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Alan Hughes: Is your DFM putting you at risk?

The ‘agent as client’ model has come under the spotlight again, with concerns raised that advisers are being exposed to unexpected regulatory risk

The issue of adviser/discretionary fund manager relationships has raised its head again – in particular, the “agent as client” model.

Despite the best efforts of some in the industry, confusion remains around these arrangements and the implications for all parties.

The agent as client framework means advisers act as an agent, thereby clearing the DFM of any relationship with the underlying client.

However, there are significant variations in the way in which these arrangements are papered, and concerns have been raised that some advisers are exposed to unexpected regulatory risk.

Here are some key principles to bear in mind:

  • The FCA Rules specifically provide for this arrangement, so there is nothing wrong with it in principle.
  • However, it does require some thought by both the adviser and DFM to make sure the contract between them accurately reflects how they expect the arrangement to work in practice.
  • Advisers need to make sure they have the client’s authority to establish the arrangement. If they do not, and something goes wrong, the client could complain that the adviser has exceeded the authority given to them by entering into the arrangement with the DFM, and is therefore responsible for any loss.
  • Exceeding the client’s authority could also create regulatory difficulties for the adviser and raise questions as to whether such activity is covered under their professional indemnity insurance policy.
  • Another crucial issue is to understand who is responsible for what, particularly in terms of suitability. This can be structured in various ways but the adviser will usually expect the DFM to be responsible for managing a portfolio in accordance with the mandate agreed, as that is what they are being paid for. That said, not all agent as client agreements accurately reflect this position.
  • Assuming the DFM explicitly accepts responsibility for managing a portfolio in accordance with the agreed mandate, the question then arises as to how that responsibility is enforced. Under the agent as client model, an adviser firm is not an “eligible claimant” as far as the Financial Ombudsman Service is concerned, which excludes the client from the most straightforward method of seeking redress if the DFM does wrong.
  • If a client cannot bring a complaint about a DFM to the FOS, then they are likely to look to the adviser instead.

Agent as client arrangements can work as long as there is clarity over these issues. A DFM should accept they are responsible for the investment management and agree they will deal with any complaint by an adviser client on that issue, as well as allow any such client to take that complaint to the FOS, even if they would not automatically have those rights under the FCA rules.

A good DFM will have no issue with accepting clearly defined responsibility for undertaking the key role for which they are being paid. It is then up to the adviser to make sure the client has a clear understanding of the relationship they are proposing to enter into on their behalf, and that they correctly execute the authority given to them after undertaking appropriate due diligence on their chosen DFM.

By taking this approach, both parties assume only those risks over which they have control, and for which they are likely to be insured.

Alan Hughes is partner at Foot Anstey LLP

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Comments

There is one comment at the moment, we would love to hear your opinion too.

  1. In all discussions about DFMs there is a particular distinction which is never made clear. If you are an introducer to a DFM and expect some kind of pecuniary recompense, whether directly from the DFM or if you have the temerity to charge the client directly for the portfolio which other manage – then of course there is risk.

    If however you REFER a client to the DFM and there is no income element and you don’t interfere with the portfolio directly, then the only risk you run is reputational if the DFM fluffs it.

    How anyone can charge for something that they don’t actually do has always been beyond my comprehension.

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