Agent as Client…advisers putting themselves at unnecessary risk
By Dave Chessell - June 21, 2020
Whenever I see articles that aim to explain the differences between Agent as Client vs Agent of the Client and what they mean for advisers, most of them create more confusion rather than add clarity.
A recent article on the topic maintains that the difference between the two is subtle and advisers shouldn’t ‘beat themselves up’ if they get it wrong.
Let’s be clear: there is nothing subtle about the differences in the basis of the agreements and, for advisers, getting it wrong has the potential to be disastrous for their business.
Sure, there are subtle differences in the operational side of the two agreements but it’s the basis of the arrangements that advisers need to fully comprehend and then make a conscious decision that this is the way they want to operate.
Continuing to operate with an advisory agreement with your client means you are potentially exposed because you will;
Have exceeded your client’s authority.
Have given a legal undertaking to the DIM that you do not have the authority to give.
Be in breach of the FCA rules on client agreements.
Very different meanings
Part of the problem is that Agent as Client sounds very similar to Agent of the Client.
When established correctly, Agent as Client means the relationship with the investment manager is directly with the adviser and not the end client.
While this appears to be advantageous for advisers – it means they don’t have to expose their clients to the third-party – the reality is most advisers do not have the authority from their clients to act in the capacity of agent and deal directly with a third-party investment manager on their behalf.
Also, under Agent as Client, a third-party investment manager can treat the adviser as a professional client. This means they could make investment decisions that are only suitable for professional clients, but not suitable for the end retail client.
Obviously, the end client trusts their adviser to make the right decisions for them yet how many advisers who feel they have ‘outsourced’ the investment management, expect to scrutinise every aspect of the investments within the model portfolios they select?
Advisers who have signed an Agent as Client agreement are exposed to any complaints from their clients about the suitability of the investments.
The investment manager is only accountable to the adviser, who, as a professional client, should be aware of what investments are being made and the subsequent risks attached to them.
We estimate that Agent as Client is the most widely used agreement between advisers who are using model portfolios provided by a discretionary manager.
If you are an adviser operating under Agent as Client, this means there is a good chance you and your firm are at serious risk of being hit with compensation claims should something happen to make your clients question the investments in their model portfolio (do I need to mention the Woodford Equity Income fund?)
We’ve never liked Agent as Client and prefer the Reliance on Others operating model, which is effectively Agent of the Client by another name. The Reliance on Others rules have been around for a long time and actually form the same section of the COBS handbook as Agent as Client, but prior to MiFID II a ‘service’ wasn’t covered.
Under Reliance on Others, the responsibilities of each party are much clearer, making it easy for advisers to fully understand where their responsibilities lie as they continue to operate on an advisory basis with their clients.
It removes the ambiguity from who carries the can should an end client complain.
Reliance on Others is starting to gain traction among discretionary investment managers but, with no requirement for DIMs to change their terms of business to adopt Reliance on Others, it’s down to advisers to be aware of their terms of business and to be proactive in demanding a change.
For the full facts on this, I urge you to read the Personal Finance Society paper, Agent as Client, What you Need to Know. This is essential reading for any adviser who is concerned about their potential exposure to unquantifiable, and unnecessary, risks within their business.