Investments  

Who owns the client when you outsource?

This article is part of
Guide to outsourcing investments

Who owns the client when you outsource?

Outsourcing to a discretionary fund manager may seem an abrogation of responsibility on behalf of the adviser, but this could not be further from the truth.

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.

“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.