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PFS flags due diligence issue with discretionary agreements

26 July 2017

Professional body urges adviser firms to review their DFM/DIM agreements and issues a good practice update to help address the issue.

The Personal Finance Society (PFS) is urging financial advisers to review their discretionary investment management (DIM/DFM) agreements, concerned that many may be working with inadequate terms.

These agreements often treat the adviser as the (professional) client of the DIM/DFM, acting as authorised agent of the underlying investor.

However, many advisers who may not appreciate the important technicalities, have signed these agreements when they do not have the appropriate authority from their client to do so. If not properly engaged, an adviser is not a true agent and ought not to be treated as the (professional) client of the manager.

In the event of a client complaint, for whatever reason about the investment, this leaves the adviser potentially exposed, the professional body warns.

David Gurr, from the independent due diligence consultancy Diminimis, which has been working with the PFS on developing best practice said: “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.”

The PFS has issued a good practice update on ‘agent as client’ arrangements to help advisers address the problem. The update seeks to clarify the requirements of the adviser when operating within the ‘agent as client’ framework. This has implications for advisers, DIMs/DFMs, platform and product providers. Whilst it applies mainly in managed or model portfolio services (MPS), it can apply to other services too.

PFS chief executive Keith Richards said: “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 undertaken by Diminimis last year revealed that one in five financial advisers had never reviewed their existing DIM relationships. In response, Diminimis and the PFS developed question sets last year, aimed at simplifying and systemising qualitative research and due diligence on DIMs. More than 1,000 copies of the question sets have been downloaded.

According to Diminimis, an increasing number of advisers are now using DIMs (57% up from 51% 18 months ago) and more than three-quarters of advisers (78%) expect their use of discretionary investment to increase or stay the same in the future.

The PFS drew attention also to the Defaqto January 2017 Adviser Survey, which found that 72% of new business has gone to DFMs/DIMs, with 40% of this through managed portfolio services on platforms and 26% direct with the investment manager.

A copy of the addendum to the PFS/Diminimis good practice guide can be found on the PFS website

The 2016 question sets, developed by Diminimis and endorsed by the PFS, can be found at the PFS website and the Diminimis website.

 

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