Wealth management firms will be banned from collecting anything more than an advisory fee on their distributor influenced funds (DIFs) once the retail distribution review (RDR) comes into effect.
Finalised guidance by the Financial Services Authority (FSA) said firms running DIFs will no longer be able to receive a share of the annual management charge (AMC) or any benefit other than an adviser charge.
The UK watchdog added that adviser charges for recommending DIFs should not vary ‘inappropriately’ from competing retail investment products and is concerned that firms that have DIFs could be presented with a potential conflict of interest.
‘A firm’s desire to make an administrative cost saving or to increase the firm’s acquisition value should not lead to customers being recommended a distributor-influenced fund when this not be in their interests,’ said the paper.
The paper added that firms that recommend a product run by a connected firm, such as a DIF, should give evidence that the advice was unbiased, suitable and in accordance with conflict of interest requirements.
These requirements include the disclosure of any connection with the fund and an analysis of potential incentives to recommend the DIF such as equity stakes, free holidays and bonus entitlements.
The FSA also advised that firms will have to ‘rigorously’ assess the suitability of DIFs for their clients and record the reasons for any decision to use them.
According to the published guidance, one of the questions wealth managers should consider is whether the asset allocation of the DIF could unbalance the overall client portfolio weighting.