Following on from my previous blog (Read the small print or risk a fine), I wanted to focus a bit more on the detail of the ‘agent as client’ agreement that many discretionary investment managers (DIMs) and discretionary fund managers (DFMs) ask advisers to sign.

The primary issue as I see it is, does the adviser have the appropriate authority from their client to commit and bind them to the discretionary investment mandate? Many advisers do not have full discretionary investment powers and are required to seek approval for every change to a client’s portfolio as and when it is made.

Using a DIM that runs model portfolios that have been assessed to be in line with clients’ risk profiles seems like a straightforward way to offer an investment service to clients while not needing to get involved in the day-to-day management of the portfolio.

The feedback I’ve had so far is that advisers see this as an easier way to take on clients with less paperwork. However, it is essential that advisers understand the consequences of this route – which is what the Personal Finance Society (PFS) is highlighting in their guidance paper for advisers.

As agent, and possibly professional client, the adviser has significantly greater responsibility to their client and will require controls and oversight to meet these obligations. Part of this is the suitability aspects.

The vast majority of DIMs/DFMs do not clearly spell out the situation in their agreements and client communications and advisers are required to ask the right sort of questions and scrutinise the terms of the agreement to be sure they are 100% clear about where responsibility sits and what is and isn’t permissible in terms of investment decisions without gaining approval directly from clients. Likewise, advisers need to have the correct agreements with their clients for the DIM/DFM to be permitted to conduct business on this basis.

Failing to engage with the detail on this leaves many advisers wide open to compensation claims if things go wrong and, worse still, could also make them vulnerable to FCA fines.


By Dave Chessell, PortfolioMetrix