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Use of ETFs by IFAs set to grow in UK, says BGI

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The use of exchange traded funds by UK-based independent financial advisers is likely to increase significantly following proposals outlined by the Financial Services Authority, accordi

The use of exchange traded funds by UK-based independent financial advisers is likely to increase significantly following proposals outlined by the Financial Services Authority, according to Barclays Global Investors.

The proposals, contained in the FSA’s Retail Distribution Review feedback statement, outline the changes the FSA plans to make for the retail investment market.

The changes aim to establish a new level of consumer trust and confidence by distinguishing between independent advice and sales advice to create better clarity for consumers.

There are three main measures: 1) improve the clarity for consumers of the characteristics of different service types and the distinctions between them; 2) raise professional standards; and 3) reduce the conflicts of interest inherent in remuneration practices and improve transparency of the cost for all advisory services.

Although there is a further six-month consultation period, to iron out some practical application issues, there is an expectation that financial firms will start to implement changes soon. The deadline for industry compliance is 31 December 2012.

BGI says that in the US fee-based advisers (paid from the consumer) have embraced the use of ETFs to a greater degree than commission-based advisers (paid by the product provider).

In the UK the use of ETFs among IFAs is very limited as they are typically multi-tied and tied. ETFs are not currently included in the tied or multi-tied product sets.

BGI says investors who are expressing concerns over counterparty risk, transparency and liquidity when using structured products, swaps, certificates, and notes are showing a preference for ETFs where the structure is a fund, and often, more specifically for ETFs which invest exclusively in-specie in securities.

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