Watch out for advisers pushing 'Cips'

The financial industry watchdog, the Financial Services Authority (FSA), is unhappy. Again. This time its target is the grim-sounding "centralised investment proposition (Cip)". So what is it; why is the FSA worried; and most importantly, can you do anything about it?

As most MoneyWeek readers will know by now, firms of brokers and independent financial advisers (IFAs) that offer their clients advice on financial products (rather than pure execution-only services) are scrambling to decide how they will cope with the Retail Distribution Review (RDR), which kicks in from January 2013.

The RDR will ban the commissions paid to IFAs for recommending certain products, and it also aims to clamp down on poor advice, whether this is given at the outset or later, when a client is advised to switch from one product to another.

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Now, here's where the Cip comes in. Many firms are daunted by the prospect of falling foul of the RDR's beefed-up rules on product suitability. They are also keen to find a way to manage their client's assets as cheaply as possible. A Cip (whether designed in-house or 'bought' from a third party) offers a range of simple model portfolios designed to cater for a client's risk preference.

The Cip invests money in a range of asset classes according to a fixed asset allocation formula (ie, 10% in a low-risk asset class, 20% in a higher-risk class, and so on). It then regularly re-allocates automatically to maintain the initial weighting.

Your broker wins twice here. First, if they recommend that you make the move to a Cip run by a third party before the RDR kicks in, they can still earn a commission from the product provider. Secondly, by moving most low-value clients onto a standardised portfolio model, an adviser cuts down on the number of individual investment solutions they have to deal with, cutting their costs.

As far as we're concerned, we rather like the idea of Cips. By standardising investment decisions, they should reduce both costs and also the amount of poor investment advice out there.

But according to the FSA, the switch to Cips isn't going well. Having reviewed 181 files from 17 firms that have been recommending Cips, they found that the advice was unsuitable in 33 cases and unclear in 103 suggesting that the motivation may have been driven more by cost-cutting and commission-hunting rather than the client's best interests.

So while we have nothing against Cips as such, if your IFA suggests you switch to one this year, be wary push them to explain why, and how much you'll be paying.