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Reaching an agreement and avoiding poaching

This article is part of
Guide to Discretionary Fund Management

Typically, Mark Stevens, head of intermediary services at Investec Wealth & Investment, says the discretionary investment manager’s firm will provide a detailed explanation of the service.

Mr Stevens says this explanation should spell out what they are offering to the adviser’s client and agree how they are going to develop their relationship - and the limitations of their dealings with the client.

In addition, Mr Stevens says an agreement would be entered into with each client setting out the mandate for the investment portfolio, reporting and service requirements and all charges.

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One of the biggest fears advisers raise about using a DFM is poaching. This has historically been the bête noir of outsourcing to a discretionary investment manager, says Mr Stevens.

He explains there is the perception that the adviser’s relationship with their client is put at risk by introducing a DFM into the mix.

However, he says in practice the investment manager works in close partnership with the adviser to ensure the best outcomes for the adviser’s clients.

Mr Stevens says: “It is not in the discretionary investment manager’s interest to ‘poach’ clients as they would irreparably damage the relationship with the adviser and by default their reputation within the broader industry.”

On the risk of poaching, Gareth Johnson, head of managed investment services at Brewin Dolphin, says an agent relationship means the DFM has a contractual relationship with the adviser but not the underlying client.

In terms of model portfolio services offer via platforms, again, Mr Johnson says there is no contractual relationship with the underlying client.

As such, Mr Johnson says a DFM cannot see the underlying client details and simply sees numbers – to put it crudely, the account number and the AUM via the platform – and therefore, he argues, “it is impossible to poach a client.”

This accords with the Financial Conduct Authority’s finalised guidance on the use of DFMs, which stated that in most cases advisers will retain responsibility for the key suitability aspects of the client relationship.

DFMs with advice arms

But where a DFM also has in-house financial planners, Eric Clapton, chief executive of Wellian Investment Solutions, warns it will always be possible that a client could request to consolidate their affairs in the hands of one firm with greater regulatory permissions.

However, while this is a possibility, Mr Clapton adds in reality it is unlikely to occur.

He says: “Investment managers are not financial planners and do not wish to encroach on the adviser’s relationship with their client.

“Indeed it is in the best interests of the investment manager to build a strong relationship with the introducing adviser and it would be very disadvantageous to the investment manager to poach clients.”

Emma Wall, director of UK intermediary sales at Morningstar, agrees the poaching of your clients by a DFM is possible and similarly states this will depend on how you access the DFM service and what other services are provided by that DFM.