The Personal Finance Society has called on advisers to review their discretionary investment management agreements amid “widespread confusion” over who bears responsibility for which parts of the advice process.
A statement from the PFS explains that such agreements often treat the adviser as the “professional” client of the DIM or discretionary fund manager, acting as the authorised agent of the underlying investor.
However, it warns that many advisers have signed these agreements when they do not have the right authority. If the adviser is not properly engaged, they are not a true agent and should not be treated as the client of the DFM.
If there is a client complaint about the investment, this can leave the adviser exposed.
The PFS’s good practice update aims to clarify the requirements of the adviser when operating within the ‘agent as client’ framework.
The organisation says this has implications for advisers, DIMs and DFMs, platform and product providers. It mainly applies to managed or model portfolio services but can apply to other services too.
PFS chief executive Keith Richards says: “We have identified widespread confusion in the market on this issue. The lack of clarity around responsibilities where advisers and DIMs are providing services to the same underlying client means many advisers believe the DIM is responsible for far more than they actually are, creating a potential ‘suitability gap’.”
Research last year from consultancy Diminimis, which worked with the PFS on the best practice update, showed one in five financial advisers had never reviewed their existing DIM relationships.
Diminimis founding director David Gurr says: “This is a problem that has been building for years. The issue has slipped through the cracks and it is only the benign market that has kept it from blowing up. Billions of pounds of assets are being managed with widespread confusion in the market as to who is responsible for what in the client relationship.”