The FSA has confirmed that advisers can recommend mostly passive investments to their clients and remain independent as long as they start their investment process by reviewing all of the relevant market.
In its final RDR newsletter, the regulator confirms its stance that if advisers start with an unbiased and unrestricted consideration of the whole of the relevant market then they are independent. This may result in a passive focused investment selection.
However, it adds that passives are not considered a relevant market in their own right and firms only considering passives should be classified as restricted.
The newsletter says: “A firm’s review process should always start with the consideration of the whole of the relevant market in an unbiased and unrestricted way (actively managed, passive, Oeics, investment trusts etc).
“However, it may be that passive investments are suitable for a large number of a particular firm’s customers and that that particular firm therefore recommends passive investments to many of its clients. The firm must ensure that the recommended passive investment is suitable for each individual client and not assume that passive investments are suitable for all of its clients.”
It adds that if an IFA firm’s panel is made up of passive-only investments it should be able to justify this decision and have the ability to move off-panel as required, as is the case with any IFA panel.
In November, FSA technical specialist Rory Percival spoke to Money Marketing about the need to “bust the myth” that advisers who only recommend passives to clients cannot maintain independence.
He said: “If your start by reviewing the whole of the relevant market across actively managed, passive, Oeics, ETFs, investment trusts etc and then end up with a shortlist then you are independent.
“This review could end with recommendation of just passives which is fine. However, if you start with just a list of passive options then you are not independent.”