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Home > Regulation > RDR News & Analysis

By Michael Trudeau | Published May 16, 2012

Debate: Are off-the-shelf DFMs ‘dead’?

The Financial Services Authority recently expressed concerns that advisers would “shoe-horn” clients into outsourced discretionary products with a less-than-perfect fit, in an outsourcing paper that has provoked widespread debate across the industry.

In one particularly high profile spat, Graham Bentley head of proposition at Skandia UK, become involved in a heated exchange on Twitter with Bill Vasillieff, chief executive officer of Novia, over the credability of off-the-shelf DFMs following the FSA’s pronouncement.

So, where do you stand? In this debate we gather arguments on both sides of the off-the-shelf DFM debate from Mr Bentley and Fraser Donaldson, insight analyst for funds at Defaqto.

This house believes off-the-shelf discretionary fund management solutions will likely be unsuitable for clients post-RDR.

Arguing for the motion: Graham Bentley, Skandia

The key starting point in this debate is to clarify that there absolutely must be contractual relationships in place between 4 parties: client, DFM, platform and adviser.

If there is no direct client-DFM relationship, the adviser retains regulatory responsibility for the investment decisions even though they don’t carry out the actual management, which means the adviser must have the relevant permissions to undertake discretionary investment management.

If advisers do not have these permissions, they will be in breach of FSA rules.

Many existing off-the-shelf DFM arrangements will fail under FSA scrutiny and it will be the advisers that are first in the firing line

The next point to highlight is that advisers, DFMs and platforms all have a role to play in ensuring the outcome is right for the client:

• advisers have responsibility to ensure the models match their clients’ needs and control the mandate and governance process;

• platforms need to look out for the interests of their clients and must therefore consider whether services hosted on behalf of DFMs are offering clients good value in comparison to other potentially substitutable offerings on the platform; and

• DFMs have the responsibility to conduct due diligence on the platforms they operate on in respect of execution and trading costs.

It is my belief that many existing off-the-shelf DFM arrangements will fail under this scrutiny and it will be the advisers that are first in the firing line from the FSA.

Arguing against the motion: Fraser Donaldson, Defaqto

Selecting an off the shelf discretionary portfolio - model portfolio - in terms of client suitability is no different to selecting a multi-manager fund or any other packaged investment solution for that matter.

It is the the responsibility of the adviser to match the client to the proposition, ensure it is suitable and better than what they already have. It remains the responsibility of the adviser to ensure that the proposition continues to be suitable.

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