What is your duty of care to clients when outsourcing?

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.

As an IFA, my knowledge lies in creating financial plans for my clients, factoring in their personal needs alongside tax, protection and investment planning.Joe Roxborough

“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.”

While for the adviser, it creates business efficiencies by removing some admin required when managing the investment process and allow companies to spend more time on the financial planning elements with clients, adding value and creating a growing business, Mr Cook adds.

He says: “By removing the burden of investment management, it gives adviser firm owners greater reassurance that they know their advisers are focusing on delivering a quality, personalised service.”

In this respect, the main benefit is expertise, says Mr Roxborough.

“There are many thousands of funds available to UK investors, let alone direct equities, bonds, alternative asset classes and so forth, so keeping on top of changes in the market is crucial,” he says.

“As an IFA, my knowledge lies in creating financial plans for my clients, factoring in their personal needs alongside tax, protection and investment planning.

“Picking an investment approach that works for the client – factoring in their risk, time horizon and tax wrappers – is foremost, and I would not pretend to be able to move nimbly between funds and stocks for each of my clients at the perfect time.”

But this may not always be appropriate for every client and so depends on their situation.

“For my wealthier clients in particular, I find this is the best way to meet their objectives,” he adds.

Outsourcing allows advisers to focus on their true area of expertise – providing holistic advice and fulfilling their clients’ financial planning needs, says Ben Willis, head of portfolio management at Chase de Vere.

Mr Willis says advisers have realised that making investment decisions has become time intensive and complex.

“Not only are advisers required to constantly understand and interpret what is happening within investment markets, but they also have to undertake the necessary research to make appropriate recommendations to clients and receive agreed permissions from their client before they can proceed with the investment advice.”

“Advisers should instead be focused on their clients’ financial and tax planning – these are the areas where they can add real value,” he adds.

Dangers of due diligence

One possible danger lies in clients paying for the same service twice, says Mr Roxborough.

He explains: “We want our clients to get the best returns possible and to ensure that our fees are more than compensated by the value we add.

“Therefore, picking an investment solution that works well for them, without adding unnecessary complexity and charges, is key.”

Another danger is advisers’ due diligence, or the lack of it, suggests Mr Cook.

He says: “An adviser will need to be clear about what he wants to achieve when outsourcing and must also do their homework on the make-up of any model portfolio they end up recommending to their clients.

“It could be that a client has requested to avoid investment trusts because they are concerned about the volatility they potentially bring to a portfolio.”

He continues: “That means advisers often won’t be able to just use an ‘off-the-shelf’ model portfolio as many of these use investment trusts.

“As such, care and consideration is vital for advisers, it is important they get as much information from their clients as possible in order to provide suitable advice.”

Finally, Mr Willis points out that if the investment solution selected significantly underperforms and/or provides poor ongoing service, this will naturally reflect badly on the adviser.

He says: “They will be deemed responsible for making the decision to outsource to that third party.” 

Victoria Ticha is a features writer at FTAdviser and Financial Adviser