Investment Hokey Cokey…actions, not words are what really matter

Last week (21 May) Professional Adviser ran a feature I wrote about the (mis)use of the term ‘outsourcing’ relating to investment management.

Even though partnering with a third-party investment manager is probably really ‘insourcing’ for many advisers, what’s important is that advisers have the correct agreements in place with discretionary managers and that they – and their clients – fully understand who is doing what in terms of risk and responsibilities.

It’s a MiFID II requirement that an agreement with a client is clear about the service the adviser is providing so getting the wording right is important.

AAC and ROO agreements

Advisers who operate with an advisory agreement with clients (and we believe this is the majority) and don’t have discretionary permissions, need to pay particular care with the agreements they have with third-party investment managers.

Specifically, are they working under Agent as Client (AAC) or Reliance on Others (ROO) agreements?

Both are fine, assuming the adviser is aware of their responsibilities and fully understands what level of risk is being carried by the adviser firm and agreements with clients reflect that difference.

According to the FCA, a third-party discretionary investment manager can only treat the adviser as its regulatory client if the adviser is acting in a genuine agency capacity and has been appointed by the client accordingly.

As I say in the feature, this is a decision for the adviser to make before entering into an agreement with an investment manager, because it involves changes to the client agreement and client take-on process.

Discretionary managers should also be checking that the advisers they work with have the appropriate client permissions before they offer this service.

You can keep control

Perhaps my greatest bugbear with the way insourcing (or outsourcing) is regarded by many advisers is that they think all control has to be signed over to the third party, giving the discretionary manager direct access to their clients.

This can be the case – and was how it traditionally worked – but it doesn’t have to be. It’s possible for an adviser to work in partnership with a discretionary manager and to remain absolutely central to the client relationship – that’s the way PortfolioMetrix works with our adviser partners. If you’d like to find out more about this please do get in touch. I promise we won’t lead you on a merry dance.