The FSA is investigating adviser sales of multi-manager funds, focusing on the justification for the level of charges and how advisers react to star managers moving companies.
The regulator has recently conducted 10 multi-manager thematic visits to adviser firms involving file inspections and interviews, asking questions about compliance standards and advice suitability.
It says the work is exploratory and, depending on the outcome, it may carry out further investigations.
The teams asked advisers if they had explained to clients that funds of funds may have higher charges than individual funds, if they could explain satisfactorily why these higher charges were justified and if they used multi-asset funds.
Advisers were grilled on other issues such as on what basis they recommended one fund of funds over another, how these funds compare with manager of managers, their view on star managers and whether they were likely to sell these funds if the managers leave.
Sifa managing director Ian Muirhead says the FSA seems to have an “unfortunate pre-occupation” with charges rather than net of charges performance.
He says: “This investigation shows that, as money continues to pour from with-profits, the FSA will keep an ever closer eye on the alternatives for client money.”
FSA spokesman Adam Rich-ards-Gray says: “We are looking into the increase in the sale of multi-manager funds. Where firms have been recommending multi-manager funds, we are interested in their reasons. We want to see if they are fully considering the advantages and disadvantages, how they are conveying these to their clients and if overall they are treating their customers fairly.”
Miton fund manager Martin Gray says: “One of the main reasons for the sales increase has been FSA pressure on advisers not to take on an asset allocation role. We are very happy for more exposure to be given to the performance of our service net of charges.”
Seven Investment Management marketing director Justin Urquhart Stewart says: “In America, an adviser would expect to see third-party validations of performance, asset allocation, risk and total expense ratio and cost management that we do not see in the UK. Anything that sheds light on this area and helps bring down total expense ratios is a good thing.”