FAQS
Compliance’s view of
LighthouseCapital
How does the compliance
LighthouseCapital?
department
view
As you will appreciate, this was central to the discussions
with
F&C.
Lighthouse
Compliance
believes
LighthouseCapital is compliant for the following reasons:
•
A psychometric questionnaire, created by Distribution
Technology Limited (DTL), is used to establish the risk
profile of the client. The 18 questions used will accurately
assess the client’s attitude to risk and can be attached to
the Suitability Letter confirming, for example “In order to
establish your attitude to risk, the attached questionnaire
was used. Your answers to the questions posed have
been assessed and a rating of 4 applied. This means you
have a balanced attitude to risk. A “balanced investor” is
looking for a balance of risk and reward, seeking higher
returns than those available from a high street deposit
account and willing to accept a certain amount of
fluctuation in the value of their investments as a result. I
would recommend you review the attached
questionnaire which explains this in greater detail to
ensure you are happy with the answers given and
contact me should you wish to clarify anything.”
the portfolios are rebalanced quarterly (in line with the output
of DTL stochastic models) to take account of the ever
changing investment backdrop. Additionally, there are no tax
implications when changes are made within the Lifestyle
Funds themselves.
Would this make me a tied adviser?
No, because as a professional IFA you must still be able to
demonstrate why this product is suitable to meet your
clients’ objectives and attitude to risk. Additionally:
•
The current range of Lifestyle Funds will not cater for
clients with risk profiles of 1 - 3 or 8 -10. You will need to
use your traditional methods of research to establish the
a p p ropriate asset allocation and suitable funds for clients
with these risk profiles. The DTL system will provide a
definition of these attitudes to risk to assist you.
•
If the Lifestyle Funds are used in a tax wrapper such as an
insurance bond or ISA, as with other fund of funds you
must still be able to justify why that product provider was
used. For example if you choose Friends Provident, (who
are expected to make these funds available within their
various product wrappers later this year), you will still
need to have appropriate research to confirm why you are
recommending them, as well as the fund choice, as you
do now. Your Suitability Letters will still need to confirm
why the wrapper, provider and F&C Fund are suitable to
meet the objectives and attitude to risk of the client.
•
Currently, the F&C Lifestyle Funds are unique in the
market place. Quite simply it’s a holistic end-to-end
investment process – from a tried and tested risk profiler
with sophisticated stochastic modelling through to
aligned multi-manager portfolios, constructed and
managed by one of the UK’s
leading teams, which is then
rebalanced
quarterly
to
ensure ongoing suitability for
your clients. The proposition
harnesses four layers of
expertise:
1 Distribution Technology for
the risk modelling.
2 F&C multi-manager team
for the fund selection and
monitoring.
3 The
individual
fund
managers who make up the
Lifestyle portfolios.
It is worth commenting that in FSA Consultation Paper
04/11 the results of the psychometric questionnaire
noted above were used to represent a benchmark for
‘perfect advice’.
•
Having analysed the attitude to risk, the DTL system will
allocate a number to reflect that attitude to risk. In
research undertaken with intermediaries and DTL, risk
ratings 4, 5, 6 and 7 have been identified as the most
common. These numbers are reflected in the four
Lifestyle Funds, the details of which are in this pack. F&C
has created these funds, to ensure that asset allocation
precisely matches these attitudes to risk.
Why do I need to use DTL and F&C when I can do that
myself; there are a number of tools available to
achieve this.
We would agree with this statement, certainly at the outset of
the investment programme. However, dependent upon your
agreement with the client as to the service you will provide to
them, it may be that the funds selected could, after a
relatively short period of time, no longer reflect the client’s
attitude to risk because they have not been reviewed. The
benefit of the F&C Lifestyle Funds is that the underlying
funds are continually reviewed, whilst the asset allocation of
The benefit of the
F&C Lifestyle Funds
is that the underlying
funds are continually
reviewed, whilst the
asset allocation of
the portfolios are
rebalanced quarterly.
FAQS
Compliance’s view of LighthouseCapital (continued)
4 You as the adviser who bring together all the key
elements as part of a tailored financial planning solution.
Does this treat the customer fairly?
We believe it does. This is because the client’s attitude to risk
is established using psychometric principles and the F&C
Lifestyle Funds match that attitude to risk and are maintained
to ensure that they continue to do so.
You assume trail commission is being taken? Why is
this?
In order to build a business that has a monetary value, and
trail/renewal commission is one of the yardsticks used by a
potential purchaser to assess its worth. Also, if you take trail
commission, the regulator has an expectation that you will
continue to service your client because that is the reason it is
paid; to do otherwise would not be treating your customer
fairly. This is why it is so important that your IDD makes clear
the service you will be providing to your client for the agreed
remuneration.
I understand that when investing in the Lifestyle
Funds an “extra” payment is made to Lighthouse
Group by F&C. How is this dealt with in terms of
commission disclosure to the client?
The “extra payment” by F&C is derived from the standard
1.5% annual management charge, which is applied
irrespective of the involvement of Lighthouse. The payment is
in essence a part of F&C’s profit and therefore has no impact
on the client. However, for investments made through third
party product providers, it will be necessary to include the
following statement in your Suitability Letter which MUST be
sent PRIOR to the application being signed, in order to meet
the requirements of COB:
Potentially, a client’s assets could all be managed, in
effect, by one fund management company, ie F&C. Is
this compliant?
As with every investment case, it will depend on the
circumstances of the client and whether you consider the
F&C funds meet the objectives and attitude to risk of your
client. It may be that it will form a core holding of an overall
portfolio. However, ask yourself this question, “If I assess the
attitude to risk of the client and use the tools available to
decide on appropriate asset allocation and select funds, do I
have the time, and is the client willing to pay for me, to review
this on a quarterly basis?”
Will standard paragraphs be available?
Compliance is working on these at the current time, but the
key elements are detailed above.
I understand that investing in the Lifestyle Funds
through non-qualifying providers could be less
expensive for my clients. Is this the case?
This is possible as we only know how much a product
provider charges when they take on the Lifestyle Funds. If it
is more expensive to use a qualifying provider, then as long
as you make clear why you are recommending a particular
provider, the client will have the information required to make
an informed decision as to whether to accept your
recommendation. Compliance will provide appropriate
research information in this area for advisers shortly and will
ensure that this is regularly updated.
“In addition to the above initial and trail commission,
LighthouseGroup may receive an additional amount per
annum based on the value of your investment. This is not an
additional charge as the payment forms part of the overall
annual management charge detailed in the illustration and key
features document provided to you. It does not affect the
cost of advice to you in any way.”
A similar statement, explaining that 0.85% trail commission
will be paid, must be made for investments made directly into
the F&C Lifestyle funds. Further details are in the
accompanying guidance notes. Compliance considers this to
be a positive step as it allows the client time to consider your
recommendations and is very much in line with the ethos of
treating customers fairly.
07/08/07 180