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Platforms are split on future of DFM services

Platforms are divided as to whether recent FSA guidance on centralised investment processes could mean the end of traditional discretionary fund management services.

The FSA’s guidance, published in April, says advisers offering a DFM service must have the correct permissions to manage client investments.

If they are referring clients to a third-party DFM, advisers must arrange for a contractual relationship between the client and the DFM.

Speaking at the PIMS conference last week, 7IM chief executive Tom Sheridan said the regulator may look to go a step further and require DFMs to have a direct relationship with clients.

Sheridan said: “If you do not have discretionary authority or a signed agreement from the client by January then the implication is that model portfolios are dead. The FSA is concerned advisers are putting clients into portfolios without the client agreeing to them.

“But even if there is a contractual agreement in place between the client and the DFM, the DFM still does not have a real relationship with that client.

“Is that a point the FSA will look at? The FSA might insist the discretionary manager knows the client.”

The FSA’s guidance says the regulator is concerned about clients being “shoehorned” into unsuitable propositions.

The regulator assessed investment files from 17 firms that recommended centralised investment processes. It found the quality of disclosure to be unacceptable in 108 cases, the quality of advice to be unclear in 103 cases and unsuitable in 33.

Novia sales director Paul Boston said the DFM model is not dead but advisers have to ensure they have carried out and documented the correct suitability procedures.

Boston said: “As long as you have evidenced suitability and conducted the research that finds it appropriate for the client, then the discretionary service is still a service advisers can use. I do not think the model is dead.”

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Why the talk of January? The rules on DFM are not changing and haven’t changed.

    If you are carrying out DFM then the rules require an agreement with the client and the DFM is responsible for suitability (though the DFM can rely on the IFA to gather info).

    The way some models are operated on some platforms appear to be outside the rules. They are operated like funds which they are not. Funds have safeguards and strict rules for good reason. That’s what the FSA are addressing NOW… January is a red herring.

  2. Anthony Smith 28th May 2012 at 5:10 pm

    Discretionary Portfolio Advice Services, as used with Model Portfolios, do not amount to Discretionary Portfolio Management and do not require additional permissions. This is made clear in the Regulatory Risk Outlook 2011 and the page number and section are clearly referenced in the Guidance Consultation should there be any doubt.

    An adviser that recommends a Model Portfolio is providing advice to a client and not carrying out the activity of ‘managing investments’. Model Portfolios are a range of funds selected against a risk profile and managed by the DFM within the parameters of that profile. The adviser is utilising the skills of the DFM to ensure the balance of the portfolio is maintained against the chosen risk profile.

    With Model Portfolios the DFM is not providing a client-by-client discretionary management service. When advising on Model Portfolios the adviser is providing a Portfolio Advice Service and is not ‘managing investments’, as acknowledged by the FSA.

    It is important to read through these consultations carefully, including the background information referenced therein, before jumping to erroneous conclusions.

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