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7IM: Third party model portfolios threatened by FSA rules

by Michelle Abrego on May 21, 2012 at 14:20

The Financial Services Authority (FSA) needs to provide clarity over how agreements between discretionary fund managers (DFM), advisers, and their clients should be structured to help IFAs avoid falling foul of proposed regulation, according to Seven Investment Management boss Tom Sheridan.

Sheridan, chief executive of 7IM, said that under the FSA’s paper on centralised investment propositions (CIPs) if an adviser puts a client in a DFM-provided model portfolio they need either discretionary authority or the client needs to sign an agreement with the DFM.

‘The implication is if you don’t do that, come 1 January next year, model portfolios [provided by third parties] are dead,’ he said. ‘The concern the FSA has is that advisers are putting clients in model portfolios and there are changes being made to those portfolios without the client agreeing to them. The FSA might insist that the discretionary manager knows the client.’

Sheridan said he understood that IFAs might be uncomfortable with DFMs knowing their clients, but said the regulator must provide clarity over how agreements between DFMs, advisers, and client were structured.

‘The DFM still does not have a real relationship with the underlying client and is that a point the FSA will balk at? Can you tell us please, FSA? Because we think these models are a good thing. We are happy as DFMs to sign up [clients] and keep the portfolio within their level of risk, we don’t know the underlying client and the fact is that the practices we deal with don’t want us to.’

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2 comments so far. Why not have your say?

Mr Sheridan is correct but interesting that people think RDR has anything to do with this, it doesn't. The rules around what constitutes discretionary activity, the permissions required, the documentation needed (e.g. client agreement) and suitability (COBS 9 doesn't contain any exemptions) are not changing.

Whoever initiates changes to a clients portfolio without their agreement is carrying out discretion, for which you need permission, a client agreement to do so, and to take at least high level responsibility for suitability.

Many model portfolios appear to be run as pseudo funds but without all the rules and protections that authorised funds confer...

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PHicks

May 21, 2012 at 16:50

I wonder if Tom (though unusually for him) has misunderstood the relevance of RDR and 1st January on this issue. The rules seem clear, and are already in existence, in that a client for whom discretionary management is being undertaken must have an agreement to that effect with somebody, otherwise nobody has permission to manage the money. It can be the IFA (though less likely as the IFA would have to have discretionary permissions) or more likely the DFM. So normally the DISCRETIONARY MANAGEMENT agreement would be directly with the DFM, and the IFA is responsible for ensuring there continues to be a suitable match between the specific DFM recommended and the client's needs/objectives/ATR etc.

Of course the latter points would come under the normal (i.e. not discretionary) client agreement between he/she and the client. It doesn't mean either the adviser or client are in a position to influence the DFM's investment decisions, but does leave the adviser with responsibility for moving the client into something different if the original recomendation no longer suits the client for any reason. The FSA paper was one of their better ones and I didn't see anything new or unclear on the point in question.

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