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FSA warns over relying on outsourced fund research


The FSA has warned advisers about being over-reliant on outsourced investment research and says advisers should be prepared to challenge specialist recommendations.

Speaking at a Defaqto RDR conference in London yesterday, FSA technical specialist Rory Percival said while the regulator appreciated that advisers outsource to bring in a greater level of investment expertise, advisers still needed to apply common sense to the recommendations they receive.

He cited a case involving an IFA that will be made public shortly.

Percival said: “There was a firm that outsourced research on a particular fund and the outsourcing arrangement was with an investment specialist. The investment specialist filed a report to the IFA firm in this case but there were a lot of holes in that report.

“The average IFA, if they had engaged their critical faculties and done what an IFA is meant to do, which is to think about the nature of the investments they are going to be recommending to their clients, should clearly have seen there were a lot of deficiencies in that report and they were not able to rely on it, even they were not a specialist as the outsourced individual was.”

He added: “What firms need to ensure is they are broadly competent in the area they are outsourcing.”


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There are 7 comments at the moment, we would love to hear your opinion too.

  1. This is a very refreshing observation and if any indication of the future of our regulation it should be welcomed.

    When outsourcing any function, you need to remember you are outsourcing the function and not the MANAGEMENT of the function.

    It is a very subtle distinction, and in our experience it can be difficult for some to grasp.

    The people you rely on when outsourcing know what they do very well, but you know the delivery of YOUR service to your clients better than they do.

    By managing them in the same way you would manage any other member of your team you should not come too far unstuck.

  2. When it goes public, it will be interesting to see which fund it relates to, and which “investment specialist” it was outsourced to.

  3. The FSA is like the schoolground bully.

    Happy to take on the little IFA but scared of the big boy Banks.

    I wish they were on the ball with regards to PPI and LIBOR issues – but that would require taking on their future employers!

  4. Philip Bailey 6th July 2012 at 3:27 pm

    As a company that provides an insourced research service to the IFA community we agree with the comments made by Rory Percival at the Defaqto RDR conference.
    Investment research carried out by a third party, whether on individual funds or the structuring of model portfolios, can be highly resource and cost effective but should be a part of the investment process which includes advisers taking the overall view and decision in a common sense way that suits their clients portfolios.
    The Assetfirst service gives advisers access to the intellectual property and research that underlies the range of model portfolios that we offer. In addition, we provide a full monthly report and a monthly conference call in which all advisers can question the research team on the investments included and their projected effect on the portfolios, as well as discuss the potential impact of the prevailing economic conditions. The adviser then decides whether to keep a fund in a portfolio or take it out and undertakes the transaction, so the adviser stays in touch with the research process and in control.
    This creates an interactive process that enables IFAs to be able to tell their clients exactly why the portfolios are invested in the way they are and helps avoid the kind of issue raised by Mr Percival.   

  5. Anon @ 2.39pm

    What’s your comment got to do with the price of eggs here? I don’t see the relevance to this article, wholly or in part…

    Or are you just venting your spleen……. You could have done that on a Barclays article at least.

    I’m not sure who Mr pervival is supposed to be bullying, but seems like sage advice to me.

    It does annoy me when people put random, unconstructive and pointless cr#p on here!


  6. I love it! The FSA, of all organisations, suggesting that anyone, in this case IFA’s, should use their ‘common sense’.
    How though will the bureaucrats in their ivory tower measure or quantify this new and alien concept?
    ‘The average regulator, if they had engaged their critical faculties and done what a regulator is meant to do…………..’ may not have made so many horrendous mistakes, especially if they had used their collective ‘common sense’. All I want is a regulator that is ‘broadly competent’.
    Still I do endorse Damian’s comments and yes this does seem to be a breath of fresh air.

  7. The FSA are right, this is as it should be.

    Every client is different. Only the IFA knows all the nuances of their situation. Outsourcing portfolio management is like a doctor outsourcing prescriptions based on a brief sketch of the patient’s ailments. Model portfolios simply raise unrealistic expectations, and then what happens when the exogenous “black swan” events occur which the model has not anticipated? These arrangements are just another balanced fund with another layer of charges. Just like broker funds before them. The FSA know it and they will come down on this in the future. Only an individualised portfolio for each client is in their best interests, just like an individualised medical regime.

    Sadly, of course, the cost of research and portfolio building is going to prohibit us from advising the smaller investor. Now, thanks to the RDR, they are expected to self-medicate.

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