Distribution solution for third-party funds
A freeing up of the UK market means banks will move towards the continental model of distributing third-party products. Polarisation has been in effect here since 1988, requiring all distributors marketing regulated products to either adopt independent financial adviser (IFA) status or be restricted to advising on the products of one investment company or marketing group. But in January 2002, in response to recommendations from the Office of Fair Trading, European legislation and international comparisons, new proposals for the advice market were introduced. They recommended polarisation be largely abolished for all packaged products. The reform also introduces a new type “distributor firm”, falling between the tied and independent positions. The new proposals affect different advisers in different ways. IFAs wishing to retain their status will need to be remunerated by a “defined payment” system established with clients. This can include fees on an hourly basis for work undertaken, but allows fees to be offset by any commissions generated. It also means IFAs can still charge even if no transaction takes place, leaning towards a true advice-giving function as opposed to product distribution. The new distributor firms will be required by the Financial Services Authority (FSA), the UK regulator, to provide the most suitable product for each client from the providers used. The withdrawal of polarisation means these advisers can recommend products from the whole marketplace, or from a selected panel of companies. Or at the other extreme, from only one company’s products. This type of adviser may be the new retail bank-based adviser, multi-tied to a number of third-party product providers. The main difference is that the “new distributor firm” is authorised by the FSA, while the “tied adviser” is authorised via the product provider. A two-tier advice process is likely, with wealthier investors paying an IFA to select the widest choice of investment funds and the other two distributor types relying on commissions. Overall, investment houses are likely to move from marketing their funds purely via IFAs to include retail banks and advisers previously tied to individual companies. This could be a huge opportunity for European fund houses and insurance companies to target the UK more aggressively. Christine Ross is head of financial planning at SG Hambros in London
