In a good practice update, the PFS, in partnership with independent due diligence consultancy Diminimis, has urged financial advisers to review the framework they have in place with their DFM ahead of upcoming Mifid II regulation.
Historically, many advisers have chosen to sign an ‘agent as client’ operating agreement with their chosen discretionary manager.
However, some of these advisers may have signed this agreement without obtaining the appropriate authority from their client beforehand.
Problem building for years
Under the FCA’s new Mifid II rules, which exhaustively touch on areas like suitability, client reporting and product governance, there is a distinct possibility that financial advisers will be brought to task for failing to disclose this information to the end client.
David Gurr, a member of Diminimis, called this “a problem that has been building for years”.
Research undertaken by Diminimis last year showed that one in five financial advisers had never reviewed their existing DFM relationships.
And yet, the consultancy’s findings emphasise that more advisers than ever are using DFMs.
In the last 18 months, the number of advisers relying on discretionary managers has increased from 51% to 57%, spurred on by the popularity of robo-DFMs.
Gurr said: “The issue has slipped through the cracks and it is only the benign market that has kept it from blowing up.
“Billions of pounds of assets are being managed with widespread confusion in the market as to who is responsible for what in the client relationship.”
Lack of clarity
PFS chief executive Keith Richards added: “We have identified widespread confusion in the market on this issue.
“The lack of clarity around responsibilities where advisers and DFMs are providing services to the same underlying client means many advisers believe the DFM is responsible for far more than they actually are, creating a potential ‘suitability gap’.”
