Who owns the client when you outsource?

The client belongs to the adviser, both in terms of relationship and regulatory responsibility.

Relationship

When it comes to the question ‘who owns the client?’, Emily Booth, senior investment manager for Parmenion Investment Management, is clear: “The adviser.”

She says: “One of the questions we face most often from advisers considering a DFM is a concern about a loss of control or identiy, with the fear that all clients will get forced into the same solution.

“With us, advisers can choose the level of control they want to maintain. They can tweak asset allocation profiles for each individual client within most of our solutions.

The adviser is responsible for all aspects of financial planning, including the choice and suitability of the various tax wrappers that are recommended. Peter Mullins

“This enables them to keep control of the process as well as allowing clients to feel they are receiving their own individual solution.”

Regulatory duty

Even if the DFM is responsible for determining key metrics, such as the client’s capacity for loss and attitude to investment risk, the financial adviser is responsible for the initial advice and the recommendation.

This means advisers still have an obligation to the client, even if the client’s investment management is outsourced to a third party discretionary manager.

As Rohit Narang, chief operations officer for Intelenet Global Services, states: “The ownership of clients always rests with the institution.

“This means it is wise for any institution looking to outsource to be sure to engage a firm on the basis of outcomes they will deliver for clients, as the original firm will ultimately be responsible for customer complaints.”

In other words, financial advisers have a duty, outlined in the Financial Conduct Authority Handbook, to ensure that outsourced operations are most suitable and appropriate.

In the FCA’s Handbook, in its section on outsourcing, it states: “A firm cannot contract out its regulatory obligations and should take reasonable care to supervise the discharge of outsourced functions.”

Peter Mullins, head of business development at European Wealth, comments: “The FCA will look at who is giving the advice. 

“As far as the DFM is concerned, it will be responsible for determining the client’s attitude to investment risk, capacity for loss and time horizon for the portfolio they are managing.

“But the adviser is responsible for all aspects of financial planning, including the choice and suitability of the various tax wrappers that are recommended.

“It is therefore the adviser who should maintain overall responsibility and therefore maintain a strong relationship with the client.”

He also states that as the adviser will have selected the appropriate DFM for the client in the first place, the adviser will therefore be responsible for ensuring that the DFM maintains the criteria by which it was selected in the first place.

Shades of grey

There are elements of the outsourced operation that could be the regulatory responsibility of the third party, rather than the financial adviser. 

A primary example of these would be tactical investment decisions taken by the portfolio manager, which may or may not end up being in the client’s best interest in terms of performance or risk.

Outsourcing to a DFM means you know all clients will have portfolio changes executed at the same time and for the same price – fairness in action.Lawrence Cook

While the adviser has a duty to monitor the manager, the DFM has a duty of care when it is carrying out the investment management.

As early as 2013, the FCA warned of advisers relying too much on marketing material provided by DFMs, and urged them to pay better heed to due diligence.

At the Defaqto conference, Rory Percival, the then technical specialist at the FCA, highlighted the lack of appropriate due diligence as a “concern for the regulator”.

The view seems to be that even if the DFM makes an investment error, against which the client and the adviser can raise a complaint, the IFA might not be completely exonerated if the adviser is found to have not carried out proper due diligence before recommending that DFM, and not carrying out proper monitoring. 

However, Lawrence Cook, business development director at Thesis Asset Management, believes the fear of regulation or loss of relationship is outweighed by the benefits to the client of ‘fairness in action’.

He explains: “Outsourcing to a DFM means you know all clients will have portfolio changes executed at the same time and for the same price – fairness in action.

“In a non-outsourced world, the IFA may decide to make some strategic asset allocation changes. But depending on how quickly the clients respond there could be consequences.”

“Clients of the same risk requirement should not get different outcomes,” he added.

Outsourcing overseas

There may be elements of the advice journey that involves overseas financial transactions – such as to a qualified, registered overseas pension scheme or when getting an overseas mortgage. 

Generally, these are rare and the regulatory requirements are clear on the processes involved with UK-based advisory firms carrying out business internationally on behalf of clients.

Even if the client is based in Singapore, if the adviser is regulated by the FCA, the advice is covered by the UK regulator. 

Grey areas can appear, however, if the client has a portfolio outsourced, say, to an overseas firm not regulated by the FCA.

Any recourse to redress should that overseas-based third party fail in its obligations will not be covered under the UK’s Financial Services Compensation Scheme – so the onus of responsibility will fall back on the adviser. 

This is why, as Mr Narang comments, it is best to find a firm based or headquartered in the UK and covered by UK regulation: “It definitely helps if the outsourcing firm is also FCA authorised in the UK.”

simoney.kyriakou@ft.com