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Certificate for Introduction to Securities & Investment (Cert.ISI) Unit 1 Lesson 44: Industry trade and professional bodies Investment distribution channels Independent Financial Advisers Tied advisers Execution only 44cis
Trade and professional bodies The financial services industry is dynamic. New products are being developed all the time. This requires co-operation between the firms to ensure an efficient market. It also requires continuous dialogue with the government and the regulators. Numerous trade and professional bodies have evolved or been set up to perform this function. Some examples of these bodies – and the products or sector they represent – are: Bonds Derivatives International Capital Markets Association Futures and Options Association International Swaps and Derivatives Association
Trade and professional bodies (cont.) Some of these trade and professional bodies are internationally based; others are specific to the UK. Some of these international bodies have been recognised by the UK Regulator as an International Securities Self-Regulating Organisation (ISSRO) and/or Designated Investment Exchange (DIE). Fund managers Insurance companies Private client investment management Investment Management Association Association of British Insurers Association of Private Client Investment Managers and Stockbrokers (APCIMS)
For those people who do not work in the financial services industry, investment can be a confusing and complicated process, with a bewildering array of products available and many rules and procedures to be followed. Investment distribution channels To help ordinary people to invest, a number of distribution channels are in place. Each channel offers differing levels of service, ranging from doing the actual investing on a discretionary basis behalf of the client, to execution only. Financial Advisers Financial advisers are professionals who offer advice on financial matters to their clients. Some recommend suitable financial products from right across the market; others from a narrower range of products With a new client, the financial adviser will start off with a detailed survey the client’s financial position, preferences and objectives (e.g. retirement, university fees, etc) o This process is sometimes known as the “factfind” The financial adviser will then suggest strategies to enable the client to meet his/her objectives and if necessary, recommend a suitable financial product
Financial advisers In the UK, there are now four main classes of financial adviser Tied advisers Tied advisers advise on the products of just one financial institution Multi-tied advisers advise on products from more than one institution Multi-tied advisers Whole of market advisers Whole of market advisers advise on the products of all the UK companies active in the sector Independent financial advisers IFAs advise on the whole range of products on offer in the market o They are “tied” to that institution and cannot recommend rival companies’ products. Usually found in high street banks or conducting door-to-door sales o They are usually allowed to sell and advise on products from a limited panel of firms o They are paid with commission on the products they sell o They must offer their clients the option to pay for advice by fee rather than by commission
Retail Distribution Review The Financial Services Authority (FSA) is in the process revising the rules on how investment products and services are sold to retail clients in the UK Independent advice Restricted advice Where a firm chooses only to give advice on its own range of products, it will have to make this clear to customers. It is expected that the Retail Distribution Review (RDR) will implement some major changes to the way in which financial advisers are classified. Investment firms will have to state clearly whether offer “independent advice” or “restricted advice” These new rules are expected to come into force from the end of 2012 Firms that describe their advice as independent will have to ensure that their investment recommendations are based on comprehensive and fair analysis
Platforms Platforms are on-line services used by intermediaries to view and administer their clients’ investment portfolios. Fund supermarkets Fund supermarkets tend to offer wide ranges of funds. They either charge for their services or take commission from the product provider, rather than from the agent or client. As well as providing facilities for investments to be bought and sold, platforms are often used to aggregate, and arrange custody for, customers’ assets. Platform providers also make their services available direct to investors. The term platform refers to both “wraps” and fund supermarkets
Platforms - Wraps Wraps tend to offer greater access to other products in addition to funds. These can include Individual Savings Accounts (ISAs), pension plans etc. Wraps should not be confused with wrappers (which are dealt with in Lesson 46) Wrap accounts enable advisers to get an overview of all the assets that a client may have in a variety of different accounts. Independent financial advisers can use wrap platforms to handle some of their back office (i.e. settlement and custodian) requirements. Nearly two thirds (63%) of investment focused IFAs surveyed by Investec Bank use wrap platforms. 38% of those using platforms cite them as the most appropriate portfolio management tool for their clients. 35% use wrap platforms to consolidate clients’ portfolios. List of wrap and fund supermarket providers in UK. Source: TISA Wraps Assets held on UK wrap platforms are set to more than triple over the next five years to over £300bn, according to Navigant Consulting. It estimates that c. £600m has been invested by wrap firms to set up their platforms
Execution-only Some clients don’t want advice on their investments but most fees and commission include an element to pay for advice The firm must also record in writing that it made it clear, at the time of the transaction, that it was not responsible for the investment product’s suitability Firms now offer a reduced execution-only fee: the client asks the broker or adviser to buy or sell a specific named product. The client is responsible for the decision about the product’s suitability Many smaller investors have no choice but use an execution-only service. Many firms are only willing to establish an advisory relationship with clients who have a lot of money to invest 12 large execution-only stock-brokers in the UK Source: Investorpages.co.uk Execution-only The firm must record and retain evidence in writing that the firm gave no advice to the client
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