An adviser outsourcing any of the functions they perform for a client must consider the implications both for their own business and for the end client.
In the area of discretionary investment management, one major due diligence issue for advisers is how exactly the client relationship is managed. There are effectively two options: “Agent as client”, or the use of 'reliance on others' framework.
Under an agent as client arrangement, the DFM’s end client is the financial adviser themselves, not the adviser’s client.
In this way, the adviser is responsible to their client for the actions of the DFM.
David Gurr, of consultancy firm Diminimis, notes that in the event of the end client having a grievance with the actions of the DFM, the liability is with the financial adviser.
Using a reliance on others model, the liability for the DFM's actions on behalf of the end client remains with the DFM.
Mr Gurr says it is crucial that the adviser is sure the end client is aware of the distinction between the two, and understands this distinction.
He says if an adviser feels their client does not understand the distinction, then it may be that a discretionary investment management solution is not appropriate for that client.
“Advisers should ask: ‘do I want to be the client of the DFM, does my current client agreement allow me to act as agent? What do I want my firm to be responsible for, and what should the DFM be responsible for?
Ricky Chan, an adviser at IFS Wealth and Pensions, says the nature of this contractual agreement is one of his main considerations when choosing a discretionary investment manager.
Martin Bamford, head of client education at Informed Choice Financial Planning, says ensuring the relationship between the adviser, the client and the DFM is a “hygiene issue” that needs to be right.
When the regulatory framework has been set, Francis Klonowski, who runs Klonowski and Co, an advice firm in Leeds says the key consideration for him when choosing a provider is the ability of the investment manager to develop a relationship with the end client.
He says: “I always think about whether they could sit down at the kitchen table with one of my clients and explain the portfolio, the personality of the person doing that matters, and how my client reacts to them.
Mr Klonowski added: ”There is a saying that you know whether you will like someone within 20 seconds of meeting them. I remember one instance where I decided much sooner than 20 seconds that I didn’t like them, and couldn’t see them getting on with my clients, so we didn’t use them."
Clear communications are important whether or not the adviser acts as the client of the DFM. Minesh Patel, adviser at EA Financial Solutions in London, says the quality of reporting from the DFM is important, as he says there is a problem when “the communication is only digestible to advisers.”