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FSA confirms its stance on passive focused IFAs

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.”


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There are 6 comments at the moment, we would love to hear your opinion too.

  1. No problem with that approach.

  2. So firms only considering passives should be classified as restricted advisers. However 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.
    That should do some sorting out. Apart from the usual arguments of passive versus active, I have always suspected that those who were staunch advocates of passives had an element of idleness in their conviction.
    Just as a current example:
    I read this after just valuing a client portfolio. The period was 23 Jan 2012 to 8th Feb 2013.
    During that period:
    FT-SE 100 +8.32%
    All- Share +10.53%
    FT-SE Ewuro-100 +8.44%
    FT-SE All World +12.62%
    APCIMS Balanced Portfolio +7.96%
    The client had (amongst others)
    Schroder Income +23.56%
    Pictet Global Megatrend Selection +16.12%
    Fidelity European +24.44%
    Invesco Perpetual +16.57%
    Jupiter UK Growth & Income +28.3%
    Jupiter European +30.5%

    And many more well in front of their indices. Overall the portfolio put on 16%. Not much credit to me, but all credit to great and consistent fund managers. Yes I can imagine the argument – but that might not be every year. But doing the work and switching when warranted tends to keep the passives at bay. I’ll stick with active managers- switching when warranted, the passive adherents can stay with their lazy version, presumably they feel they don’t have to switch or monitor particularly thoroughly.
    In the end I guess it boils down to – If you can’t do investments – stay away.

  3. Harry Katz.

    If you think a passive approach is about laziness you have a misunderstanding of what it is about and you possibly believe it all about trackers Our firm uses mostly passives and we are able to provide much more robust infomation and more detailed planning without the added uncertainties of what actives will be doing to their asset mix and performance.

    Watch how your ‘consistent’ performer list will change over the next few years. Your switching between funds can only ever be based on hindsight and you are taking a punt each time.

    The fact that they have produced more than the indices you mention is more likely to be down to 1. cherry picking (any sample will have extremes) but more so 2. their general weighting in certain parts of the market. That is not an argument active stock picking, it is an argument for which asset classes you use and these can also be offered via focussed passives – all of which will perform better than most active funds when it comes to a like for like comparrison rather than using clumsy IMA sectors.

    I thought like you once and it was in the process of trying to assemble the evidence in favour active management, found that I had an epiphany of sorts. The weight of evidence fo Passive investing simply dwarfs that of active stock picking AND also active asset allocation. Every attempt I made to counter any argument effectively got blown away.

    Please read some more accademic articles over industry sponsored blige and Good luck, the truth is out there!

  4. Surely Dominic, if passives are right for the client after due consideration of the relevant markets, why put a client into an active managed scenario unless you have a crystal ball and can second guess the market?

  5. Harry

    Surely the corollary of this recent FSA clarification is that your “active only” investment approach means you will need to label your advice as restricted……

  6. @ Harry Katz… if you believe you’re able to switch your clients’ funds at the right time, using foresight to choose the best future sector performance, you probably also belive in fairies!

    @ Andrew Whitely… touche! :o)

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