The Personal Finance Society is launching a confidential telephone review service to help advisers get to grips with new rules on discretionary fund managers.
It comes amid concerns about how advisers are left exposed under commonly used terms with their DFM which leaves advisers exposed to all of the liabilities in the relationship with clients.
But new rules which come into effect in January as part of Mifid II will make it easier for DFMs to move away from this current situation - known as the “agent as client” framework - and share more responsibility.
In response, the PFS is launching a campaign to inform advisers about the rules and to encourage them to lobby their DFM to change their terms.
Under the commonly used "agent as client" terms, the adviser is treated as the client of the discretionary manager, acting as authorised agent of the underlying investor.
But this leaves the adviser exposed in the event of a client complaint since the discretionary manager does not have a direct relationship with the underlying investor.
Mifid II includes reforms of the Financial Conduct Authority's COBS 9 suitability requirements which, it has been claimed, make it easier for DFMs to change their terms to the “reliance on others” framework.
Keith Richards, chief executive of the PFS, said: "Many advisers don’t seem to understand whether they have entered an ‘agent as client’ agreement with a discretionary fund or investment manager or one based on ‘agent of the client’.
"So if complaints arise about the levels of service or performance, advisers are likely to find it is they - as the intermediary in the process - who is responsible, not the DFM.
"Such uncertainty could expose them to all sorts of risk, which would catch most advisers unawares. And if their professional indemnity cover provides no protection, it could threaten their whole business."
The PFS has asked its subject matter expert partner, Diminimis, to provide a confidential telephone review service to help its members understand the risks, begin any necessary audit and understand their options.
It has also agreed to fund a limited number of initial consultations and has negotiated special terms from Diminimis for any ongoing discussions to allow members to get a better understanding of the issues and what they mean to them, their business and their clients.
Mike Roberts, UK managing director of discretionary manager PortfolioMetrix, said his company is currently moving to the “reliance on others” framework, saying it would allow the risks to be in the “right place”.
This would mean advisers would be responsible for the suitability of selecting the right mandate while PortfolioMetrix would be responsible for running the portfolio to the mandate.
Mr Roberts said: “We think discretionary investment managers post Mifid II could move to ‘reliance on others’, although we suspect many will stay on ‘agent as client’ for as long as they can.
“It will probably take pressure from the regulator or advisers to force the pace of change.
“We are going to be repapering all our advisers in the new year.”
As it stands making a personal recommendation for a discretionary investment service doesn’t come under COBS 9.2.
But Mifid II brings investment services into COBS 9.2 and because it does that Mr Roberts said reliance on others can work so that if an adviser has got an agreement with a DIM they can rely on other people to do parts of the process.
David Gurr, founding director of due diligence consultancy Diminimis, said the question of whether DFMs move to new terms will be driven by commercial pressures.
He said: “Unless advisers apply pressure discretionary managers will continue to offer services on the basis of ‘agent as client’.”
Stefan Fura, director of Furnley House Wealth Management, said: "We don't actively work with DFMs on a model portfolio solution for this exact reason.
"When you do bulk centralised investment propositions with DFMs it is an area you have to be very careful about because of the ongoing suitability.
"I would be interested to see how it changes with Mifid II but I you would have to question, if you were a DFM, what would be your motive to change it."
Charles Stanley, Rathbones, Investec Wealth, Brooks Macdonald, Quilter Cheviot were all asked to comment on whether they would be changing their terms in the new year but did not comment.
A spokesman for Brewin Dolphin said: “At Brewin Dolphin we break the advice process down into four parts, with the adviser responsible for a needs analysis, assessing suitability and assessing the appropriate risk level.
“Brewin Dolphin is responsible for managing the portfolio to the risk mandate provided by the adviser.
“We see the benefits of this model as offering transparency of our terms and clear guidance to our adviser clients, as well as protecting their interests.”
The Financial Conduct Authority did not respond to a request for comment.
damian.fantato@ft.com
