The FSA has warned advisers using DFMs run the risk of ‘systemic misselling’ if their risk profiles are not correctly mapped against those of the outsourced investment solution.
Speaking at a Defaqto DFM conference today, FSA technical specialist Rory Percival said the regulator has seen evidence that some advisers are not ensuring the risk profiles they use are aligned to those used by the DFM.
Speaking to Money Marketing, Percival says: “Risk profiling is the key problem. If an adviser firm is carrying out risk profiling and the DFM is running portfolios which will always have risks associated with them, who is making sure one matches up with the other? Mapping is key.
“A DFM’s portfolio risk maybe different from the advisory firm’s assessment of risk. They need to be matched otherwise you have effectively got systemic misselling on your hands which is not a good place to be.”
Percival added the use of DFMs falls outside of the independence definitions because they are not a retail investment product and therefore advisers were not expected to review the whole DFM market to remain independent if outsourcing certain clients to a DFM.
An FSA spokeswoman confirmed the regulator would consider a thematic review into the situation if it sees significant misselling or large numbers of cases through the Financial Ombudsman Service.
Seven Investment Management marketing director Justin Urquhart Stewart says: “It is an area of concern and quite rightly we have got to make sure risk levels are correctly mapped against those of adviser firms. It is an area that constantly needs to be under review because risk profiles can change from firm to firm and clients’ attitude to risk change over time.”
The Platforum managing director Holly Mackay says: “One of the concerns we hear raised is there can be a frequent mis-match between what the adviser thinks is “balanced” and what the DFM thinks is “balanced”.
“Then you get into the sometimes murky area of who is liable when the client’s portfolio doesn’t perform as expected.”