FOFA-proofing needed on portfolio construction
Financial planning firms operating in-house portfolio construction functions face having to 'FOFA-proof' against looming operational risks embedded in the Future of Financial Advice legislation, according to Select Asset Management.
According to Select, the higher consumer protection standards and 'best interest duty' that would apply to all product recommendations post 1 July 2013 mean that the bar has been raised with respect to managing risk.
David Yale, chief risk officer for Select, said that the new regime had fundamentally altered the operating landscape, particularly for those groups running in-house portfolio construction and investment product models.
"We see an emerging world where non-aligned advisers will seek to maintain greater control of client relationship and outcomes, but also limit downside business risk as it relates to complying with the new standards," he said.
"So there is a high degree of tension between those two ends of the advice business spectrum, particularly as the deadline for FOFA compliance begins officially on July 1."
For Yale, advisers and licensees must have effective ways to equip their business against the risk of failing their best interest duty under FOFA, paying particular attention to a comprehensive research capability, real-time portfolio adjustment and scenario analysis.
"And sitting across all of this is a requirement for risk management capability that efficiently identifies, monitors and manages key risks and any unexpected investment behaviour," he said.
Yale said that the potentially onerous requirements of the new standards, such as the best interest test, had already led certain dealer groups to find a better solution that primarily ticked three boxes; improved client engagement, FOFA compliant investment recommendations, and genuinely addressing the best interest principle.
"Various non-aligned financial planning licensees and dealer groups have met with Select to discuss their concerns, seeking ways to better handle the challenge of delivering excellent portfolio construction outcomes for their clients, whilst achieving compliance with the FOFA legislation," he said.
"We have developed an outsourced model, called Customised Portfolio Solutions or CPS, which is a bespoke model built to help these groups such as Profile, MGD Wealth, Stonehouse and DMG find a better, compliant, risk-mitigated way to run client portfolios.
"The Select CPS service comprehensively equips dealer groups and advisers to deal with the operational and business risks presented by FOFA," Yale continued.
"In effect, the solution gives advisers the benefits of an investment management business but without the overheads or conflict.
"(It enables) them to tick the best interest box knowing they genuinely comply with this upcoming and potentially onerous obligation."
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