FSA casts doubt on passive-only IFA propositions
Rules allowing firms to remain independent while serving a specialist market would likely not extend to passive-only models.
Advice firms that are looking to move to passive-only investment models post-Retail Distribution Review will likely be forced to define themselves as restricted and would not be able to use relevant market rules to maintain independence, according to the Financial Services Authority.
According to FSA guidance, an adviser who specialises in products for a certain demographic - for example investors who only want to buy Islamic or ethical products - would be able in theory to retain their independent status.
Such firms would not be able include the word independent in their firm name and must state in all marketing that they simply provide independent advice within the specific market in which they specialise.
Advisers catering to a specialist client demographic such as this will have to provide proof that they are serving a “relevant market” in order to maintain their independent status.
The FSA explicitly states that this market must be defined by the needs and objectives of the clients themselves and not the views of the adviser, or “product or service types”.
For examples such as Islamic finance and ethical investments this is simple enough - they are driven by religious or ideological beliefs and the nature of the clients precludes products from outside of the specialism - but in other areas the FSA has been less clear on how to define such a market.
However, for the many advisers that have discussed offering passive-only investment models post-RDR, the FSA specifically told FTAdviser that it is unlikely an adviser would be able to prove a specialist market such as this exists and would therefore need to operate a restricted model.
A spokesperson for the regulator said: “I don’t think we really saw passive investments as that kind of segment that would work for that. The relevant markets which are identified in the guidance are based upon the suitability of the client.
“We didn’t really envision that passive investments as a group will fit that as a relevant market. They couldn’t really make the case that every single person that would walk through the door would want a passive investment.”
Concerns arose in response to an FTAdviser article in which Alan Dick, partner at Forty Two Wealth Management, said he will remain independent even though he said his firm operates a model that is effectively exclusively passive.
In the interview, Mr Dick said: “If you say to the client we believe you should be invested in these tracker funds, here’s why, the client will always say yes and then you can exclude all active funds.
“What you are really doing is segmenting clients you take on. You take clients that suit the model you run in your business.”
Asked for clarification on this, Mr Dick said that he does not rule out active funds altogether but finds that between the client’s and adviser’s respective criteria they are ruled out “99.9 per cent of the time”.
Additional reporting by Ashley Wassall
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