Warning over Ucis breaches for advisers using DFM

Advisory firms could fall foul of the City regulator by failing to scrutinise the underlying assets in discretionary fund managers’ portfolios, Tony Bray has warned.

The head of client relationships at support services firm threesixty said advisers were often unaware that their DFMs were investing in unregulated collective investment schemes as defined by the FCA, which banned their promotion to all but the most sophisticated and high net worth investors at the start of 2014.

Mr Bray said that professional investor funds, which contain low-risk underlying assets and are “perfectly good from the investment manager’s point of view”, may be accidentally breaching Ucis regulations when used in clients’ portfolios.

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He said advisers were leaving themselves “open to criticism” even though they could achieve the same outcomes can be achieved with FCA-authorised funds.

Speaking at a DFM round table in the City, Mr Bray said: “A lack of due diligence means that many advisers do not fully understand how the DFM will deliver the style of investment they value so much. Advisers and managers have different definitions of risk and suitability, creating a gap that could lead advisers open to regulatory criticism.”

Mr Bray went on to suggest that using “simplistic” risk profiles to determine the most appropriate DFMs was a “fast way” to get Rory Percival, technical specialist at the FCA, “camped in out in your office for a number of months”.

He said: “I would not be surprised to see the FCA taking apart many advisers’ risk profiling strategy and finding that is short-cut route is not the right answer for clients.

“The right answer is that we need to not only work out the end game, but the particular journey that is most suitable for the client. That is an area where there is much room for improvement.”

A spokesman for the FCA said: “Both adviser and DFM have a responsibility to provide suitable advice to the client. Suitability requirements have to be fulfilled, which either the DFM or the adviser can do, so long as it is done by someone and it is clear to the client who is responsible for what.”

Adviser view

John Sutton, adviser for London-based Partners Wealth Management, said: “One issue we had when we decided to start using DFMs was how to choose the right one.

“We have had problems with staff changes at larger DFMs, which disturbs clients because they are seeing different people at every meeting. Also, it is extremely difficult to compare the relative performance of different DFMs.”