The FSA says independent advisers will be able to use discretionary investment services, model portfolios, platforms and panels post-RDR as long as they are not the default solution and suitability is established for individual clients.
In October, the FSA announced it was investigating the quality of investment advice involving model portfolios, discretionary fund managers and distributor influenced funds. It has expressed concerns about suitability where these tools are used as the default, without considering the investment needs of individual clients.
The FSA’s guidance consultation on independent and restricted advice, published today, says it has seen evidence that some firms are failing to question unsuitable investment solutions that are generated through these tools.
The regulator says where independent firms refer a client to a discretionary investment service, this would not be considered a “personal recommendation” as it does not involve a specific retail investment product. This will therefore not affect firms’ independence.
However, it says firms should objectively consider a wide range of investment solutions in the market before recommending a discretionary investment service.
Where the recommendation of a discretionary service is not a personal recommendation, a firm would not need to demonstrate that it has picked the service based on a comprehensive and fair analysis of the market. However, the firm should undertake sufficient due diligence before recommending a service to a client.
The FSA says if an adviser implicitly recommends particular funds offered by a discretionary service, this would amount to a personal recommendation, and the rules applicable to personal recommendations would apply, including those for independent advice.
The FSA says: “Another example of a personal recommendation is where an adviser recommends a retail investment product in which the underlying investment approach will be managed by a Dim.
“In this case, the Dim is integral to that retail investment product, and the advice to use the product and the Dim must be suitable and the suitability report should discuss the advice as a whole and explain all charges that apply to the client, including those for the Dim.”
On model portfolios, the FSA says a firm should consider each product in the model portfolio within the context of the whole portfolio, when determining whether it is suitable for a client.
It says if an independent firm is constructing its own model portfolios, it should ensure that it bases its product selections on a “comprehensive and fair analysis” of relevant product markets.
If a firm is using model portfolios constructed and managed by a third party, it should ensure the criteria used by the third party is sufficient to allow the firm to meet the independent advice rules.
The FSA says if any aspect of the model portfolio is not suitable or consistent with the client’s investment needs and objectives, the model portfolio should not be recommended or the model portfolio should be tailored so that it is suitable.
It adds in giving independent advice, a firm should not restrict its advice to certain model portfolios, or treat model portfolios as the default solution, regardless of whether these can be tailored for individual clients.
The guidance says firms will be able to compile a panel of investment products and select from the panel when giving independent advice.
However, firms will need to be able to advise off-panel if that would be in the best interests of a particular client.
It says: “To do this, its advisers should maintain an awareness of what is and is not included in the panel, so they can identify clients for whom an off-panel solution would be suitable.”
The FSA says a similar rationale applies to platforms. A firm can use platforms to provide independent advice, but will need to remain aware of the limitations of its chosen platform and advise off-platform, or through another platform, where this is best for a client.
The FSA has reiterated its view that it expects it will be “very rare, if possible at all, that a firm could use a single platform for all of the investment business of all of its clients and meet the standard for independent advice”.