Discretionary Management 

What is your duty of care to clients when outsourcing?

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Taking care of outsourced clients

What is your duty of care to clients when outsourcing?

While some advice companies have the internal resources and expertise to effectively manage clients’ investments, many do not, and as a result they choose to outsource clients’ investments to be managed by third parties. 

Last year, the Financial Conduct Authority published a discussion paper exploring whether a legal duty of care was needed after some stakeholders raised concerns the regulatory framework was not providing adequate protection for consumers.

The regulator defined it as a positive duty to promote customers’ best interests, and as a fiduciary duty to not cause harm to a customer’s financial interests, create or exacerbate conflicts of interest.

But the Personal Investment Management & Financial Advice Association warned the proposals were confusing, representing a ‘one size fits all’ approach.

So, what exactly is your duty of care when it comes to your client’s investments, and does it change when outsourcing their wealth to a third party?

Client’s best interests

Advisers need to act in their client’s best interest and to know the options available to them, says Joe Roxborough, a chartered financial planner at Ascot Lloyd.

He notes: “My primary duty to my clients is to know about every single area available to them and why it is or is not appropriate.

“After you know how big the playing field is, you can then start to whittle down your options and focus on the detailed elements.”

In this respect, adviser’s duty of care is exactly the same for advisers who outsource investments and for those that do not, suggests Dan Russell, managing director of SimplyBiz Investment Services.

Mr Russell says: “If a third-party fund manager of a multi-asset fund, a model portfolio or a bespoke [discretionary fund management] service does not deliver as expected for clients, it remains the responsibility of the adviser.

“Of course, any good adviser would be continuously checking that any outsourced provider in their supply chain is delivering as expected.”

He adds: “This will likely mean an adviser will establish their own benchmarks for the outsourced portfolio and monitor this to ensure it meets those expectations, especially accounting for the additional costs.”

Lawrence Cook, director of Thesis Asset Management, agrees.

He says: “Even before [DFMs] became popular advisers have outsourced investments to an asset manager by selecting funds.

“Using a DFM is just an extension to this, taking care of the administration side of things.”

Benefits of outsourcing

For these reasons, there are a number of benefits that can be realised for both the adviser and the client, notes Mr Cook.

For example, clients can be assured they are going to receive consistent and seamless service, and are faced with less paperwork.

He explains: “Those paying to use a professional service value their time, and having an [independent financial adviser] who outsources investments means the client is more likely to receive personalised service.”