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Home > Investments > Discretionary Management

By Jenna Voigt | Published May 02, 2012

Advisers fear losing independent status over DFMs

Advisers have warned their “biggest concern” when outsourcing their investment decisions to discretionary fund managers (DFMs) is losing their independent status.

The FSA recently warned against advisers “shoehorning” clients into outsourced investments ahead of the implementation of the RDR.

Last week advisers expressed concern over the “exclusive or even heavy use” of discretionary outsourcing services, saying the FSA was unclear whether such a move would leave advisers in a restricted advice category.

Martin Bamford, chartered financial planner at Informed Choice, said: “We’d be very concerned exclusive or even heavy use of a DFM (discretionary fund manager) would result in us being restricted.”

Mr Bamford added the FSA could determine that recommending just one or a few DFMs may not count as advice on a “fair and comprehensive range of products”, which advisers are required to give if they wish to retain their independent status after the RDR.

Aj Somal, chartered financial planner at Aurora Financial Planning, said he would be concerned if the majority of his clients were invested with one DFM “by default”, as his independent status would be threatened.

Mr Somal said that in order to ensure this was not the case, he was moving away from investing directly in a discretionary service and using model portfolios and segregated portfolios on platforms.

Mr Somal said platforms enabled advisers to outsource their clients’ investments to DFMs and still control their relationship with them. It also gave them the option to switch from one DFM to another if the proposition was “faring poorly”.

Alistair Cunningham, director at Wingate Financial Planning, also warned recommending one or a few discretionary solutions could jeopardise an adviser’s independent status.

“If you want to be independent but only recommend across a few DFMs you’ve got a problem,” Mr Cunningham said.

Mr Cunningham said he is unlikely to use discretionary solutions for smaller retail clients as he could run a less expensive in-house alternative.

“Why would you want to add another layer of complexity and lose control of [the client’s assets]?” he said.

Chis Hannant, policy director at the Association of Independent Financial Advisers (Aifa), said the “test for independence” was different from offering a segmented range of products.

Mr Hannant said advisers need to be “competent” to advise across the entire range of financial products, but are not required to offer products across the entire range.

“If advisers choose to segment the market that shouldn’t detract from their independent status,” he said.

But Mr Hannant said if advisers choose to recommend model portfolios, the FSA is clear that they must stay “up to date” on what is happening in the portfolio on a regular basis.

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