Ascentric has written to its users giving the platform’s understanding of the FSA’s Guidance Consultation GC12/06 on the permissions necessary to become involved in centralised investment propositions and model portfolios on a platform.
The need for further clarification was raised at the latest round of Ascentric User Forums and follows recent media coverage on the topic.
Mike Morrow (pictured), Ascentric’s Sales & Marketing Director, says: “There are a number of types of centralised investment propositions (CIPs) summarised in the guidance consultation including ‘portfolio advice services’, discretionary investment management and distributor influenced funds (DIFs).”
The focus of GC 12/06 is on determining suitability, in particular the wider issues raised by replacement business. It emphasises firms should focus on costs, likelihood of improved performance, tax implications and client’s specific objectives. There should be robust processes around replacement business and the needs and objectives of target clients to avoid ‘shoe horning’ clients into CIPs.
Morrow continued, “How model portfolios on Ascentric are treated depends on agreements signed by the four respective parties; namely client, financial adviser, DFM and ourselves. The most usual treatment on the platform falls into the category of ‘portfolio advice services’. In this case, advisers select a model portfolio, or range of model portfolios, provided by one of the specialist providers available on the platform such as a discretionary fund manager (DFM). Advisers will select model portfolios they consider will meet the needs of their clients.
“Each DFM has an agreement with the adviser to provide the service and routinely rebalance the portfolio and set asset allocation to reflect a published approach to risk. This agreement may also address the important issue of suitability and requires that the adviser has clear responsibility for ensuring that the selected portfolio is suitable for the client at the outset and that it remains suitable as time passes. It is therefore important that the adviser reviews the portfolios regularly to ensure they continue to meet the objectives agreed with their clients.”
The FSA Guidance Consultation describes portfolio advice services in the Retail Conduct Risk Outlook 2011 (see notes). Ascentric believes discretionary investment management is quite different to advising on a ‘model portfolio’, in that it involves managing portfolios based on specific mandates given directly by individual clients. Such an arrangement requires the permission of ‘managing investments’.
The FSA guidance makes clear any adviser that outsources discretionary management to a DFM would also need equivalent permissions. Any adviser that wishes to set up discretionary mandates on a client-by-client basis should ensure they have the appropriate permissions (this would involve becoming a MiFID firm with the relevant permissions and associated regulatory capital) or that the DFM has an agreement directly with the client.
Morrow says: “Discretionary portfolio management should not be confused with portfolio advisory services related to model portfolios. Advisers must be clear about the distinction and stay within the perimeter of their permissions. Our view is that it remains possible to advise on model portfolios without changing permissions or clients having to enter into direct agreements with a DFM.”