DFM Platform Model Portfolios

Following the publication of FSA’s Guidance Consultation (GC12/06) there have been a number of press reports on the permissions necessary to become involved in centralised investment propositions and model portfolios on a platform.

There are a number of types of centralised investment propositions (CIPs) that are summarised in the guidance consultation including portfolio advice services, discretionary investment management and distributor influenced funds (DIFs).

The guidance focuses on suitability, in particular the wider issues raised by replacement business.  Firms should focus on the costs, the likelihood of improved performance, the tax implications and the 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 CIP.

Model portfolios used with platform services fall into the category of portfolio advice services.  Advisers typically use a discretionary fund manager (DFM) to provide the service and recommend model portfolios suitable to their target market.  DFMs have an agreement with the adviser to provide the service and routinely rebalance the portfolio according to the asset allocation.  The asset allocation can also be reviewed periodically and the adviser should review the portfolios to ensure they continue to meet the objectives agreed with their clients.

In describing portfolio advice services the FSA Guidance Consultation refers to page 64, 3.5 onwards of the Retail Conduct Risk Outlook 2011: 'Portfolio advice services are investment advice services provided on an ongoing basis, which typically involve recommending a range of investments to meet an asset allocation and reviewing this on a periodic basis, but that do not amount to discretionary portfolio management.'

Discretionary investment management is quite different to  advising on a ‘model portfolio’, as described above, in that it involves managing portfolios based on specific mandates given directly by individual clients (see PERG 13.3 Q17).  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. 

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.

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