Investment advisers’ RDR victory

Now that the dust has settled and the full reaction has emerged, the FSA’s clarification of advisers’ status after the RDR looks like one of the bright spots in the history of next year’s new rules. In particular, it presents a massive opportunity for investment advisers.

The FSA confirmed an IFA’s coveted independent status would not be threatened if they outsourced services in a certain area to another specialist adviser. In other words, advisers wishing to outsource their clients’ investments can sub-contract investment advisers as well as investment managers to do the job.

At a time when investment managers’ services are looking increasingly expensive, this is a victory for common sense. When advice, tax, dealing and administration are included, the annual cost of investing is running at roughly 2 per cent a year for single manager funds, according to Fidelity, and even more for many multi-manager vehicles and discretionary fund managers. As an average, this is unacceptably high. If advisers can charge their standard 0.5 per cent a year and pick a brace of funds with total costs of no more than 1 per cent, they will already have slashed consumers’ expenses by a quarter.

Investment advisers not only charge less than investment managers. If they invest according to common-sense, steady-eddy principles, their returns are likely to be no worse. No matter how many state-of-the-art models investors apply, all of them will produce little better than an approximation of the future. Investment is ultimately only semi-scientific. Since the future of the markets is so labyrinthine and unknowable, no amount of money that investors throw at “sophisticated” managers will make them able to predict it perfectly.

When advisers outsourced investments, the first wave of beneficiaries were multi-managers. The second have been discretionaries. After recent statements from the FSA, let’s hope the third is investment advisers.