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When does an adviser become a manufacturer?

The coverage of the Keydata affair in Money Marketing brings to the forefront an issue that no one seems to be dealing with properly, including the regulator. This is the question of how far vertical integration of the advice process can go before the person delivering the advice ceases to be an adviser and becomes a salesperson for the firm’s own product and the firm is recognised as a product manufacturer?

It is well known that some bigger adviser firms, even those that claim to be fee-charging, motivate their advisers by the use of the remuneration structures they have put in place or by compliance constraints to place client money into their “in house” portfolios or unit trusts/Oeics. Where the policy is such that in most cases 100 per cent of the client’s investment goes into such funds, surely the so-called adviser is simply a product distributor?

It does not matters how much research has gone into the funds being recommended, how they are risk-graded or anything else that might be put forward to justify the “independence” of the adviser business.

If I decided to sell the one provider’s range of riskgraded, OBSR-ranked, quarterly-rebalanced unfettered funds of funds or similar to all my clients for all their investments, I would be in big trouble with the FSA for having provider bias. Furthermore, if I took 0.5 per cent from the funds every six months, it would be called commission and there is no way I could pretend that I was charging a fee.

I can only see one difference between me putting all my client money with my preferred choice of provider and an adviser putting all client money into their range of in-house funds.

The difference is that I will only be paid my commission by that provider and any product manufacturing profit goes to them. With the vertically
integrated firm, they keep the profit at every level – which is why they want the money kept in house. Surely, by any application of logic, that means they are a manufacturer? If they are, what happens if they make a big mistake and one of their in-house funds blows up? Will we have to foot the bill?

MARK POTTER
Ethos Financial Management

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Comments

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  1. Spot on Mark, now make a list of IFA firms who have moved on and which now operate as stockbrokers or fund managers. Could that include Hargreaves Lansdown?

    Also make a list of providers who hand over the invested money to say hedge funds or cash accounts in banks, or any financial instrument where they ‘lose control’ of the invested monies.

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