Wealth managers who make substantial use of their own funds in portfolios are still deterring adviser clients, despite being given a relatively clean bill of health by the regulator more than two years ago.
Analysis of the main criteria used by advisers when reviewing and selecting discretionary fund managers (DFMs) has pointed to renewed concerns about the use of in-house funds.
Gillian Hepburn, director at Discus, which provides information on the UK outsourced investment market and conducted the study, described the subject as a “surprising newcomer” in the top-10 issues considered by intermediaries.
“Many financial advisers I have worked with to review their DFM panel have indicated that they don’t want to select a provider where a significant proportion of the portfolio invests in its own funds,” she said.
The findings come more than two years after an FCA probe into the use of in-house funds found that firms generally recognised the potential conflict of interest risks to customers and their own reputations.
Abraham Okusanya, of research firm Finalytiq, suggested a renewed focus on the issue from advisers could be attributed to the FCA’s recent assessment – via its asset management market study – of value for money throughout the entire “value chain”.
He warned advisers that DFM propositions, and their possible conflicts of interest, remained difficult to assess.
“Are the funds in the portfolio being selected based on their merits and performance, or have they been selected essentially based on commercials?” Mr Okusanya said.
“There isn’t an effective way to benchmark these portfolios and assess them. As an adviser, you either avoid those conflicts altogether, or you are going to have to live with them and deal with the consequences.”
In November 2014, the FCA published a thematic review of conflicts of interest arising from the use of in-house products by wealth management firms and private banks. The watchdog highlighted some “shortcomings”, including cases where not all firms monitored the level of in-house products in customer portfolios. But it also listed a number of positive findings, including a “heightened focus” among senior management on conflicts of interest relating to these products.
The concerns also chime in with the FCA's latest study into the platform market, where the body raised concerns with the use of in-house products at both platform and DFM level.
Fraser Donaldson, an analyst at Defaqto, acknowledged advisers were “right to be wary” about integrated offerings, but said continued concerns might be unwarranted.
“Going back five or 10 years you did occasionally come across organisations that would use in-house funds and charge a discretionary fee, a fund fee and an initial charge,” he said.
“It was a way of ramping up some charges. Discretionaries are [now] much cleaner.”
Ms Hepburn also suggested advisers should not automatically dismiss in-house funds.
“If a DFM is using funds to populate their asset allocation, then why wouldn’t they select one of their own funds if it captures their best ideas, rather than one from another investment house?” she said.