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Should IFAs get discretionary permissions?

More advisers are looking to bring investments in-house, experts are predicting, but barriers to entry can be tough to overcome.

Events such as the commercial property saga of last year and disappointment with some external discretionary fund management firms are cited as some of the reasons why advisers would prefer to have more control over clients’ money.

But the need to achieve scale and pass regulatory hurdles such as Mifid II reporting standards could slow this trend.

So how many advisers think they have the necessary skills and confidence to take care of investments themselves? And at what price?

Money Marketing asks if it is worth going down the discretionary route and what advisers should know before they do.

Grey areas

16 per cent of IFAs have discretionary permissions and 11 per cent of firms plan to get them in the next five years, according to Platforum data.

The proportion of outsourced advised assets, however, has almost doubled in the past four years, rising from 18 per cent in May 2013 to 30 per cent in April 2017.

Platforum head of intermediary research Miranda Seath says the IFAs that are using in-house expertise to run the money are doing so in order to make quicker decisions, take a greater share of fees and bolster their professional credentials.

Once they obtain permissions, Hallen Investment Services consultant Raj Hallen says IFAs could be able to compete against multi-managers and funds of funds.

He says: “Part of the reason to get permissions is a tactical play, like before Brexit when DFMs came out of sterling or commercial property.

“IFAs want to get discretionary permissions so they can apply decisions quickly and not email their clients all the time to protect or increase capital.

“Also, some IFAs may have been disappointed in the past by a DFM and maybe decide to do it themselves now with an additional fee.”

Advisers divided on merits of discretionary permissions

Strategic Solutions managing director Kevin Forbes says firms need to make it clear whether they are offering discretionary or advisory services.

He says: “Advisers with a centralised investment proposition may fall in that grey area between discretionary and advisory and that can be an issue.

“Some firms I know used to send out mails and switch clients without responding to them so I think there is a grey area where some get caught which we need to make sure it doesn’t happen.”

Nearly a year ago, Strategic Solutions started managing clients’ money with the launch of its new DFM business Casterbridge Wealth. Since launch in December 2016, it has taken on £150m in assets.

Forbes says: “We set up a separate company so other firms could use it, which they do already, without them thinking we are a vertically integrated firm.”

Can advisers manage money?

The risk of conflict of interest that can come from integrating advice and investment management is what leads some firms to set up separate entities or hire qualified consultants and investment managers.

Forbes notes that conflicts of interest can arise within some of the big non-independent DFMs.

He says: “So many DFMs out there get owned by large investment houses and I think there is a conflict of interest in the way they are charging too, such as Intrinsic running at a loss but Old Mutual not caring because they use Quilter Cheviot.”

Progeny Group managing director Neil Moles says including investment management within an IFA firm is a way for advisers to justify higher fees, but won’t necessarily result in better outcomes.

He says:What’s driving more advisers into asking for discretionary permission is vertical integration but that’s not the best outcome for clients. There are people far better than us at managing money.

“I am so thankful Vanguard launched in the market earlier this year in their direct platform, not that they will take all the business, but it challenges cost.”

David and Goliath: The investment advisers taking on the big players

Progeny Group, a national wealth manager with £800m assets, has a centralised investment proposition using Vanguard and Dimensional funds and a panel of DFMs. It also has discretionary powers to rebalance portfolios.

Moles says: “Charges are the problem with advisers, and how they justify their fees. They justify that by talking about investments. That’s not financial planning.”

Regulatory roadblocks

Experts argue the regulatory process to get discretionary permissions can become an obstacle for firms, especially in light of the upcoming MifidII requirements.

7IM head of platform Verona Smith argues size is one consideration to make before considering going in-house, but having an high level of compliance expertise is more important.

She says: “The firm needs to look at what they deliver to their clients, what their clients value and how they can achieve their objectives and then decide if outsourcing is for them or not. A major consideration will be the ever changing regulatory environment and specifically the impact of Mifid II.

“We have been seeing a number of the firms using the 7IM platform apply for their discretionary permissions and successfully embedding this within their client offering. Many other firms we work with have decided to outsource and again we have seen this successfully achieved.”

But Moles argues high capital requirements will put off many from making the change.

He says: “Firms such as Mattioli Woods and others are all going that discretionary route but it will fall apart as it did in the past. Thankfully it is very hard to do.

“Capital adequacy means that most firms can’t afford to do it as three months fixed cost is a lot to hold in cash for larger firms, so there’s a good barriers to entry but a lot of people are trying.”

Seath adds: “Under MiFID II, the new rule about notifying clients within 24 hours if a portfolio falls 10 per cent or more has been interpreted by some to apply to the holders of discretionary rather than advisory permissions. The discretionary firm would therefore be responsible for compliance.

“So for advice firms of a certain scale, likely to be £1bn assets upwards, buying a DFM might make more sense.”

Forbes says the set up of the DFM for Strategic Solutions wasn’t an easy task and argues it is more challenging for small firms.

He says: “We’ve spent hundreds of thousands of pounds to build it, a lot more than we thought. People who want to go through this route need big pockets.”

Forbes says there are firms also “struggling” to get permissions when they had a history of mis-selling products.

Forbes says: “It’s harder because there’s been a few DFMs recently that have been selling a lot of toxic products, a few have been shut down recently because they’ve filled themselves full of unregulated investments to just get back [into business] and that has spoiled the situation for everybody.

“The FCA liked us because we picked up the phone and talked to them instead of just sending legal letters, which seems disingenuous.”

Expert view

The questions to ask when going discretionary 

There are two ways for an adviser firm to seek and gain discretionary powers. Most apply to the FCA for a Variation of Permissions for their existing business. Some others may choose to set up a separate investment management company.

Applying for VOP is more cost effective and can be a quicker route to gaining the new powers, as it can cost £2,500 and the FCA have to authorise or decline the application 6 months from when it determines the application to be complete or 12 months of receiving an incomplete application.
Succession Advisory Services were granted VOP approximately 4 months after submitting their application.

This also counts for a new entity and the application costs for this are £5,000. Firms may wish to go down this route to keep the VAT issues separate and leave a clear business audit trail as the intermediation of advice is not subject to VAT whereas the discretionary service is.

Professional requirements are outlined in the FCA’s Training & Competence sourcebook.

Generally, relying on an internal member of staff is not sufficient even if they have a level 6 qualification. I know of a business that was not granted discretionary powers as they relied on an internal member of staff who had a Level 6 qualification but was not deemed by the FCA to have the adequate required discretionary experience. Firms can reapply for these powers even if they were denied approval the first time.

Some firms take on a CF30 with discretionary experience to be paid monthly rather than have the expense of employing an experienced discretionary manager on a full time basis.

Once you have been granted discretionary powers, you will need to communicate this to your clients and what this means to them. The best way to do this is at client annual reviews. The client can also sign the new discretionary management agreement at this stage.

The majority of clients will sign the agreement but it may take a year or more for a firm to get to this stage depending on the size of client bank.

If you offer a discretionary service you can charge a small discretionary fee, so you can increase the revenue streams which increases the value of the business.

Some companies can reduce their holistic planning fees if they apply these ones. They are driving the costs down, which is what the FCA is focusing on.

Raj Hallen is an independent consultant at Hallen Investment Services

Money Marketing is putting investment strategies under the microscope at the Money Marketing Interactive conference, which is being held at the Majestic Hotel in Harrogate on 14 September. To join over 150 advisers who have registered to secure their free place, click here.





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There are 8 comments at the moment, we would love to hear your opinion too.

  1. However big you may be Discretionary permission will increase the risks to your business hugely. Is the cost and the risk worth it?

    • Trevor Harrington 30th August 2017 at 12:01 pm

      I agree with you Harry.

      The costs are not worth it, and the risks to our businesses if lots of IFAs get discretionary powers, and abuse them, in terms of increases to PI and FSCS would be onerous.

      Anyway, it is all part of our existing services to clients (or should be) to advise on fund allocations and switches, which we should be reviewing as part of our justification for our “ongoing adviser fees”.

      None of this is a problem if the Adviser’s computer systems are up to scratch …. client service proposition … if you will…

  2. The main driver for this is to increase operational efficiency over the advised portfolio route and to drive manufacturing revenue back to the business.
    Of course there is another route that many are taking which is to gain discretionary permissions but to ‘insource’ the investment expertise at a fixed fee. This, in many cases, ends up being cheaper and more efficient than doing it internally and therefore maximises the value driver for the business. Square Mile would be delighted to talk to anyone interested…….

  3. In looking to gain discretionary management permissions sufficient capital adequacy and two qualified people with relevant experience are mandatory requirements. Relevant experience is not a defined term so it is vital that any firm takes expert guidance on what would be acceptable. The capital adequacy position can be complex but three months fixed overheads or £50,000 euros (whichever is greater) is not a substantial amount of money for a mature advisory business. The key obstacle and a decisive factor in in deciding whether to authorise a new entity or vary permissions is usually the corporate structure of the existing business. This is because the capital position of a BIPRU discretionary management firm is subject to ‘group’ rules which means that the capital adequacy requirement can be hugely affected by any holding company and any other companies in the group. As experts in helping firms make that transition to DFM the length of time in getting the permissions does not necessarily vary between a new entity and a VOP. At threesixty we have seen new entities authorised as quickly as VOPs. The deciding factor is usually the quality of the application, particularly the business plan and supporting documentation to the FCA forms. Threesixty have successfully assisted firms gain DFM permissions varying in turnover from £200k to many millions. The most important factor is to be clear about why the firm want the permissions and how it will lead to a better client experience. Many firms come at the issue from the perspective of saving their own costs when going through a re-balancing exercise on an advisory basis. In truth the acquisition of DFM permissions is a fundamental change to your business model as the firm will then be both financial adviser and investment manager –two entirely different functions.

  4. I did look into discretionary permissions many moons back….. risk and paperwork made me quickly re-think, however i do think a relaxing of jackets (if you will)would be welcomed.

    If i think back to the start of the credit crunch, being able to alter portfolios quickly and efficiently across many clients would be welcomed, without the need for massive form filling computer hours and client visits, when a quick phone conversation with the client and then online alterations.

    I know we can do this at the moment but its still very clunky to say the least !

  5. No.
    There are more than enough ‘value-subtracting’ DFMs out there already without IFAs adding to the pool.
    Plus, what makes IFAs think they have any talent for that practice?

  6. Robert Milligan 30th August 2017 at 4:43 pm

    No. its simple, they are two different jobs, I have used several DFM’s for my business for the past seventeen years, I have yet to meet anyone earning a living as an IFA who could convince me they have the Time, experience and ability to do both jobs, Be honest to your self, I have driven a car for forty four years, but I would not change a Brake pad,

  7. DFM’s who take over your clients are not worth their weight in “muck”. In my experience DFM’s are a means of getting on Board your clients then removing them – referred to as “Passing Off” to third parties. Any good quality or professional DFM would not poach clients in such a way

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