How IFAs could be fall guys in DFM suitability probe

How IFAs could be fall guys in DFM suitability probe

Harrison Spence research has shown nearly half of advisers use a discretionary fund manager to meet client needs, raising questions about whether IFAs could be the fall guys “in a coming suitability blow-up”.

The consultancy firm’s survey of 150 advisers during November and December showed that 43 per cent use a discretionary manager to meet some of their clients’ needs, while 8 per cent use a discretionary manager to meet all of their clients’ investment needs.

About 39 per cent of advisers carry out all investments services for clients in-house, while 9 per cent said they use another solution.

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The study also revealed that many do not recognise their obligations when working with a discretionary manager and have minimal or non-existent controls and oversight in place.

Brian Spence, managing partner at Harrison Spence, said many advisers may be labouring under misapprehension about what they are outsourcing to a DFM. “The regulatory spotlight has long been on suitability and its glare is getting hotter, we have been warning that IFAs could be the fall guys in a coming suitability blow-up.

“The FCA’s most recent thematic review revealed 59 per cent of discretionary investment managers’ files were found to be ‘high risk’ or ‘unclear’.

“This may leave IFAs hugely exposed as the ones who introduced the business. The regulator’s patience must be running out and pleading ignorance of how the rules really stand is scant defence.”

Mr Spence pointed to the Financial Conduct Authority’s research from four years ago, which found that 79 per cent of wealth managers’ files were not appropriate, particularly when assessing attitude to risk.

He pointed out that while it is a good idea for IFAs to use discretionary investment managers, it is also potentially risky for them to do so if the DFM “hasn’t got his own act together”.

Robert Lewis, director at Heritage Financial Solutions, agreed that there are a lot of advisers who outsource everything because they think it gives the responsibility away.

“I think the IFA has got to look at what they are doing and how they are doing it. With our DFMs we question what they are doing - we see it as a three way discussion.

“Even though you are outsourcing the investment part, the adviser still has responsibility to make sure the advice given is suitable, so it’s almost like a parental role.”

He also agreed that the FCA would look at this area a lot more closely going forward.

To learn more about discretionary fund management and earn CPD, read FTAdviser’s guide.