Tony Vine-Lott, director general of TISA (Tax Incentivised Savings Association), says the industry must present a united front on DIFs or face the consequences from the regulator.
Distributor Influenced Funds (DIFs), in some guise or another, have been squatting in the FSA’s in-tray for quite a while now. The question mark that hangs over them is the same one that raises issues for all in-house funds: Is their potential to generate genuine value for clients outweighed by the possible additional layer of costs and risk that surrounds them?
Ensuring fair play
In Utopia, all customers are treated fairly: whether clients by their advisers or distributors by their suppliers. But, of course, we live in an imperfect world, and for that reason a regulator is needed to provide, implement and monitor appropriate checks and balances to ensure fair play.
History, unfortunately, is littered with examples of funds that have been operated in a way that serves to benefit the supplier or distributor, with scant regard for the end investor. It is this experience that has alerted the FSA to the potential pitfalls of DIFs if inappropriately structured, and it is these dangers that, quite rightly, it is keen to extinguish. Nevertheless, there is a valid, multi-faceted argument to present in favour of well-constructed funds, used appropriately, for suitable clients.
As is often the case, this is not a black and white issue - and because DIFs and other in-house funds are a matter not just for IFAs but for restricted advisers, ‘tied’ advisers, banks, insurance companies and others too, this is where TISA steps in.
TISA’s focus is to help the industry resolve these issues by means of a pan-industry project, the ultimate objective being to ensure the fair treatment of clients to the satisfaction of the FSA. We don’t want to see a healthy baby flushed away with the bath water because these concerns have not been addressed.
There are potential conflicts of interest in the operation of DIFs and other such funds in terms of the impact of additional charges that may apply. Also, unless sufficient scale is achieved, high total expense ratios may disadvantage the investor. The allocation of the revenue or commission that these funds generate may influence the direction of new business as well. But mechanisms can be incorporated that resolve this.
There is certainly an issue concerning the proportion of business flow that is invested in these funds, potentially casting doubts over claims that ‘independent’, unbiased advice is being provided. But there are possible ways to mitigate this risk too.
For distributors, DIFs offer the potential to build genuine, long-term value into their firms. On disposal, rather than selling an advisory firm, there is an established asset management business in tandem. The potential for vested interest is therefore deemed considerable. It is in the light of such concerns that the counter-balancing investor benefits must be fully explained and the necessary checks clarified.
There are many client advantages to be gained from in-house funds, but the industry needs to present a coherent argument in their defence. Let’s make sure we do just that before the FSA acts unilaterally!
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