Addressing regulators worries over outsourced investments

There continues to be a lot of misleading articles in the press on this subject and here on this blog I continue to argue the case for advisers being able to advise on the suitability of model portfolios without requiring permissions to manage investments or outsourcing to discretionary fund managers.  That is not to say I endorse the merits of so doing and understand the FSA's concerns about 'shoehorning' and some of the costs involved but these are different arguments altogether.

Assessing suitability is not the same as exercising discretion, which is the key to the regulated activity of ‘managing investments’.  Advice on the merits of buying, selling, subscribing for or underwriting a particular investment is the activity of ‘advising on investments’ e.g. advising on the suitability of buying or selling an investment in a model portfolio.  Provided the IFA is acting on the instructions of the client and advising on the merits of the model portfolio (i.e. ‘assessing suitability’) they would be acting within their regulatory permissions of ‘advising on investments’ without ‘managing investments’.

Similarly non-discretionary portfolio management or the buying or selling on the instructions of the client requires the permission of ‘dealing in investments as agent’ but is not ‘managing investments’. 

In order for an IFA to fall foul of this requirement they would have to be managing their client’s portfolio on a case by case basis and acting with discretion over those investments without reference to their client, not simply advising on the suitability of a model portfolio.  It is something to be wary of but let’s not get carried away by dismissing an IFA’s perfectly legitimate means of providing advice and guidance on the suitability of model portfolios, which has nothing to do with discretionary management. 

See PERG 2.7.8 on the definition of ‘managing investments’ and the FSA Glossary definition of ‘advising on investments’ for further information.

Published: June 2012
By: Anthony Smith

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