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Obligations for advisers regarding FirstChoice Wholesale Investments TMDs and Investment Diversification

Colonial First State’s (CFS) Target Market Determinations (TMDs) for the investment options available through FirstChoice Wholesale Investments and other investment products define the class of customers that each product is likely to be appropriate for. Given some discussions we’ve had recently with advisers, we would like to make our position in relation to diversification across our products clear.

Key Points:
  • We understand that some product issuers’ TMDs have included a ‘diversification statement’. We don’t believe this is necessary to facilitate a diversified portfolio constructed from a number of different risk profiles to arrive at a desired customer risk/return profile, however we are planning to include this statement in our TMDs from early 2022. 
  • Our criteria for a significant dealing excludes instances where a customer has obtained a product that is not aligned to their risk profile specifically for the purposes of using the product, in combination with others, to arrive at a diversified portfolio that meets their risk profile. 

 

We understand that a diversified portfolio can be constructed by investing in a number of different products to achieve the customer’s desired risk and return outcomes. 

Our investment product TMDs describe the risk and return characteristics specific to each individual investment option available through our FirstChoice platforms. If a customer gains the recommended exposure to the risk and return characteristics of an investment option for only a proportion of their portfolio, this does not preclude them from being within the target market of the product. Our disclosure documents for these products make clear the importance and benefits of diversification. We also understand that advisers are educating clients on the importance of diversification through the advice process.

We understand that some product issuers’ TMDs, including those written using the FSC standard, have included a ‘diversification statement’. This statement is not a requirement in the relevant legislation and guidance, and we don’t believe that it is necessary to enable construction of a diversified portfolio comprising a number of different risk profiles.

Personal financial advice is excluded conduct under the Design and Distribution Obligations (DDO) rules, as it may be appropriate for a financial adviser to advise a consumer outside of the target market to acquire a financial product, when it would be in their best interest.Regardless of the personal advice exclusion, advisers still need to report significant dealings outside the target market to us. Some product issuers using the FSC template will require reporting on all dealings outside of the target market, not just those deemed significant, however this is not the case with CFS and it is not legally required.

Our criteria for a significant dealing excludes instances where a customer has obtained a product that is not aligned to their risk profile specifically for the purposes of using the product, in combination with others, to arrive at a diversified portfolio that meets their risk profile.

Example:

Cathy sees a financial adviser to create an investment portfolio to save for a medium-term savings goal. The personal advice process uncovers that it is in Cathy’s best interests to invest in a portfolio of medium risk with CFS, comprising 40% cash, 30% fixed interest, and 30% in shares. As a result, investment options are recommended to Cathy to create exposures to each asset class. In this case, Cathy has been provided with personal advice, so the adviser doesn’t need to satisfy any reasonable steps obligations. As Cathy has been recommended each investment option as part of a diversified portfolio, this wouldn’t give rise to any significant dealings reporting to CFS.

To clarify going forward however, we plan to include a diversification statement in our TMDs in early 2022.

 

Need more information?

If you have any questions, please contact your local Business Development team.

Alternatively, for FirstChoice please call Adviser Services on 13 18 36, or for FirstWrap please call FirstWrap Service and Support on 1300 769 619 (Monday to Friday, 8am to 7pm, Sydney time).

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