Last Thursday the PFS published a very detailed guide written by consultancy Diminimis on the potential issues arising from the “agent as client” basis on which some discretionary and MPS services are run. Many advisers will be on top of this but, for those who aren’t, the potential consequences are significant…
Under the agent as client basis, a discretionary investment manager treats the adviser as the client, not the end investor. That seems attractive to advisers – there’s no contact between the DFM and end investor, so the adviser’s exclusive relationship with the client is preserved. However, this raises a key question:
Does the adviser have authority from the end client to enter into such an agreement on his or her behalf?
The PFS Guide says that a standard advisory agreement is unlikely to meet the requirements of appointment as agent.
We understand that the FCA have been involved in discussions around the implications of this and, no doubt, this is what they were referring to in the Investment Platforms Market Study when they said next steps included:
a review of the relationship between advice and discretionary services, as part of the RDR/FAMR post-implementation review starting in 2019
Every adviser using traditional bespoke DFM or model portfolio services should check how the accounts have been established and – in particular – who is being treated as the client? And if the agent as client basis has been used, does the agreement between the client and adviser actually allow this?
The legal relationship is a critical element of due diligence. Sadly, in most cases we’ve seen, the standard packs commonly issued by DFMs don’t cover this at all. However, there are detailed questions in the DD|hub databank allowing advisers to see clearly what basis different managers offer. The Quickstart – Legal Structure & Regulation question set includes this, as do the PFS/Diminimis question sets. Alternatively, create your own question set to focus on the matters of most concern to you and your clients.