Regulator’s views on DFMs

Most DFMs have tightened up the monitoring of their investment managers and created centralised investment processes, approved lists of securities and monitoring procedures in light of FCA comments, says Guy Stephens, managing director of Rowan Dartington Signature.

However, he says it is vital that the adviser ensures that any DFM solution maps appropriately across to his client risk-profiling approach so that consistency of recommendation and its on-going application is achieved.

There also needs to be absolute clarity as to where the advice liability sits, Mr Stephens adds.

Indeed it is the link between the adviser and DFM that has more recently come under scrutiny from the FCA.

He says some discretionary management agreements are constructed wholly on this point.

More generally, Mr Stephens says his interpretation of what the FCA has raised on this matter is that whoever sits down with the client on a one-to-one basis, which results in recommendations and decisions, is responsible.

Mr Stephens says: “When an adviser uses a DFM, most advisers prefer to preserve their monopoly over the client relationship.

“However, if an investment manager establishes a direct and separate client relationship then the adviser should ensure this is explicit within the agreements for all three parties.

“If there is a complaint regarding the investment management, the key will be whether the investment manager has applied the mandate appropriately as specified by the adviser or DFM - depending on which part agreed it with the client.”

Nick Holmes, managing director of Brooks Macdonald Asset Management, says ensuring the portfolio is consistent with the client’s investment profile or the portfolio’s own investment mandate is always the DFM’s responsibility.

Assessing suitability can be done by the adviser or by the DFM – or even both – but it needs to be set out clearly Nick Holmes

Assessing whether an investment service is suitable for a client involves understanding their investment requirements and personal circumstances.

Mr Holmes says this includes reviewing their financial circumstances to determine that the client can bear the investment risks consistent with the chosen risk profile; ensuring the client has adequate knowledge or experience so that they understand the risks of the proposed investment service and assessing whether the investment service chosen is consistent with the client’s requirements.

He says: “Both the FCA and the Wealth Management Association have confirmed that the rules are flexible with regard to how responsibility for assessing suitability is allocated.

“Assessing suitability can be done by the adviser or by the DFM – or even both – but it needs to be set out clearly, so the client understands where the responsibility lies.”

According to Mr Holmes, the recent FCA update paper TR 15/12 emphasises this point.

Robin Beer, head of the intermediaries division at Brewin Dolphin, says the regulator is looking for DFMs to provide clarity in terms of which party is responsible for which element of the advice process.

In this regard, Mr Beer says Brewin Dolphin breaks the advice process down into a number of components within literature, and confirms the adviser is responsible for undertaking the client fact find, the suitability of any product or service and the appropriate level of risk for the client.