
  • How rebalancing affects performance

Consumer Duty Requirements:

  • Test whether target audiences genuinely understand the strategy
  • Simplify explanations of asset allocation rationale
  • Clearly explain risks specific to blended approach
  • Demonstrate understanding through customer research

3. Target Market Precision

Composite funds must be suited to specific investor needs:

Questions Firms Must Answer:

  • Which investors genuinely benefit from this blend?
  • Are there customers where single-asset solutions work better?
  • Does the risk profile genuinely match target market needs?
  • Can target market investors afford to tie up capital as required?

2025 Regulatory Developments

Enhanced Fair Value Assessments

The FCA expects more rigorous fair value analysis for composite products:

New Focus Areas:

  1. Component-Level Analysis

    • Break down costs by underlying asset class
    • Justify each component's inclusion
    • Compare component costs to direct alternatives

  2. Rebalancing Value

    • Demonstrate benefits of tactical/strategic rebalancing
    • Evidence when rebalancing creates or destroys value
    • Show net impact after trading costs

  3. Platform/Wrapper Costs

    • Assess whether platform charges are proportionate
    • Consider whether direct fund access would cost less
    • Justify convenience/service fees

Improved Consumer Communication

2025 guidance emphasizes clearer communication about composite strategies:

Best Practices:

  • Use visual aids showing asset allocation
  • Provide scenario analysis (e.g., "in a downturn, bonds help because...")
  • Explain rebalancing with worked examples
  • Show historical performance of each component, not just blend

Vulnerable Customer Considerations

Composite funds must work for vulnerable segments within target markets:

Key Considerations:

  • Are explanations accessible to those with lower financial literacy?
  • Do risk labels (e.g., "balanced") genuinely help or mislead?
  • Can investors change strategy if circumstances change?
  • Are exit costs reasonable if customer needs shift?

Practical Implementation Steps

Step 1: Conduct Detailed Fair Value Review

Methodology:

Total Annual Cost =
  Platform Fee
  + Weighted Average Fund OCF
  + Estimated Trading Costs
  + Rebalancing Costs
  + Performance Fees (if applicable)

Total Value =
  Risk-Adjusted Return Potential
  + Diversification Benefit
  + Rebalancing Value-Add
  + Service/Support Value
  + Accessibility Benefits

Compare this to:

  • Single-asset alternatives
  • Passive multi-asset index solutions
  • Competing composite funds
  • Direct holdings (if feasible for target market)

Step 2: Test Consumer Understanding

Testing Framework:

  1. Recruit representatives of your target market

  2. Show product communications and fact sheets

  3. Ask key comprehension questions:

    • What does this product invest in?
    • Why does it hold different types of investments?
    • What are the main risks?
    • How much does it cost, and why?
    • When might this product not be suitable?

  4. Revise communications based on findings

  5. Retest to confirm improvements

Step 3: Evidence-Based Target Market Definition

Document:

  • Investor characteristics that align with product features
  • Risk capacity and tolerance requirements
  • Investment time horizon expectations
  • Financial sophistication needed to understand approach
  • Situations where product would NOT be suitable

Step 4: Monitor Actual Outcomes

Key Metrics:

  • Performance versus investor expectations
  • Complaint themes and frequency
  • Switching/redemption patterns
  • Vulnerable customer outcomes
  • Actual costs versus projections

Composite Fund Structures: Consumer Duty Lens

Multi-Manager Funds

Advantages for Consumer Duty:

  • Professional manager selection
  • Diversification across management styles
  • Institutional access for retail investors

Risks to Manage:

  • Layered fees (fund + underlying funds)
  • Complexity in explaining value-add
  • Manager selection risk

Model Portfolios

Advantages:

  • Customizable to individual needs
  • Transparent individual holdings
  • Often lower cost than funds-of-funds

Risks to Manage:

  • Platform dependency
  • Rebalancing timing and costs
  • Adviser/platform conflict of interest risks

Target-Date Funds

Advantages:

  • Clear target market (retirement date)
  • Automatic de-risking
  • Simple for investors to understand

Risks to Manage:

  • One-size-fits-all within date cohort
  • Glide path assumptions may not suit everyone
  • Limited flexibility for changing circumstances

Common Pitfalls

1. Over-Complicated Blends

Problem: Including too many asset classes or strategies

Consumer Duty Issue: Customers can't understand or value complexity

Solution: Simplify where possible; justify every component

2. Cost Layering

Problem: Multiple fee layers creating high total costs

Consumer Duty Issue: Total cost may not represent fair value

Solution: Consider structure that minimizes layers; clearly show total cost

3. Generic Risk Labels

Problem: Using terms like "balanced" without clear definition

Consumer Duty Issue: Customers misunderstand actual risk exposure

Solution: Use specific risk scales; provide scenario analysis

4. Inadequate Performance Disclosure

Problem: Showing only blended return, not components

Consumer Duty Issue: Investors can't assess value of diversification

Solution: Show component performance and explain contribution

The Future of Composite Consumer Investments

Trend 1: Increased Simplification

Expect to see:

  • Fewer asset classes in each blend
  • Clearer explanations of each component's role
  • More transparent cost disclosure

Trend 2: Enhanced Digital Tools

Emerging solutions:

  • Interactive portfolio visualizations
  • Scenario modeling tools
  • Personalized risk assessments
  • Real-time cost calculators

Trend 3: Tighter Target Markets

More precise targeting:

  • Narrower risk/capacity ranges
  • More specific time horizon requirements
  • Better-defined suitability criteria
  • Explicit exclusions

Trend 4: Sustainability Integration

Growing expectations around:

  • ESG considerations in asset selection
  • Sustainability-linked performance
  • Clear disclosure of ESG approach
  • Alignment with investor values

Conclusion

Consumer Duty elevates expectations for composite consumer investments. Success requires:

  1. Rigorous fair value assessment across all cost and benefit dimensions
  2. Clear communication that retail investors genuinely understand
  3. Precise target market definition with evidence of suitability
  4. Ongoing monitoring of actual consumer outcomes

Firms that embrace these requirements won't just achieve compliance — they'll build better products that genuinely serve retail investors through well-constructed, clearly explained, fairly priced composite solutions.

The composite investment market continues to grow as investors seek diversification and professional asset allocation. Consumer Duty ensures this growth serves genuine investor needs rather than firm convenience.

Need help assessing your composite investment products? Miggins provides AI-powered analysis to help firms evaluate Consumer Duty compliance, test consumer understanding, and demonstrate fair value. Contact us to learn more.