Trade body says DFMs ‘must form 4-way agreements’
Discretionaries ‘must establish four-way agreements with clients, advisers and platforms’.
Discretionary fund managers (DFMs) must establish four-way legal agreements with clients, clients’ advisers and fund platforms ahead of the RDR, the DFM trade body has warned.
Tim May, chief executive of the Association of Private Client Investment Managers and Stockbrokers (Apcims), said DFMs should be ensuring they have proper agreements between their clients and their clients’ advisers and fund platforms – including when advisers outsource clients’ investments to DFMs.
Advisers have been delegating clients’ investments to DFMs in droves ahead of the implementation of the RDR and its stringent new rules on investment advice.
The FSA has said advisers, clients and DFMs should sign up to a tripartite agreement if the DFM starts managing investments for an adviser’s clients. Mr May’s ‘four-way’ model goes beyond even the regulator’s requirements.
In April the FSA issued a guidance consultation on outsourcing investments, in which it said DFMs running clients’ money with no proper permissions being held by either the DFM or adviser would be an example of poor practice.
It warned that DFMs could be “operating outside their permissions” if no such agreements were in place.
However, the FSA said an advisory firm could carry the investment permissions themselves, even though it does not carry out the actual investment management when outsourcing to a DFM.
The regulator confirmed to Investment Adviser in May that it would formally address the issue of DFM client arrangements in an upcoming guidance paper.
But Apcims’ Mr May said DFMs should go further.
The financial services industry “absolutely needs to make sure there is a tripartite agreement in place and also include the platform”, he added.
Mr May said that defining who was responsible for various aspects of the investment process was a “crucial point” and said the FSA’s current guidance was “not clear”.
“The presence of the platform in the link has muddied the water,” he said. “The [FSA’s] most recent guidance has opened up doubt again.”
Some industry figures have said the FSA’s guidance is “misunderstood”. They have maintained the existing permissions are sufficient for clients using DFMs’ model portfolios on a platform.
Hugo Thorman, managing director of the Ascentric platform, said in the case of model portfolios, for example, he did not believe the DFM needed a formal agreement.
“Our view is that it remains possible to advise on model portfolios without changing permissions or clients having to enter into direct agreements with a DFM (discretionary fund manager),” he said.
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