The onset of the FSA's treating customers fairly (TCF) initiative will inevitably point advisers in the direction of risk-based funds, according to F&C.
The investment firm says the products, which are often termed ‘lifestyle’ or ‘lifecycle’ funds, “address a number of the concerns of regulators”.
Risk-based funds involve advisers regularly reassessing the risk-profile of their clients as their circumstances, and those in the market, change, and adjusting their portfolios accordingly.
“Risk-based funds enable advisers to address a number of the concerns of regulators in a very practical way that helps deliver a robust investment proposition to their clients, says John Yule, head of UK retail distribution at F&C.
“In particular this includes the regulator’s TCF initiative which was recently identified as the top regulatory risk and priority for the coming year, ahead of financial crime and data security.”
Yule also says risk-based products could prove to be the next generation of multi-manager funds.
He points to the experience of the US mutual funds industry where, according to the Investment Company Institute, lifestyle and lifecycle funds have accounted for around two-thirds of the increase in assets in funds of funds products over the past decade.
“Traditional multi-manager funds have seen strong take-up with advisers in recent years but if the US experience is anything to go by, we feel that ‘lifestyle’ funds represent the next generation of retail multi-manager products,” he says.
F&C also argues risk-based funds could provide an alternative to distributor-influenced, or ‘broker’, funds.
The FSA has recently drawn attention to this area of the market, which involves firms establishing funds for their exclusive use and being involved in directing either the asset allocation or fund selection.
FSA director of retail policy, Dan Waters, said: “There are some serious issues that firms should consider before going down this route”.
But Yule says firms do have an alternative. “We think lifestyle funds offer intermediaries a clear alternative which can considerably reduce the costs and risks of establishing own-product.
“In particular, a key strength of the F&C range is that independence is embedded at each layer of the process and there is no vertical integration of the complete process with a single provider.”
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