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Home > Investments > Discretionary Management

By Deborah Kay | Published Jun 22, 2012

Befitting a purpose

The business of financial advice has traditionally been a cottage industry, with advisory firms generally made up of a loose collection of self-determining individuals.

The FSA has made it clear through the retail distribution review and other regulatory initiatives that it mistrusts this current set-up. It would rather advisers were consistent in process and delivery, ensuring that two clients with similar needs visiting the same firm but seen by two advisers receive consistent advice. Arguably, this will cause IFAs to limit their effective range of recommended funds to fewer numbers of well-known brands, potentially killing off innovative offerings from specialist fund managers. The outcome is not necessarily the best one for the end investor.

New regulation is leading to an evolution in investment management. Advisory business owners will be loath to take the regulatory risk of allowing their advisers to ‘do their own thing’.

When one rogue adviser could attract the attention of the FSA, business owners are likely to impose an iron discipline. They will also be looking to streamline operational costs at a time when the burden of compliance is increasingly complex and costly.

Model

Verona Smith, head of proposition at Cofunds, said: “When advisers have moved to a fee rather than commission-based model post-RDR, they will run portfolios that keep costs to a minimum. The value chain will not stretch to support a client paying both high-fund total expence ratios and an increased annual fee for the adviser.’

The solution for many advisers is to outsource – to fund of funds managers, to discretionary portfolio managers and to platform-led, model portfolio solutions. According to a recent CWC study of the retail investment market, entitled “The King’s New Clothes”, 65 per cent of IFA firms currently offer model portfolios; this is likely to grow as regulatory pressures increase. Nearly 90 per cent of nationals and networks will offer discretionary management of one form or another. Over 75 per cent of them said they will also offer model portfolios.

But some commentators are now concerned that third party outsourced solutions are more about keeping the FSA and the adviser happy and less about the investment outcome for the client. They will skew towards offering undifferentiated portfolios of “me too” products, dominated by big brands and the core asset classes that fail to harness the key growth stories of tomorrow’s world.

The outsourcing of fund selection to a third party portfolio research team, for example, is likely to deliver streamlined portfolios that exclude new funds or specialised investment strategies. The CWC survey found that large brands were likely to retain their strength in a climate of fear over the regulatory burden. When asked who they would use post-RDR, advisers trotted out the same old favourites – Aberdeen, Invesco, Jupiter, M&G, Newton, Schroders, BlackRock, Vanguard and others.

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