Last week the Personal Finance Society (PFS) announced an addendum to their Good Practice Guide paper (produced in association with Diminimis) which relates to whether advisers’ agreements with discretionary investment managers (DIMs) are fit for purpose.
If you are a financial adviser who uses investment products provided by a third party (including standard model portfolios) I would urge you to take a look at it, so you are aware of where the risks and responsibilities sit and don’t get caught out falling foul of the FCA rules or potential changes to the rules once MiFID II comes into force in 2018.
The main area of contention is around ‘agent as client’. This is how many DIMs/DFMs position their services with advisers because it appears to meet all the advisers’ perceived requirements of outsourcing: adviser keeps complete control of the client relationship whilst the DFM has no relationship with the client and is responsible for all aspects of the investment solution.
While this seems to be a ‘win-win’ arrangement in terms of day-to-day management, there is a sticky situation around investment suitability. Advisers who keep the direct relationship with their clients yet rely on a DIM/DFM to handle the investment side should have enough knowledge and expertise in the investment process, with appropriate controls and oversight in place to be confident that the DFM is making the right decisions on behalf of their end clients. If something goes wrong and a client isn’t happy with how investments are shaping up, it will be the adviser who will suffer the consequences, especially if classed as a Professional Client who, has the lowest level of investor protection.
Unless advisers have full discretionary authority from their clients to make changes to their investments (even rebalancing), they won’t have the correct authority to hand over responsibility to the DIM/DFM to manage the investments on behalf of their clients. Advisers can only truly outsource if they hold discretionary permissions themselves.
What is essential is that advisers are aware of exactly what their agreements do say in the small print and with whom the responsibility lies for the various aspects if they want to avoid putting themselves at risk of fines or claims for compensation.
