In July, the FSA warned advisers that it was “unacceptable” for them not to show “appropriate due diligence” for investment decisions.
Advisers, regardless of whether they choose to go down the restricted or independent route after the RDR, must demonstrate the suitability of the business to which they are outsourcing their clients’ investments. According to the FSA paper, this particularly relates to costs and performance of the third party business.
But the decision to outsource from an adviser’s perspective surely comes down to how their business is going to be run in a post-RDR world. What kind of service are they going to offer clients? What impact will outsourcing have on the business over the long term?
Research consultancy Defaqto’s most recent paper into outsourcing warns advisers not to view risk-targeted multi-manager or multi-asset portfolios as a way of avoiding the burden of carrying out due diligence on the products being recommended to clients.
Although currently only a small amount of assets are held in these funds, it is expected that this area of the market will grow in the post-RDR world. In essence, risk-targeted funds have pre-set risk parameters, such as volatility, that the fund managers ensure are met on a continuous basis.
Adrian Gaspar, senior consultant at Defaqto, says: “While these funds are effectively an outsourced solution it does not remove the burden of due diligence and ongoing servicing from advisers, as a detailed assessment of each provider and fund range will still need to be completed and reviewed periodically.”
Nor have discretionary fund managers (DFMs) - a recent outsourcing favourite - escaped scrutiny. In a recent conversation with Investment Adviser, Cazenove Capital Management went so far as to suggest that the perceived trend towards DFM portfolios in particular may not actually come to pass.
Robert Thorpe, head of UK retail at the firm, argued that DFMs’ model portfolios - the much touted ‘third way’ between costly bespoke discretionary portfolios and multi-manager or multi-asset - are little more than a non-unitised multi-manager funds. As unitised multi-manager funds are already widely established among IFAs, is there a need for a non-unitised alternative?
While there are some IFA firms that outsource everything, it certainly isn’t the only option available. Firms must be careful not to jump onto a bandwagon that, ultimately, isn’t the best option for their clients.