Hands up who rushed to check their intermediary agreements with discretionary investment managers following the recent publication of the PFS paper ‘Agent as Client – What you need to know’ ?
If it is still on your ‘to do’ list, I would urge you to put it at the top because you may well be exposed to far more risk than you imagine.
Part of the problem is the terminology used. "Agent as client" sounds very similar to "Agent of the Client", yet there is a world of difference between the two.
We estimate that the majority of advisers have an Agent of the Client agreement with their clients.
This means they are acting in an advisory capacity with their clients. Under Agent of the Client, agreements with third-party investment managers should mean the end investor is the client of the discretionary manager and not the adviser.
With Agent as Client, the relationship with the investment manager is directly with the adviser and not the end client.
While this may be advantageous for advisers on the face of it – it means they do not have to expose their clients to the third-party – the reality is most advisers do not have the authority to deal directly with a third-party investment manager on their clients’ behalf.
Under Agent as Client, a third-party investment manager can treat the adviser as a professional client.
This mean they could make investment decisions that are only suitable for professional clients, but not suitable for the end retail client.
Obviously, the end client trusts their adviser to make the right decisions for them yet how many advisers who feel they have ‘outsourced’ the investment management, expect to scrutinise every aspect of the investments within model portfolios?
Advisers who have signed an Agent as Client agreement are exposed to any complaints from their clients about the unsuitability of the investments.
The investment manager is only accountable to the adviser, who, as a professional client, should be aware of what investments are being made and the subsequent risks attached to them.
We estimate that maybe as many as nine out of 10 advisers who are using model portfolios provided by a discretionary manager are doing so under an Agent as Client agreement.
If you are an adviser reading this, this means there is a good chance you and your firm are at serious risk of being hit with compensation claims should something happen to make your clients question the investments in their model portfolio (the Woodford Equity Income fund could be a timely example).
Reliance on Others
We have never liked ‘Agent as Client’ so we were pleased when MiFID II allowed the Reliance on Others operating model to be used.
The Reliance on Others rules have been around for a long time and actually form the same section of the COBS handbook as Agent as Client, but prior to MiFID II a ‘service’ was not covered.