UK pensions and investment provider Merchant Investors has launched Zest Solutions, a service which enables IFAs to create their own funds under management and subsequently convert them to an open-ended investment company.

By providing what it calls a “stepping stone to OEIC” service, the firm says that Zest Solutions has the potential to significantly increase the value of IFA businesses through the direct ownership of funds under management.

IFAs adopting Zest Solutions first choose a fund manager and set up one or more insured funds with Merchant Investors.  Subsequently, once the fund(s) reach approximately £20 million ($30 million) in funds under management, they can be converted to an OEIC structure. 

Open-ended investment companies issue shares on stock exchanges, using the funds raised to invest in other companies. Using Zest Solutions, once the IFA business has a value on the market the OEIC can then be made available to other distribution outlets and platforms.

In addition to being a gateway to OEIC status, Merchant Investors says that Zest Solutions reduces the regulatory risk of fund selection as the funds are constructed in consultation with the IFA.  Through this collaboration IFAs can select funds that match their clients’ risk-profile and are in keeping with their advisory style.

Richard Ellis, head of sales and marketing at Merchant Investors said: “The IFA market is facing many business challenges, not least the changes resulting from the Retail Distribution Review.  IFAs are under pressure to improve their income stream, grow their business and deal with the growing regulatory pressures while still retaining control.”

The UK Financial Services Authority’s Retail Distribution Review, the policy proposals of which will come into effect in 2012, focuses on improving “confidence and trust” in the investment market.  

According to Merchant Investors, Zest Solutions addresses the RDR by enabling IFAs to retain control of their client relationships and maintain the independence and transparency of their investment advice.

Merchant Investors already has a number of IFAs set to launch their funds over the coming weeks, having piloted the service with Welsh firm Buckles Investment Services since October last year.

Merchant Investors currently administers £1.6 billion in assets and since 2003 has been part of South African financial services group Sanlam.