Overuse of DFMs could rebound on advisers

Overuse of DFMs could rebound on advisers

Research into the way advisers use discretionary managers has raised questions about whether IFAs could be the fall guys “in a coming suitability blow-up”.

Consultancy firm Harrison Spence’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 investment services for clients in-house, while 9 per cent said they use another solution.

Article continues after advert

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.”

He pointed out that while it was a good idea for IFAs to use discretionary investment managers, it was 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 were a lot of advisers who outsourced everything because they thought it gave 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 in future.

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