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Advisers face ‘onerous’ best interests risks

Financial advice businesses, particularly those operating in-house model portfolios, will have to face fresh operational risks when new best interest requirements are brought in.

The Future of Financial Advice (FOFA) measure will mean a greater level of research and analysis will need to be applied to client portfolios as advisers will have to be able to justify every investment, according to Select Asset Management chief risk officer David Yale.

This will be of particular concern to less well resourced, non-institutionally backed groups.

“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,” Yale said.

The new FOFA regime and particularly the best interests test will fundamentally alter the operating landscape of non-aligned advice businesses running in-house portfolio construction and investment product models, he said.

“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.”


Advisers will need to be able to explain exactly why each asset is in their clients’ portfolios, they will need to regularly adjust portfolios and be able to answer specific questions from clients around how their portfolio will meet their objectives, according to Yale.

“Such analysis requires the application of sophisticated scenario analysis and stress testing techniques,” he said.

“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.”

Yale said his group has developed an outsourced bespoke model called Customised Portfolio Solutions to help these groups, which he said included Profile, MGD Wealth, Stonehouse and DMG, to find a compliant and risk-mitigated way to run client portfolios.