Most DIMS will be class: FMA

Most discretionary investment management services (DIMS) will be class advice and require a licence under the Financial Markets Conduct Act, the FMA says.

Friday, March 21st 2014, 6:00AM 3 Comments

by Susan Edmunds

It does not expect that many authorised financial advisers will be capable of providing significant personalised DIM, which AFAs will be able to continue to offer without a licence.

It has released a report outlining how it will approach the regulation of DIMS, from December 1 this year.

There has been some consternation among advisers about what constitutes a DIMS service – and what makes it class or personalised advice.

The FMA said the key to whether a service was DIMS was who was making buy/sell decisions – and who had the power to execute them.

“If the client is making the buy/sell decisions, then it is not a DIMS, even if the client has granted someone else an authority to execute the transactions."

Execution-only services would not count, nor would situations where advisers made decisions but always had them signed off by the client. But it would be DIMS if an adviser could proceed if they did not hear back from a client.

Portfolio rebalancing would count as DIMS if the adviser had the discretion to replace one financial product with a similar one that the client had not expressly chosen, or the ability to vary the original portfolio. If the rebalancing was based on a strategy that took into account an individual’s situation and goals, it would likely be a personalised service – otherwise it would be class DIMS.

Advisers using model portfolios and model asset allocations to make investment decisions under a DIMS arrangement would be offering class advice.

“It is class DIMS because model portfolios and model asset allocations are designed for a class of clients. These models are not originally designed to take account of an individual client’s financial situation and goals, even though an individual client’s financial situation and goals may match a model. A DIMS following a model portfolio will always be a class DIMS even though each client’s individual portfolio may vary.”

The eligibility requirements for AFAs providing personalised DIMS have not yet been finalised.

But the FMA said it would expect AFAs to demonstrate they meet certain minimum standards.

“The bespoke design of investment strategies may need significant time and expertise… we do not expect many AFAs will be capable of providing significant personalised DIMS.”

The document can be found here.

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Comments from our readers

On 21 March 2014 at 8:47 am Bill said:

FUNERAL NOTICE

The death of the small adviser

“In any bureaucracy, the people devoted to the benefit of the bureaucracy itself always get in control, and those dedicated to the goals the bureaucracy is supposed to accomplish have less and less influence, and sometimes are eliminated entirely.”
― Jerry Pournelle

On 21 March 2014 at 10:37 am Pragmatic said:

I don't agree that this latest FMA signal is a death blow for the small adviser. This remains a relationship industry, where asset gatherers will continue to excel in dispensing low cost/low touch solutions, and consumers will continue to pay a premium for bespoke advice.

I read this latest FMA suggestion as a). a further demonstration as to the ignorance of the regulator, and b). the requirement for the non-aligned adviser to recalibrate their offering

On 21 March 2014 at 10:46 am Paul Mersi said:

RIP. Another angle is that this is a natural progression from a regulatory approach that is designed around the biggest first (whose natural unregulated state is, ironically, to strongly self-regulate to, inter alia, protect brand); this big-corporate approach eventually iterates 'down' to the subset of smaller players who operate in a relatively formalised way. This leaves the more ad hoc, individualised, customised individually-managed portfolios with the lightest(-est) touch regulation. The highest barrier to entry is therefore at the (generally) most organised self-policed end of the market, leaving most unprotected those who chose do go to the most individualised end. THAT's where regulation should really have focussed (and with quite a different approach and style - not one whose naissance is from the big corporate world).

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