Scottish Life calls for standard on risk definitions
Provider sees trend towards advisers using DFMs as they need to do more due diligence on model portfolios.
Scottish Life has suggested that there should be an industry standard on terms of risk, citing that the risk allocation on a balanced model portfolio should be the same “or at least look similar” when compared with providers.
In an interview with FTAdviser, Lorna Blyth, investment marketing manager at Scottish Life, pointed out that providers need to disclaim risk, when putting together a balanced model portfolio.
She said: “What would be good is an industry standard on terms of risk as there are lots of different risk attitudes. The risk allocation for a balanced portfolio on a model portfolio must be the same or at least look similar if comparing different providers and across all portfolios.”
Earlier this year, the Investment Management Association unveiled new mixed asset fund sectors to replace its old Managed groupings.
The names Cautious Managed and Balanced Managed in particular were regarded by many as an inferior means of representing the risks of many of the funds in their peer groups, as many of them held a large proportion of their portfolios in riskier assets, principally equities.
A recent FSA consultation paper, Assessing suitability: Replacement business and centralised investment propositions, looks into advisers offering a centralised investment proposition, such as model portfolios, discretionary fund managers and distributor influenced funds.
The regulator wants to ensure that clients are not being shoehorned into the outsourced option, that the extra costs are justified and unnecessary churning is not occurring.
Ms Blyth said that Scottish Life is seeing a trend with advisers using DFMs and outsourcing.
Ms Blyth said: “The key point is that advisers need to understand the underlying assets that are being held, advisers need to understand what portfolio is held, assets, risk and that they can explain that to the client.
“It isn’t enough to shoehorn clients into balanced or another one etc. Advisers need to do more analysis, and that is why we are seeing a trend with advisers using DFMs or outsourcing. Advisers have to do all this and they still need ensure they are suitable for clients.
“They need to do due diligence on model portfolios and we have seen advisers send out questionnaires to providers about their governance, their financial standing etc and they are doing this once a year.
“Perhaps a move to save time for advisers would be for providers to have this information on the website.”