The Advice Process

Four stages of advice, the seven categories of need, Know Your Customer (COBS 9.2) and changes to suitability.

1. The Four Stages of the Advice Process

Every regulated advice firm may present the process slightly differently, but all professional financial advice follows the same four core stages. Each stage builds the evidence needed to show the adviser acted fairly, transparently, and in the client's best interests — a key expectation under the FCA's Consumer Duty.

• Stage 1 — Gathering Information — The adviser builds a complete picture of the client's personal and financial situation. This includes goals, priorities, concerns, income, expenditure, assets, liabilities, and existing arrangements. A thorough fact-find ensures advice is based on facts rather than assumptions.
• Stage 2 — Analysing Needs — All collected information is reviewed to identify gaps, risks, and opportunities. The adviser considers affordability, existing provision, and how the client's needs may change over time. This stage determines what the client genuinely requires.
• Stage 3 — Identifying Solutions — The adviser selects suitable recommendations that match the client's needs, risk tolerance, timescales, and preferences. They avoid unnecessary duplication and ensure the proposed solutions are appropriate and justifiable.
• Stage 4 — Presenting Recommendations — The adviser explains their recommendations clearly, outlining benefits, costs, and risks in language the client can understand. The client must be able to make an informed decision before agreeing to proceed.

The Advice Process

Each stage provides documentary evidence that the advice was suitable, compliant, and aligned with the client's best interests.

2. The Seven Categories of Financial Need

Financial advisers use seven core categories of financial need to organise, prioritise, and understand what a client requires. These categories help ensure nothing important is overlooked and that recommendations address both immediate concerns and long-term goals.

• Emergency Planning — Day-to-day money management and preparing for unexpected events. Includes accessible savings for urgent repairs, medical costs, or temporary income loss. The aim is to prevent short-term shocks from causing long-term financial damage.
• Family Protection — Protecting dependants if the client dies prematurely. Considers loss of income, additional expenses that may arise, and lump sums needed to maintain the family's financial stability.
• Income Protection — Safeguarding the client's income if illness or injury prevents them from working long-term. Ensures both the client and their dependants can maintain financial security even if earnings stop.
• Retirement Planning — Building sufficient income for later life so the client can maintain their desired lifestyle. Includes pensions, long-term savings, and strategies to ensure money lasts throughout retirement.
• Wealth Building — Growing and protecting the value of savings and investments. May involve generating income from existing assets or building initial savings for future opportunities.
• Tax Efficiency — Reducing the amount of tax paid on income, savings, and investments by using appropriate financial structures and planning strategies.
• Estate Planning — Ensuring the client's wishes are carried out after death. Includes wills, trusts, and arrangements that determine how assets are passed on and how dependants will be supported.

The Advice Process

These categories help advisers understand the full picture of a client's financial life and ensure recommendations are aligned with their priorities and long-term wellbeing.

3. Know Your Customer (COBS 9.2)

The FCA's Know Your Customer rules, found in COBS 9.2, form the regulatory foundation of suitability. These rules require advisers to build a complete and accurate understanding of each client before giving any recommendation. Advice must be based on facts, not assumptions, and the adviser must be able to show clear evidence of how they reached their conclusions. To meet these requirements, advisers must gather detailed information about the client's circumstances, goals, and financial position. This includes their income, expenditure, assets, liabilities, existing arrangements, and future objectives. Advisers must also understand the client's knowledge and experience of relevant financial products, as well as their ability to bear losses. All information collected must be clearly documented and kept as part of the client's records. This documentation forms the basis for assessing suitability and demonstrating that the adviser acted in the client's best interests. The Know Your Customer framework ensures that recommendations are genuinely tailored to the individual, properly justified, and compliant with regulatory expectations.

• Source rule — The Know Your Customer rules sit in COBS 9.2 of the FCA Handbook and form the regulatory foundation of suitability.
• Evidence-based advice — Advice must be based on facts, not assumptions, with clear evidence of how the adviser reached their conclusions.
• Client circumstances — Advisers must gather detail on income, expenditure, assets, liabilities, existing arrangements and future objectives.
• Knowledge and experience — Advisers must understand the client's knowledge and experience of relevant financial products.
• Ability to bear losses — Advisers must assess whether the client can financially withstand potential losses from a recommendation.
• Documentation — All information collected must be clearly documented and kept as part of the client's records to evidence suitability.

4. Changes to Suitability — Sustainability Preferences

In 2023, the European Securities and Markets Authority (ESMA) updated the MiFID II suitability rules to include a new requirement: advisers must now take account of a client's sustainability preferences when assessing suitability. This means sustainability is no longer optional — it is formally part of the advice process.

• Collect preferences — Advisers must collect information about the client's sustainability preferences.
• Assess and match — They must assess those preferences and match them with suitable sustainable products.
• Receive training — Advisers must receive appropriate training so they can understand and explain sustainability options.
• Keep records — Clear records must be kept showing how sustainability preferences were considered.

The Advice Process

Although the UK is no longer part of the EU, similar expectations are likely to be introduced in the future, meaning UK advisers should be aware of these developments. These changes reinforce the principle that suitability must reflect all relevant client preferences — not just financial goals, risk tolerance, or timescales, but also how the client wants their money to be invested from an environmental or ethical perspective.

Quick recap — key revision points

Lock in the essentials before moving on.

• Professional financial advice follows four core stages: gathering information, analysing needs, identifying solutions and presenting recommendations.
• The four stages create documentary evidence that advice was suitable and aligned with the client's best interests under FCA Consumer Duty.
• There are seven core categories of financial need: emergency planning, family protection, income protection, retirement planning, wealth building, tax efficiency and estate planning.
• Family Protection deals with protecting dependants if the client dies prematurely; Income Protection safeguards earnings if illness or injury prevents work.
• Estate Planning uses wills and trusts to ensure the client's wishes are carried out after death.
• Know Your Customer rules are set out in COBS 9.2 of the FCA Handbook and form the regulatory foundation of suitability.
• Advisers must assess the client's knowledge and experience of products and their ability to bear losses, and document everything.
• ESMA updated the MiFID II suitability rules in 2023 to include client sustainability preferences as a formal part of suitability.
• Advisers must collect, assess, match, train on and record sustainability preferences alongside financial goals and risk tolerance.