A new paper from the Personal Finance Society is warning about some issues arising from the use of model portfolios, distributor-influenced funds and outsourced discretionary fund management.
When the Retail Distribution Review (RDR) comes into force at the end of next year, Independent Financial Advisers will need to uphold a much higher standard of ‘independence’ when providing advice to each client.
Under current rules, the term ‘independent financial adviser’ is reserved for financial advisers who select products from the whole of the market and offer their clients a fee option.
The new definition of independent is “advice which is unbiased and unrestricted, and based on a comprehensive and fair analysis of the relevant market.”
According to the FSA, it is designed to reflect the idea of a genuinely independent adviser being free from any restrictions that could impact on their ability to recommend whatever is best for the customer.
Where an IFA uses model portfolios, distributor-influenced funds or outsourced discretionary fund management, they need to ensure it meets these new higher standards of independence.
In practice, this will mean considering these options alongside other investment options and ensuring each individual client receives suitable advice based on this comprehensive analysis of the relevant market.
In our opinion, all independent financial advisers should already be meeting these new higher standards of independence.
Our own use of model portfolios forms one option we consider for each individual client, as part of the investment advice process will always follow to ensure suitability.
The funds we select for inclusion in our model portfolios are never related to the remuneration we will receive from the fund manager, as this is always agreed at a client level before we provide advice.
One of the most important issues raised in the Personal Finance Society paper relates to adviser incentives and potential conflicts of interest.
Transparency has certainly become a hot topic in retail financial services. The recent move by Fidelity to disclose the rebates they receive from fund managers has raised questions of other fund supermarkets, including execution-only platforms which provide no advice, about the level of ‘kickbacks’ they each receive.
No independent financial adviser should ever receive of any undisclosed remuneration from a fund manager.
There is a real danger, particularly with distributor-influenced funds, that investors will be advised to put their money into something more suitable for the adviser (in terms of the commercial arrangements) than it is for meeting their personal investment goals.
We welcome the current trend towards greater transparency in the sector, and hope it will not be long before all financial advisers are forced to disclose in detail the remuneration they receive from various sources.
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