Does your client understand the agent as client rules when it comes to model portfolio services? More importantly, do you?
The development of model portfolio services has continued apace over the years. Many firms have made the decision to use them to manage investment risk for their business and provide consistent solutions to their clients.
They have become a profitable way for discretionary fund managers to expand their businesses and offer their services to those with smaller sums to invest.
The bulk of these offerings operate on the agent as client basis. This means the DFM only has a relationship with the intermediary, not the end client.
This arrangement is legitimate and permissible but there are a number of regulatory risks to be aware of.
The clarity of the relationship chain is vital. It will only work if all parties clearly understand their different roles and responsibilities, and these are appropriately documented.
In most cases, the intermediary firm will hold only advisory permissions, so it is just the DFM that can manage investments. Doing anything that constitutes managing investments by discretion would amount to the intermediary acting outside of their scope.
The DFM will manage the portfolio, rebalancing or making changes as and when they see fit. It is common for the DFM to not know how many individuals are investing in their portfolios. This is not important. They merely engage with the advisers and permit them to invest their client’s funds into their offerings.
As for the client, they must know who the discretionary manager is but that they do not have a relationship with them. They must understand the arrangement and its implications, and be shown it is suitable for their needs.
The adviser should explain the full rationale behind the agent as client position in the suitability letter which recommends the DFM’s model portfolio service.
Our work with firms suggests some are still not fully understanding the agent as client relationship. Of more concern is that it is often not adequately explained or documented with the client.
Firms should consider reviewing their approach to documenting advice to invest in a model portfolio service, ensuring agreements, recommendations and the associated implications are fully explained and understood by all involved.
Clive Summers is business risk consultant at Threesixty