What to consider in the countdown to Mifid II

On the face of it this shouldn’t pose much of a problem but, in reality, it exposes the flaw in the ‘agent as client’ operating model where essentially DFMs do not share responsibility with advisers. 

Under this arrangement, which the Personal Finance Society (PFS) is quite rightly concerned about, the DFM does not have a direct relationship with the underlying investor. 

Advisers leave themselves with increased liabilities using this model. It will be extremely difficult to carry out portfolio depreciation reporting if the discretionary investment manager is not part of the reporting chain and does not have a contractual obligation to the underlying client, or indeed know their identity.

Given the short reporting timelines involved in notifying clients of 10 per cent portfolio declines, advisers may need to engage with their platforms now to establish reporting responsibilities and use this opportunity to review their arrangements going forward.  

We believe there are two obvious solutions to ensure this is done in a timely and effective manner.

In the first, the DFM agrees to establish a direct contractual relationship with the underlying client. This imposes suitability obligations and a sharing of responsibility between advisers and the DFM. Importantly, it allows DFMs to take on the responsibility for portfolio depreciation reporting. 

Advisers who choose to offer complex products must determine whether the client has the necessary experience and knowledge to understand the risks involved.

The most efficient way to do this is to harness the power of technology to create an automatic chain of events.

When a particular portfolio depreciates by 10 per cent, a message is generated notifying the client of what has happened and any implications on the client’s capacity for loss and investment objectives. 

The email also considers whether the portfolio remains suitable – raising the possibility of updating the asset allocation. 

The adviser’s contact details are front and centre, giving the client all the tools needed to get in touch to discuss the situation in greater detail. The email is copied to the adviser so both parties are kept informed.

Alternative solution

The other solution is for platforms, given the discretionary investment manager is not part of the distribution chain, to inform the adviser, who in turn reports the portfolio depreciation to their client. 

This tends to be a slower process, with the portfolio valuation often having to be established by a human - who passes the information to the adviser, who in turn tells the client.

Imagine this scenario: A portfolio breaches the 10 per cent level but the valuation feed has technical issues and is delayed until 3.30pm on a Friday afternoon.