Advisers must heed client investment switching costs, says FSA

The FSA is concerned that advisers are not giving enough consideration to the additional costs clients face when moving them from one investment proposition to another.

The regulator will publish a paper on assessing suitability of replacement business and centralised investment propositions in the coming weeks. It will look at advisers’ use of model portfolios, discretionary fund managers and distributor influenced funds and follows supervisory work in these areas in January and October last year.

At The Platforum’s adviser roadshow in London this week, Rory Percival, technical specialist at the FSA, said one of the FSA’s “big concerns” is how advisers are assessing suitability when it comes to switching clients with existing investments from one investment proposition to another.

He said: “One of the concerns was inadequate consideration of the cost differences between the investments that clients hold already and the investment proposition they are going into.”

He said advisers need to understand the additional costs associated with a new proposition, such as a new platform, and clients need to be able to judge whether they want the additional benefits on offer.

He added: “We will be very clear in our publication that understanding the cost differences and being aware of what additional benefits are provided where additional costs are incurred is key.

“We said that four years ago in the pension switching report, we said it two years ago in the platforms and intermediaries report and unfortunately we are saying it again now.”

Duncan Carter, managing director of Clearwater Financial Planning, says: “If additional benefits cannot be demonstrated for extra costs, the adviser should rightly be criticised.”