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Home > Investments > Discretionary Management

By Laura Suter | Published Apr 25, 2012

FSA paper causes stir in outsourcing industry

A recent FSA consultation paper on the suitability of investment decisions has ruffled a few feathers in the discretionary management market.

The paper, Assessing suitability: Replacement business and centralised investment propositions, looks into advisers offering a centralised investment proposition (CIP), such as model portfolios, DFMs and distributor influenced funds.

In particular it wants to ensure that clients are not being shoe-horned into the outsourced option, that the extra costs are justified and unnecessary churning is not occurring.

Another issue raised is that advisers can receive incentives to use one form of CIP, which the FSA says presents “a clear risk of clients receiving advice that was not in their best interests”.

Of the 181 client files from 17 firms assessed, the FSA found the advice to be unsuitable in 33 files and unclear in a further 103.

The issue of outsourcing investments is in focus at the moment as many predict the practice to be more widespread post-RDR.

While much of this prediction comes from the discretionary managers and model portfolio providers themselves, the wider industry is predicting advisers will move away from stock-picking and instead use a CIP.

Recent research from Defaqto found that 42% of platform users are outsourcing some element of the investment process, with 21% using a DFM, and this predicted to grow in 2012 and 2013.

Philip Bailey, partner at Assetfirst, warns the practice of outsourcing to DFMs could lead to swathes of clients leaving advisers “especially as many DFMs have their own advisory arms”.

He added, “In outsourcing not only are they passing control of client investments to a third party but many clients see portfolio management as the core area of value in their relationship with the IFA.”

However, some firms have batted off the criticism of outsourcing following the FSA paper, saying that rather than warning advisers off outsourcing, it is just urging them not to have a one-size-fits-all proposition.

Consultation on the paper is open until 4 May.

laura.suter@ft.com

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