View more on these topics

The death of Difs?

Graham Hooper
Graham Hooper Chairman All My Plans www.allmyplans.com

Distributor influenced funds have been with us for decades. In the 1980s, they were called broker bonds and generally involved IFAs managing unit trust funds under the umbrella of an investment bond.

Performance was mixed, the charges were high (north of 2 per cent in many cases) and were tax-inefficient for most clients as the investment bond paid taxes internally before investors saw much of the performance benefit.

However, they offered substantial commission, control over clients’ money and the ability to drive substantial discounts on the initial charge on the underlying unit trust funds.

In the relatively lax regulatory regime of the day, everyone was (relatively) happy. Back in the present day, I suspect that the FSA has been wrestling with Difs for some time.

New model adviser
For IFAs, the principal benefit of Difs was that it gave them an alternative way of building value in their firm other than selling what amounts to a small business largely built around a founding partner.

By building their own miniasset management business within their IFA business, advisory businessowners had an alternative asset to sell. The additional value at exit is very attractive to IFAs. Asset management businesses tend to trade at a higher multiple than advisory businesses, have less risk attached to them and are discretely identifiable as funds under management of £xm.

Non-model adviser?
In the background, the FSA did not seem to understand why the clients (with a multiplicity of complex needs and backgrounds) of a particular IFA firm, all roads (well, most anyway) led back to the advisory firm’s own Dif(s). Surely this was too simple a solution?

From a cost perspective, the charges on Difs are almost certainly higher than for many other firms. There are also extra levels of regulation and some heavy lifting around asset allocation, fund management and communication.

The FSA does not like hefty charges – it’s one absolute measure which is quantifiable and comparable and where they can (justifiably) say: ’Aha- your charges are x% per annum higher than the industry benchmark, therefore it must be bad’.

Performance is transient – costs last forever. The easy answer was find ways of outlawing Difs to minimise the risk to both consumers and the FSA.

The last sting?
Have the FSA said they are going to ban DIFs? No. Have they laid down criteria which identifies acceptable Difs? No.

Are they likely to? No. Will they find a way of outlawing Difs? I believe they will. To the FSA, they represent a risk which is unquantifiable and unmanageable – and they have bigger fish to fry elsewhere. Just ask the banks.

If Difs are off the agenda and RDR jumps into life on January 1, 2013 as currently proposed, it will accelerate the demise of the IFA – which can’t be a good thing for consumers.

IFAs may not be perfect but the better ones represent the best chance for consumers to get personalised, specific and relevant best advice. Remember that old chestnut?

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com