Personal Finance Society 

PFS warns of DFM claims against advisers

PFS warns of DFM claims against advisers

Advisers outsourcing services to discretionary investment managers could be vulnerable to future client claims if they have fail to understand the extent of their authority, the Personal Finance Society has warned.  

The professional body today (July 8) warned advisers may be "inadvertently" leaving themselves and clients "potentially exposed" when signing an intermediary agreement with a DIM, if they do not have the level of authority to act as an agent on their client's behalf. 

A signed intermediary document between an adviser and a DIM can confirm the former has the authority to act as an "agent" on a client's behalf, binding them to specific actions and giving them the authority to appoint a DIM in the first place. 

But according to the PFS advisers are unlikely to have this level of authority if only a standard advisory agreement exits between themselves and the client, meaning the adviser does not have the legal power to appoint a DIM despite signing an agreement to say they do. 

The warnings come amid concerns advisers could face claims from both sides, with the PFS also publishing a guide today clarifying which steps advisers must take to ensure outsourcing investment services does not "come back to haunt them". 

The guide warns if a financial adviser acts outside the authority given to them by the advisory agreement they have in place, the client and the DIM could each make a claim for compensation against the adviser.

Keith Richards, chief executive of the Personal Finance Society, said: "Any financial adviser who has signed an intermediary agreement with a DIM or DFM, based on the agent as client rule, but has not read and understood the terms and checked their client agreements could have left themselves vulnerable to future compensation claims.

"As with any complaint, who is on the hook depends on how the regulatory and contractual obligations are set up. The regulatory requirement is that a recommendation or decision to trade is suitable for the client."

Mr Richards said where there is a direct contractual relationship between the adviser and client, or the DIM and client, the responsible party is easy to identify, but he warned entering into an agreement to act as agent for the client "muddies this water". 

He added: "By reading this guide we hope advisers will be clear on what their responsibilities are when they utilise discretionary investment services."

David Gurr, founding director of Diminimis, which worked in partnership with the PFS to produce the adviser guide, said the risk was particularly relevant when dealing with a managed portfolio service on external platforms, which he said was one of the fastest growing areas of DIM business in recent years.

If markets take a dip, Mr Gurr warned, this issue of authority, which is not necessarily new to the advice community, will come to the forefront of an adviser's dealings with DIMs. 

He said: "Rising or steady markets can cover a multitude of sins, and these sort of issues will only come to light when a catalyst in the market causes clients to start asking questions and potentially complaining.