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FSA warns on centralised investment propositions

The FSA has warned firms against “shoe-horning” clients into investment services such as model portfolios and discretionary fund management, and says it is “unacceptable”  that many firms cannot justify why investment switches have taken place.

The regulator has published a guidance consultation on replacement business and centralised investment propositions today.

It defines replacement business as switching a client out of an existing investment into a new solution.

Centralised investment propositions refer to standardised approaches to advice, including model portfolios, discretionary investment management, and distributor influenced funds.

The consultation shows the findings from a thematic review carried out by the FSA into centralised investment propositions.

The regulator assessed 181 investment files from 17 firms which recommended these kind of services. It found the quality of disclosure to be unacceptable in 108 cases, and found the quality of advice to be unclear in 103 cases and unsuitable in 33 cases.

On replacement business, the FSA saw firms recommending switches based on improved performance prospects but provided no evidence to show how better performance was likely to be achieved.

The FSA reiterated its concerns about the cost of switching investments, revealed by Money Marketing last month, and says where additional costs apply firms need to judge whether they are suitable in terms of the client’s needs and objectives.

It says firms should not automatically assume a centralised investment proposition will provide better performance prospects than the client’s existing investment, and says it expects firms to justify why a new investment is likely to outperform existing investments.

The FSA says: “Advisers should never approach a fact-finding exercise with a preconceived agenda to switch the client’s existing investments into a new solution as this may not be the most suitable option for the client.”

Firms need to adopt a consistent approach to checking the costs of replacement business are considered. The FSA says it saw good practice in this area, including firms that placed a limit on the additional acceptable cost of replacement business, or used a traffic light scale for different cost levels that were acceptable for different types of investor.

Where a firm offers a centralised investment proposition the firm should the requirements of its target clients. It cited an example of good practice where a firm used client feedback to identify they required a simple, low-cost proposition.

It said it saw examples of poor practice where firms inherited investment solutions through mergers or acquisitions, but failed to assess whether the service was suitable for the enlarged client bank.

The FSA’s review also found several firms benefited financially from recommending centralised investment propositions, and did not manage the “inherent conflict of interest”.

The FSA says: “We recognise there can be benefits to offering a centralised investment proposition for both clients and firms. However we have concerns that in certain circumstances a centralised investment proposition may be unsuitable for a retail investor. For example there may be ’shoe-horning’, where firms recommend a one size fits all solution.

“The use of a centralised investment proposition might also result in higher and potentially less transparent charges than the client’s existing investment and few additional benefits.”

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Comments

There are 9 comments at the moment, we would love to hear your opinion too.

  1. This is fundamental stuff really isn’t it?

    Any form that is running DFM/ model portfolios based purely on the comericality and profit arguments is going to have problems just like the ones highlighted.

    There isn;t a problem with the principle of centralised propositions but they do need to be properly thought through and focused on what’s really important.

    Ian Coley
    Partner
    Medical Investment Services

  2. Under 4.9 in the document it gives an example of a firm that has clients in model portfolios run by a discretionary manager where there is no contract (assume that’s a discretionary management agreement?) with the manager. They are saying that if the IFA doesn’t have discretionary permissions then this is outside the rules/scope of permissions.

    I may be wrong but aren’t a lot of IFAs operating exactly this model, often promoted to them by platforms and the discretionary running the portfolio?

    If it’s wrong who’s taking the blame?

  3. Bye bye Towry

  4. When is the FSA going to tell us what`s right instead of what`s wrong? Don`t do this, don`t do that, but when asked what is correct they tell us it`s our decision and they cannot advise! Priceless.

  5. Hugh…
    Ummm i hate to say this but they do. You need to cast a more concrete eye over FSA material.

    Good practice provides just that and most thematic reviews (inlcuding this one) have a “our expectations” section covering what the FSA deems to be what they want you to do….

  6. just wait when they get hold of the stuff people are trying to do in the corporate world. Shoehorning auto-enrolled clients into investment funds

  7. JP,

    but corporate/auto enrolment suggests default model portfolio’s is just the ticket – ever read the IGG documents?

  8. Julian Stevens 4th April 2012 at 9:00 pm

    I read the other day that the FSA has handed out a number of fines against SJP for exactly these types of activities, which concur exactly with those of one SJP partner I know who, upon joining the fold, proceeded to churn all his existing clients’ portfolios into SJP funds. He also took 3% initial commission on every churn.

    Yet, reportedly, SJP are constantly telling all their partners that the FSA is quite happy with SJP’s business model.

    Who should we believe?

  9. and here in lies the nub. The IGG is sensible for an Occupational Scheme, but there are all sorts of issues for a GPP not least that the members become IPPs, so any real or deemed authority that a Fiduciary manager had from the employer is now no longer valid. Just watch the FSA require these to be structured with AC for leavers.

    Secondly the IGG and the august body of investment advisers etc is broadly predicated on lumpy assets not a GPP.

    So nothing wrong with a default fund but real issues if these are broker funds.

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