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FSA warning over investment switching costs

The FSA is concerned that advisers are not giving enough consideration to the additional costs clients face when moving them from one investment proposition to another.

The regulator will publish a paper on assessing suitability of replacement business and centralised investment propositions in the coming weeks. It will look at advisers’ use of model portfolios, discretionary fund managers and distributor influenced funds and follows supervisory work in these areas in January and October last year.

At The Platforum’s adviser roadshow in London this week, FSA technical specialist Rory Percival said one of the FSA’s “big concerns” is how advisers are assessing suitability when it comes to switching clients with existing investments from one investment proposition to another.

He said: “One of the concerns was inadequate consideration of the cost differences between the investments that clients hold already and the investment proposition they are going into.”

He said advisers need to understand the additional costs associated with a new proposition, such as a new platform, and clients need to be able to judge whether they want the additional benefits on offer.

He added: “We will be very clear in our publication that understanding the cost differences and being aware of what additional benefits are provided where additional costs are incurred is key.

“We said that four years ago in the pension switching report, we said it two years ago in the platforms and intermediaries report and unfortunately we are saying it again now.”

Clearwater Financial Planning managing director Duncan Carter says: “If additional benefits cannot be demonstrated for extra costs, the adviser should rightly be criticised.”


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There are 10 comments at the moment, we would love to hear your opinion too.

  1. they are absolutely correct to flag this.some clients are getting a raw deal

  2. J C almighty. Does the FSA’s left hand not know what the right hand is doing at any stage? In their Outlook risk assessment they said they were expecting tril commission to dissappear as clients were moved from one investment to another and going to be watching very closely to ensure adviser werent keeping clients invested just so trail could be maintained. Now they are slabbering about watching very closely for investments that are switched. For God’sake I wish they would make their minds up. These people are just unbelievable.

  3. What concerns me is the clear implication that there are actually advisers still out there that do not consider the costs when advising

  4. Clearly to justify extra cost you have to know reasonably accurately ‘how much’ extra cost and it follows that there must be such a thing as ‘too much’ extra cost which no amount of extra ‘soft’ (i.e. unquantifiable’) benefits can justify. The more experienced practitioners in the field work to between 0.5% – 1% additional RIY (for a lot of additional relevant ‘soft’ benefits). Some official guidance from the FSA as to where they draw the line would be very useful!

  5. Is this not already covered by the TCF regime??

  6. this is pretty obvious, one of the first things to look at when restructuring.

  7. I was at the Platforum conference.

    If everyone at the FSA had the same attitude and outlook as Rory then the advisory world would be a much better place. He made a great deal of sense with his believe that the focus for advisers should be the client.

    There were clear warnings for advisers that do not give advice that is in the client’s interest.

    Costs are okay where the advice is suitable for the client’s needs but not when it is adviser driven or for the adviser’s benefit.

  8. Was Rory talking about St James Place?

  9. Unfortunately, there are still plenty of IFAs out there who appear to think in compartmentalised silos. Therefore the kind of logic and criteria which could and should be applied to ‘pension switching’, does not get applied to the business of managing a ‘portfolio’ of investments (irrespective of how loosely we use that term). In my experience, a great deal of ‘annual review’ activity is focused on laying the groundwork for selling a bunch of ‘underperforming’ funds and replacing them with alternatives, usually selected from the Top 10 tables in MoneyFacts.

    It’s depressing, but there’s still a lot of it about.

  10. Maybe…or Towry……?!

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