Are advisers managing conflicts of interest from in-house funds?

How vertically-integrated and restricted advisers are trying to prove bias is not the weak link in their chain

While the RDR heralded a watershed moment by removing the conflict of commission, the rise of vertically-integrated advice models – where the same group owns both the financial planners and the investments – has led many experts and the regulator to question whether the potential biases that come with this new model can be mitigated.

Support services firm Threesixty head of client relationship Tony Bray says: “Firstly, if you have your own investment fund, or you run your own discretionary management service, you have a conflict of interest. You cannot avoid it. You can’t make it go away, because it is just there.”

Vertically-integrated groups can also have a stake in the platforms their advisers’ investments sit on.

Earlier this year, the FCA looked at the conflict of interest arising in that space, examining monetary and non-monetary ties between the platform providers and advisers. It warned some links could “impair advisers’ ability to fulfil their duty to act honestly, fairly and professionally in the best interests of the client”.

With platforms the regulator found that some financial arrangements had the effect of attracting and retaining advisers.

According to the FCA, these included “directly or indirectly offering advisers financial help to expand their business and offering advisers a private equity stake in the business”.

So, what can integrated firms and restricted advisers do to show that they are effectively managing these conflicts, and are not favouring in-house investment solutions over third-party ones at the cost of a client’s best interest?

Deepening client disclosure

While Bray acknowledges the inherent conflicts in vertically-integrated firms, he is clear that there are ways to mitigate it.

He says: “Firstly, you have to be clear in any communication with clients if that conflict is there, that you have a foot in both camps. The regulator is very keen on transparency.”

According to Bray, the disclosure should come at the point of any recommendation and, depending on the type of advice that you are going to give, it might even be at the point when you first explain what your services are.

But disclosure alone might not always be enough.

The Lang Cat consulting director Mike Barrett says whether disclosure will suffice depends on the nature of the conflict. The FCA has warned that the so-called self-created conflict, such as advisers holding equity stakes in providers, can impair advisers’ professionalism, even when “adequately disclosed to clients”.

Barrett says: “Disclosure is not particularly clear if it is in small print at the back of the report, just to be able to say it has been disclosed. I don’t think just that is good enough.”

He adds: “You should make sure that any conflicts of interest that are in place aren’t impairing your ability to act honestly, fairly and professionally at all times.”

Good housekeeping

Industry experts agree that if vertically integrated firms want to make sure their business model doesn’t deprive the end client of always getting what’s best for them, they should keep an eye on what in-house solutions advisers are recommending.

Defaqto investment analyst Fraser Donaldson recommends keeping accounts of the in-house propositions sold compared to others.

Bray adds: “What the firm needs to put in place is a regular track to see that whatever advice it gives is in the client’s best interest. That must be evident, whatever the solution is.”

But Bray admits that firms might have a difficult time proving that their solution is always the best for each individual client.

He says: “It is very difficult to say your fund is the most suitable if you are saying that you are recommending the most suitable solution from the whole of market.

“It is very difficult to prove your own managed fund would be at least as effective as, say, other firms that have their own funds, some of which may have good track records and may be very suitable for many cases.”

But, while showing your own funds are the “best of the best” might be tricky, overarching suitability rules do not require this standard, and place more emphasis on matching the client to a solution that is the right fit for them.

Both Bray and Donaldson say it is important to make sure clients won’t be squeezed into an in-house investment where there is no fit.

Bray says: “In the case of restricted advisers, you obviously need to be able to identify where your own in-house solution is not suitable for the client and then you should not recommend it.”

As another potential remedy for combating conflict of interest, Barrett notes that a vertically-integrated business model could work well with niche firms with a very specific customer base.

He says: “What has been working well recently is when the whole business is very clear on who the target clients are, what the types of client need are, and what the ranges of solutions that are on offer and suitable for them are.”

While Quilter-owned advice network Intrinsic does not have any additional measures in place to scrutinise their restricted advisers’ recommendations for in-house solutions compared to external funds, the group checks the suitability of all the advice given by its affiliated advisers.

According to an Intrinsic spokeswoman, when a restricted adviser with Intrinsic makes a recommendation, no matter what fund an adviser chooses, the advice has to go through “robust” compliance procedures.

Should advisers cap in-house fund picks?

As Money Marketing reported last year, the Standard Life Aberdeen financial planning arm 1825’s way to keep the danger of conflict of interest in check was to cap how much their advisers can recommend into in-house funds at 30 per cent. Other firms feel differently about going down the capping route, however.

Standard Life’s 1825 imposes portfolio cap on SLI holdings

While Sanlam Private Wealth has set limits and controls on the proportion of SPW funds in its model portfolios, it has not capped the proportion of in-house funds advisers can recommend.

Sanlam UK wealth division chief executive John White says: “There are no monetary limits on how much they can invest in our own funds, because that could possibly jeopardise the client. If our funds are right, our funds are right.

“When you put caps on those kind of things, you are really coming away from what is right for the client. If we have something that is right, competitively priced and has good performance, that stands up on its own two feet, there should be no limits for the client on how much they can invest with us.”

White adds: “About half of what our investment teams look after comes from clients of our in-house advisers. Some 55 per cent of the clients’ monies that our advisers look after is in Sanlam investment solutions.”

Similarly, Intrinsic does not set any limits on either internal or external fund recommendations.

According to the Intrinsic spokeswoman, 75 per cent of net flow into Quilter Investors came from Intrinsic’s restricted network in the first half of 2018.

The payment puzzle

Potential conflicts of interest can be rooted in any fee structure that motivates advisers to opt for in-house investments over others.

Allegations are frequently levied at a number of major vertically-integrated firms that they incentivise advisers in one way or another to recommend in-house funds.

Mifid II regulations require financial services providers to disclose itemised fees for individual services as well as the total to be paid. Such disclosure could reveal potential differences in the underlying costs of funds between a restricted adviser offering an in-house investment and an external one.

The Intrinsic spokeswoman says there is no difference in fees for Quilter funds between advisers restricted with Intrinsic and external financial advisers.

With the regulator signalling another look into conflicts of interest after its recent asset management market study, the onus is on vertically-integrated firms and their affiliated advisers to proactively show how they ensure their business structures do not disadvantage clients.

Expert view

Client offering comes above everything else

Having in-house funds is not necessarily a bad thing. They can have greater governance and control. They are able to use their position in the marketplace to discount charges for their client. And at the end of the day, if they are able to create a really compelling proposition for their client, and they are constantly reviewed against a benchmark of the market, then it is not necessarily a bad thing.

I think the independent versus restricted argument is very much outdated these days. You can have an excellent restricted offering and an excellent IFA offering, just as you can have a core restricted offering and a core IFA offering.

The most important thing is the service proposition that you are offering to your client. If you are offering an exceptional client experience and delivering on all outcomes for the client, then to a degree, I don’t think it is that different if you have a brilliant IFA or a brilliant restricted offering.

We just choose to be independent financial advisers because for our customer experience we would like to give our clients access to the entire market as a preference that we have.

In essence, it all comes down to the client offering that you have and the client relationship.

Martin Brown is managing partner at Continuum Financial Planning



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There are 5 comments at the moment, we would love to hear your opinion too.

  1. this should be interesting . . . .
    I doubt it, usual justifications for making more money for company, shareholders and advisers . . .
    I have been approached many times to offer my own DFM or funds, never once did any of the companies put the benefits to my clients first. It was always about increasing the wealth of my firm, FUM etc.

  2. Who would have guessed it!!!

  3. 1825 has a restriction of up to 30% however a large majority of alternative funds are passive with extremely cheap charges for example sample portfolio 5 has in the region of 46% passive funds with around 10% in its own more expensive 1 star multi asset absolute return funds (GARS and Absolute Bond Funds) with the higher fund charges. Again a lifeco turned AUM gatherer being evasive in client outcomes

  4. Forget all the pussyfooting about with semantics. Tony Bray hits the nail squarely on the head when he says: “…if you have your own investment fund, or you run your own discretionary management service, you have a conflict of interest. You cannot avoid it. You can’t make it go away, because it is just there.”

    One wonders what would happen to an adviser employed by a company with its own funds and DFM proposition is s/he were always to choose and recommend alternatives from the open market.

  5. “…if you have your own investment fund, or you run your own discretionary management service, you have a conflict of interest. You cannot avoid it. You can’t make it go away, because it is just there.”

    For funds I agree but how can that be the de facto case for a DFM (unless we’re talking fixed portfolios, but that’s not the same issue)?

    How is that different from saying “if you offer financial advice you have a conflict of interest”? A DFM manages investments and providing they are ‘independent’ in doing so why is that different from being an IFA?

    If a DFM introduces clients to an in-house IFA is that a conflict?

    As for restricted advisers having a conflict, I think this is misconstrued and irrelevant. It’s the business model allowed under the regulations, the only thing of relevance is whether it is clear what that model is and suitable for the client. Neither are a function of conflict of interest.

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