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Regulator clarifies stance on advisers' passive propositions

by Rachael Revesz on Feb 14, 2013 at 12:25

Regulator clarifies stance on advisers' passive propositions

The Financial Services Authority (FSA) has clarified its stance on passive-only, or mainly passive, propositions for advisers who wish to remain independent.

The regulator stated that advisers must start with a whole of market objective, and only adopt a passive proposition if suitable for the client.

It added that firms must not assume that passive investments are suitable for all clients, and must make sure passive investments are suitable for individual clients.

Likewise, if a firm’s panel is mainly passive investments, the adviser should be able to evidence that regular reviews have been taken and that other products or services would not be more suitable.

‘The firm would need to be able to advise on investments other than passive investments if that would be in the best interests of a particular client,' it said. 'To do this, its advisers would need to maintain an awareness of what is and is not included in the panel, so they can identify clients for whom, if necessary, an off-panel solution would be suitable.’

The FSA also said that passive investments do not constitute a 'relevant market', of which examples are ethical or Islamic investments. It referred to COBS 6.2.A.11G which states that a relevant market should 'comprise all retail investment products which are capable of meeting the investment needs and objectives of a retail client.'

36 comments so far. Why not have your say?

Jonathan Kirby

Feb 14, 2013 at 12:55

So, given that small amounts can't justify a fully active portfolio and trackers may be used to cut costs for clients they are now saying that even if we don't have a review agreement with the client we have to review it anyway????????

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Hickky

Feb 14, 2013 at 13:14

Jonathan, what's the average difference in annual management fees between active and passive clean share price funds? I only ask as I wish to challenge your given: that small amounts cannot justify a fully active portfolio, statement.

I think the FSA is saying your panel needs to be reviewed regularly, not existing clients already invested.

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Investment Guru

Feb 14, 2013 at 13:39

Equity passive funds from 0.09%, active funds typically from 1% for a clean unit class.

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Hur Reebigballz

Feb 14, 2013 at 13:45

Obviously an investment guru that has not reviewed the market since January 1st then.

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You must be joking

Feb 14, 2013 at 13:46

Good for the FSA - some clear common sense guidance at last!

Let's hope this is the start of things to come :-)

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You must be joking

Feb 14, 2013 at 13:50

Hickky

Whilst I cannot speak for the whole market, as an example the Net of Rebate TERs on our Fully Reserached (predominantly active) and (restricted to) Passive portfoilios are typically:

Fully Researched: 0.75%

Passive only: 0.16%

Both excluding platform charges.

So the difference is about 0.6% :-)

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Jonathan Kirby

Feb 14, 2013 at 13:51

Hickky,

I loathe trackers but when someone has only £4,000 to invest as we had recently I used the Fidelity Multi Asset allocator fund which has a TER of about 0.69 if no servicing fees are taken.

My point is though that the FSA are saying people don't have to pay for servicing yet we should do it unpaid!

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GNewman

Feb 14, 2013 at 13:54

What the FSA appear to be saying is that passive investments will not be suitable for 100% of clients, no different to saying that VCTs will not be suitable for all clients. My guess is they're referring to firms who only have one CIP or even if they have 3, all involve passive only. The best bet would be to have at least 2, one of which offers the opportunity of more actively managed options.

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Paul Lothian

Feb 14, 2013 at 13:59

The FSA evidently simply does not understand the many and compelling reasons why many adviser firms only recommend passive investment instruments. Once you "get" the argument for passive and adopt that approach, its difficult to envisage a scenario where one might deem that actively managed funds would be more suitable for clients. I guess there will be exceptions, but I can't think of any at the moment!

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Jamie via mobile

Feb 14, 2013 at 14:01

Be interested to hear views of the nma offering a passive only option. What are your thoughts please?

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Gillian Cardy

Feb 14, 2013 at 14:05

It may also be the case that as more and more clean share classes emerge and price competition hots up that active collective and investment trust management costs get a lot closer to passive costs ... and then the argument will need to be about something else other than lower costs ... GNewman is quite right - it's about suitability - and if not every client wants to "just follow the market" then you must be willing and able to go elsewhere to look for appropriate solutions ... and take a view on whether or not the client is forced to sell active holdings just to sit in passive ... remember shoe-horning and churning??

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Mr Man

Feb 14, 2013 at 14:07

The FSA have picked up on the fact that IFA's are trying to short change certain clients based on available funds to invest. If they don't have much money throw them into a passive. Either you do the job correctly and assess their attitude to risk or turn them away which is effectively what a typical stock broker will do. The industry has once again been caught out trying to turn a fee on the cheap. It just keeps coming.

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Paul Barnard

Feb 14, 2013 at 14:08

Sounds eminently sensible to me and a point I have been raising with the passive zealots for a long time.

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Jonathan Kirby

Feb 14, 2013 at 14:18

Mr Man,

You show your ignorance again.

Passive versus active require exactly the same level of fact find and suitability reporting.

What they don't have to have is a tailor made portfolio and detailed fund recommendations so the cost is less and more suitable for lesser amounts.

There is no point charging someone £600 to invest £4,000.

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Gillian Cardy

Feb 14, 2013 at 14:28

Or they have noticed that some advisers switched to passive offerings, reducing investment costs but keeping the total portfolio costs the same??

Accepting Jonathan's point that any portfolio requires similar efforts of review and monitoring then all other things being equal the total cost of that process should fall to the extent that the investment management costs have been reduced??

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You must be joking

Feb 14, 2013 at 14:40

I'm inclined to partially agree with Gillian here as I've seen many IFAs move to a passive offering to bring the underlying investment costs down thus enabling them to then slap on a 1% ongoing advice fee.

I say only partially agree as if a client has stipulated that they do not believe in the value of active fund management, for whatever reasons (usually reading the Daily Mail has something to do with this) then the ongoing reviews should require less effort - there will be a smaller universe to review - and thus the ongoing advice cost should also be less.

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David West

Feb 14, 2013 at 14:55

As a result of the FSA's stance, if they ban trail commission to platform providers, which is still under consultation and a decision is now expected by the end of Q1, platforms will have to make this money up somehow and will start charging annual admin fees for each security held.

You can bet your bottom dollar the annual management fees charged by the individual funds will not be reduced proportionally.

This is yet another example of the FSA hitting investors/savers and this governments inability, or will, to stop it.

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Duncan Orr

Feb 14, 2013 at 15:08

Presumably the very same rules apply to those adviser firms offering “active only” portfolios?

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Mr Man

Feb 14, 2013 at 15:23

@Jonathan Kirby. As per usual you just don't get it. There is a reason why the FSA felt a need to issue guidance on this subject and it wasn't because they wanted to applaud what has been going on. More that they could see discrimination becoming an ever more popular means of dealing with those clients with less to invest. Just provide the service that you advertise to all clients without dilution or don't take them on.

On going fund management fees to an adviser firm that doesn't actually manage the money ( can you believe it ) and has nothing to do with its growth or otherwise will be next. Trail commission is just plain wrong. You need to charge a flat fee for whatever service you think you offer and be transparent about it. Easy really if you have nothing to hide and actually do provide an on going service. I can't believe the amount of advisers I meet who's game plan is to build up FUM /AUM with a 1% trail to then sell "their" book to the highest bidder !.

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Colin Barrett

Feb 14, 2013 at 15:31

As we all know, there is no single "right" way of investing. It comes down to research and judgement. As an adviser I could either be compelled by the conclusions I draw from my research and judgement (in which case I have a philosophy which I invite potenetial clients to buy into), or I could be less compelled (in which case I may be comfortable with a variety of approaches).

If I have a clear philosophy then as long as it is properly described to the client, he or she will know from the outset what I stand for and can choose to sign up (or not) as they see fit. In this scenario it is perfectly possible to have a client bank which is 100% compatible with your investment philosophy - as all the ones for whom it isn't right will have chosen another adviser.

This isn't about "active v. passive". It's about how you structure your client proposition and present your offering. Which is why, whenever you get into the real detail with the FSA, if you can clearly explain what you are doing and why it's appropriate for your clients they are usually happy.

But of course that doesn't make great headlines.

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alan from perth

Feb 14, 2013 at 15:39

Mr Man

cant really disagree with any of your comments, (apart from flat fees which even lawyers dont do in most cases) however again some ifas on order to be able to justify up to 1& trail comm, fees etc are simply going for the cheapest option so that the overall charges dont look so bad. All the FSA is saying is that trackers, passives or any alternative should be discussed in a professional manner and then recommended as appropriate for the client.

Its NOT rocket science, you are dealing with peoples savings and I really wish some IFAs would get out from under their own ar..s and stop knocking everything that comes out from the FSA. You are professional and act as such

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Jonathan Kirby

Feb 14, 2013 at 15:57

Bearing in mind that Mr Man is not an investment professional but merely a jaundiced individual with some axe to grind I don't know why anyone should take notice of his vitriolic comments,.

If he knew me, as my clients do and how I work hard at reasonable cost to do my very best for each and every one of them then such comments would not be posted.

Ignorance combined with arrogance is a nasty combination.

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Mr Man

Feb 14, 2013 at 16:17

@ Jonathan Kirby. The my comments are noticed is because they resonate with reality, are not narrow minded and reflect what is actually going on.

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Jonathan Kirby

Feb 14, 2013 at 16:18

In you dreams Mr Man

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SJ

Feb 14, 2013 at 16:20

@ Paul Lothian. You say "I guess there will be exceptions, but I can't think of any at the moment!"

I can.

We use an in-house low-cost passive solution for most of our clients (rather like you do, I suspect). However, we use actives with a DFM where clients want ethical/socially responsible investments. We do this because we can't meet their requirements using passives.

It's horses for courses, isn't it?

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Jonathan Gibson, Verus Wealth

Feb 14, 2013 at 16:33

The FSA should be focusing on increasing standards with Chartered and/or Certified v Diploma or even Financial Planning v Financial Advice. I'm so tired of Restricted v Independent and it has only been with us for a little over one month!

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sol trader

Feb 14, 2013 at 16:50

To Jonathan Kirby - this probably isn't the place but, having read the prospectus for the multi asset allocator fund you mention above, I suspect it may be cheap because it doesn't actually have to contain much in the way of "assets".

This is in no way a criticism, and I too have used the fund for a client.

However, we know from past experience, that whilst the regulator continues to allow product providers to leave things out of TERs, lend out peoples stock for profit and sample shares for trackers, if it transpires our clients "asset" backed investments are nothing but worthless bits of paper - we will get the blame, not anyone else...

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Jonathan Kirby

Feb 14, 2013 at 16:59

Hi Sol,

It does contain assets but they are trackers for the equities and bonds but ETFs for the commodities as opposed to the original versions that were existing Fidelity funds and again ETF's for the commodities.

They are run in exactly the same way by Trevor Greetham who calls the allocation amounts to each asset class.

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Paul Lothian

Feb 14, 2013 at 20:24

@SJ. Good point. Arguable, we can't provide an adequately diversified ethical portfolio purely from passive funds (yet).

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Eugen

Feb 14, 2013 at 21:14

The FSA was hopeless on this one. An adviser will use a passive portfolio because he thinks that active funds should not exist, or if they exist the adviser should not be bother.

The FSA should employ more financial planners than lawyers.

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Hickky

Feb 14, 2013 at 21:49

So, following my post of 1.14 I really have opened up a hornets nest here. Let me make it very plain, I believe passive only portfolios without discressionary overview are very dangerous for my clients. They cannot react to market conditions, and are much more likely to be replaced during the lifetime of a portfolio than active. Passive funds are more likley to loan stock to hedge funds, then pocket a big portion of the fee, but the investors lose out.

You can always quote individual funds that disprove my belief, but those who attempt this will always be tainted and classified by me as clever dicks who know the price of everything and the value of nothing.

Yes, the eventual return on a portfolio is mainly due to asset allocation, but someone please tell me how passive funds can replicate special situations, or high income strategy or the many other areas that active can specialise in? These strategies can be vbery important in a portfolio.

Maybe the answer is 20% FTSE 100 tracker, 10% FTSE All share, 10% S&P 10% Emerging ETF, 30% Gilt ETF and 20% Corporate tracker as a 'balanced' fund. Then I can charge 1% annual to make the total charges (less undisclosed costs and fees) up to about 1.6%. But could I do it to my clients? No. I am not doing a thing for my money unless I recommend churning the funds on the pretext that my asset modeling system states the allocation is now not optimal.

Gill is so right. those who persist in passive only are not IFAs as they are too arrogant to be considered.

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Gillian Cardy

Feb 15, 2013 at 07:13

@Hickky : that's not exactly what I said ;-)

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Hickky

Feb 15, 2013 at 10:19

Sorry Gillian, I only refered to your comment about being able and willing to consider all types of investments, not just limiting your advice to one particular style of investment. You also refered to the practice of using a lower cost annual management fee to allow some advisers to charge their clients an annual review fee that may take away the benefit of lower annual management fees. To use this philosophy as an excuse to transfer all pre-existing active funds without considering the merits of them is. frankly, a travesty, even if there is no client fee involved.

Please be assured I did not attempt to put a spin on your blogs to back up my opinion, but in essense, I agree with your and the regulators views.

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Luxemburg3r

Feb 15, 2013 at 18:04

@ Hicky

"... someone please tell me how passive funds can replicate special situations, or high income strategy or the many other areas that active can specialise in? These strategies can be vbery important in a portfolio."

It is likely an index or sub-index exists somewhere. It may not be tradeable but an investment bank could probably build a proxy for you so you could buy it as a certificate or a note. The same bank would almost certainly provide liquidity as well.

@ Jonathan Kirby

Just because you are an investment professional (sic) doesn't mean you know what you're talking about. "Ignorance combined with arrogance is a nasty combination" - you said it.

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Hickky

Feb 18, 2013 at 09:22

@ Country rated 170/194 in world by area#3

I refer you to my post of 14th Feb@21.49, Para 2.

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Luxemburg3r

Feb 18, 2013 at 09:36

@ Hicky

Sorry, but I didn't take your suggested equity/fixed income portfolio that seriously.

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