InvestmentsMay 24 2016

PFS backs DFM questions to fix ‘suitability gap’

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PFS backs DFM questions to fix ‘suitability gap’

Increasing numbers of advisers are now using discretionary investment managers, but effective due diligence is frequently lacking as existing documentation and agreements fail to view it as a dynamic service rather than a product, according to Dimiminis.

Regulatory due diligence consultancy Dimiminis warned the resulting lack of clarity around responsibilities where advisers and DFMs are providing services to the same underlying client, means advisers believe the manager is responsible for far more than they actually are, creating a potential ‘suitability gap’.

To help close this, the firm is launching a standardised set of qualitative questions advisers should ask when working with DFMs, endorsed by the Personal Finance Society.

It follows on from the PFS Good Practice Guide on Adviser Research and Due Diligence on Discretionary Investment Managers, which was authored by Diminimis and published last February, with more than 3,000 copies having now been distributed.

David Gurr, founding partner of Diminimis, said the rising number of DFMs and their growing use amongst the adviser community, means there is an urgent need to address the specific nature of the delivery of service.

“The FCA’s recent warning around suitability in wealth management is a timely reminder that inadequate due diligence is one of the main root causes of unsuitable advice.

“Having the right questions to ask means advisers will now be equipped to make an informed decision, but this cannot be a ‘tick-box’ exercise.

“There is no short-cut and the information gathered needs to be analysed and interpreted if the adviser is to have a greater understanding of the controls and oversight they need to manage the risks involved, otherwise they may still find themselves exposed.”

Do you use a DIM to meet the investment needs of your clients
ResponseMay 2016December 2015
Yes, I use a DIM to meet all the investment needs of my clients11.5%8.3%
Yes, I use a DIM to meet some of the investment needs of my clients45.9%43.1%
No, all investment services for clients are carried out in house33.6%39.4%
No, I use another solution9%9.2%
Total DIM use57.4%51.4%

There are four versions of the question set to reflect the four broad service types available in the market. The different operating models and service styles that the advisers’ and DFMs enter into have significant differences and resultant obligations:

1. Managed or tailored discretionary investment management services;

2. Managed portfolio services direct (DFM’s own nominee);

3. MPS on external wrap platforms;

4. Other DFM services on external wrap platforms.

PFS chief executive Keith Richards said a large percentage of its members use DFMs in some capacity and there has been ongoing concern in recent years about the time and cost involved in completing an appropriate and robust due diligence process.

“A standardised question set will go some way to easing these pressures during the initial stages of a due diligence exercise and will offer advisers the confidence that they are asking the right questions from the outset,” he stated.

“I encourage members and all advisers to apply this new standardised approach, in order to develop a greater understanding of the controls and oversights needed when engaging with DIMs.”

Sharon Sutton, PFS Practitioner Panel member and managing director at Thornton Chartered Financial Planners, noted due diligence is high on the FCA’s agenda so it is vital to ensure the right outcome for clients, as well as meet regulatory responsibilities.

“Key to this is understanding where the advisers roles and responsibilities lie, and the upfront matrix of who does what brings clarity to this. Semantics, jargon and acronyms are often used, so a glossary of terms is an invaluable part of the guide.”

Adrian Tonks, intermediary development manager at Quilter Cheviot, said the Diminimis approach differentiates between the requirements for platform, model and bespoke services and should be a helpful step in driving up standards.

For more on adviser due diligence, read our guide on the subject from March and gain one hour’s structured CPD.