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FSA warns of mis-selling risk over DFM suitability

by Rachael Revesz on Feb 27, 2013 at 09:10

FSA warns of mis-selling risk over DFM suitability

The Financial Services Authority (FSA) has warned advisers who outsource investment of a mis-selling risk due to mismatches in the risk profiles of clients and the portfolios they are placed in.

FSA technical specialist Rory Percival said it was insufficient for an adviser to place a client judged as cautious into a discretionary fund manager’s cautious portfolio without further analysis.

'The obvious area of concern is risk profiling and matching that with an investment solution, ' he said. 'This mismatch could result in mis-selling on your hands.'

He said that suitability checks and risk profiling needed to be carried out by either the DFM or the adviser.

'Both the DFM and the adviser have suitability obligations to the same client,' he said. 'But it needs to be clear who is doing what.'

He added the regulator would be focusing on disclosure agreements provided by advisers using a DFM as part of its thematic review of adviser charging this year.

He said the FSA would not be judging whether advisers’ propositions represented ‘value for money’ but that charges were properly disclosed.

'The only person who can decide that is the client,' he said. 'And for a client to do make that judgement, they need to be clear about what service they are getting and how much it will cost. We have specific disclosure rules on adviser charging so disclosure becomes pre-eminently important.'

37 comments so far. Why not have your say?

l'ifa passeport en provenance de France

Feb 27, 2013 at 09:40

well said Rory

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stephen lyth

Feb 27, 2013 at 09:48

I cant wait for the food standards agency to adopt a similar stance to the FSA, just how much are M&S making from the sale of a Black Forest Gatteaux ????

Its all about charges isnt it and whilst we are on the subject, the Regulatory Authorities last year were £500 Million, how can that be justified ?

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Feb 27, 2013 at 09:52

If the FSA would allocate a teensy weensy slice of their IT budget to create a risk profiling tool that they approve and we can at least consider using, surely that would be an good use of their resources. Just saying..............

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You must be joking

Feb 27, 2013 at 10:15

Rory is undoubtedly one of the most sensible people from the FSA that I've had the pleasure to meet.

His comments regarding "cautious" in the IFA's/client's view compared to "cautious in the DFM's view" is extremely sensible, it is just too subjective a word.

In all honesty, it is a pity that the FSA don't go one step further and completely ban the use of such subjective terms - maybe the FCA will take this one by the horns.

As far as disclosure is concerned, I do wonder what exactly IFAs who pass their client's assets over to a DFM to manage will disclose as their ongoing service?

Maybe something like...

"I've introduced you Fred, our chosen DFM, and he will check your risk profile to ensure that he manages your money in a manner in which you are comfortable. He will select the underlying asset allocation and constituents, and review these on an ongoing basis. For doing this he will charge you 0.5% of the value of your assets"

"We, as your IFA, will keep an eye on Fred, although the investment management responsibility is his and provide a reglar valuation, based on the information Fred provides to us (and probably to you directly). We will also suggest that you move monies into an ISA each year (this is financial planning after all) so that you can shelter these monies from income and capital gains taxes."

"For providing this ongoing service, we will charge you 0.5% of the value of your assets, so for your £250,000 portfolio we will in effect be charging you £1,250 per annum to tell you to move some money into an ISA."

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David Cathcart

Feb 27, 2013 at 10:16

There is one high profile DFM's out there and you know who you are, that provide their own risk profiler and produce a suitabilty report on the client.

But be warned if a complaint arises they blame you for everthing and take no responsibilty, even though their TOB's clearly state say they do.

If you want to know who this firm is then please feel free to email me and potential save yourself thousands of pounds


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Mike Morley via mobile

Feb 27, 2013 at 10:18

And who exactly is to say that some wonk at the FSA is better qualified than an investment professional to build a cautious portfolio. Of course the responsible IFA will discuss the make up of the portfolio with the client and agree suitability. My recommendation is that this discussion is fully documented, put in words of one syllable and signed by the client. By doing this you will have at least a one in ten chance of raising a reasonable case for the defence if things go t*ts up!

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Ian Lees

Feb 27, 2013 at 10:23

What a cornacopia of crap from the FSA - on " the sutability of a discretionary fund manager ". This is the result of too many people acting without thought or knowledge , or checking their objectives or the way the markets operate - then applying their tick box attitude, to their dysfuntional and un workable " Regulatory Systems". The FSA having " warned" people ( authorised advisers only) to the " suitability of DFM's . . . the FSA, their colleagues and cronies impose . . . auto enrolment upon employers, employees . . .with absolutely no thought to the " investment ", or ANY risk profiling. By forcing people to join - or sign out each year , and relying on unauthorised employers to provide auto enrolment - and advice on enrolment ( or pay huge fees to the remaining authorised advisers - as they are the only people where consumers can obtain properly qualified Independent advice ( unlike the banks tied, and restricted advice - and poor quality of advice on default products default funds and default investments - paid for by commisions and structured bonuses ) . The FSA claim this to be " shoe horning ", into unsuitable products - then force feed the nation into autop enrolment - with the assistance of, Theo Pathetic site us the drag in . . . for auto enrolment.. It seems there is more " horse meat " in the FSA rules than a Tesco beef burger ? ? ? ? or a sweedish meatball ? according to the news . That is IKEA to the FSA ( the other " regulatory authority ", who have failed consumers - despite staggering wage costs and financial costs .

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l'ifa passeport en provenance de France

Feb 27, 2013 at 10:44


Only one ??

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Feb 27, 2013 at 10:44

I think this is one of the more sensible statements from the FSA for some time. Too many IFAs outsource/refer to DFMs for their clients stating they don't have the expertise to manage a portfolio (I can understand the time argument). But, and it is a massive but, if you don't have the expertise to manage a portfolio, why do you think you think you have the expertise to judge or review the suitability of a portfolio?

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Michael Brown

Feb 27, 2013 at 10:45

@ Ian

I am in your stable with this one!


Your last paragraph, if true, is beyond belief.

There is much more that is offered than just move some of your money into an ISA. Why would you do that without completing a Fact Find and recommendations for nothing?

The new world is that if you want advice there is a cost directly to you.

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Michael Brown

Feb 27, 2013 at 10:48

@ Tom.

It is not only a time argument but also a knowledge argument as well for IFA's.

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Ross D

Feb 27, 2013 at 10:54

If you outsource to the DFM, wash your hands of the investment decisions, and expect no liability, then how can you justify charging? You haven't done anything.

Lazy and greedy.

But sadly, typical.

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Feb 27, 2013 at 11:27

The first article I read on this speach by Rory said he had concerns about 'balanced' portfolios. Now this article is about 'cautious'.

If a good DFM runs any portfolio specifically for a certain client (rather than the fund of funds approach many have) The manager would have got a lot of information on the client, preferably meeting them face to face. Thus you can get 'cautious and a bit' or 'racy, but not too much' or any point in between. Of corse it is all subjective, but if Rory feels as advisers we must dictate to a DFM what the fixed asset allocation should be, then the benefits of a DFM will be lost.

As a portfolio manager has discressionary powers, he can exit a holding far quicker than a long portfolio advised and reviewed regularly by the adviser. This gives the DFM the chance to invest in areas we would be loath to recommend, or our permissions do not allow us to recommend. Commercial Structured SCARPS are one area where they can invest some of a low risk portfolio in, either for income or growth. They can get out if it is not working with little penalty, but honestly, can we? They can invest in investment trusts, ETFs whatever the class and again, as their individual actions do not effect the market very much, can enter and leave when is right for a client. These powers make a DFM lower risk for the asset allocation than if it were one of our own tailor made portfolios.

So Rory, I agree when you look at 'fund of funds' outsourced, (I rarely see the point unless passive), but if you are recommending a manager to run a bespoke portfolio, you have missed the point.

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Nicholas Cane

Feb 27, 2013 at 11:35

I think one or two people might have the wrong idea about how an IFA can make effective use of DFM services, to clients' advantage.

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Feb 27, 2013 at 11:45

Most of the comment here seems to be assuming that the DFM is engaged with the client. However the other way is for the DFM to be engaded with the Adviser to manage risk rated model portfolios linked to the ATR analysis program used by the IFA. This would seem to tick the boxes!

I agree about the use of subjective words like "Cautious" - can mean anything to anyone and adds to business risk. We go for the colourful approach!

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Ian Lees

Feb 27, 2013 at 11:53

@ Ross D . . . how uninformed you are about the work of advisers and financial planners . . .it is not what you know. . . it is about what you don't know ! and it appears there is a gap in your knowledge.

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Michael Brown

Feb 27, 2013 at 12:26


Welcome back. Been on your hols?

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Feb 27, 2013 at 12:45

Sorry Mike, been dealing with clients!

Guess it needs to be done from time to time.

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You must be joking

Feb 27, 2013 at 13:08

@ Michael Brown

I'm not sure if you read my tongue in cheek comment fully - but taking a percentage of a large sum of money to do a bit of basic financial planning (even if you do a full new factfind and recommendation) doesn't appear to be particularly good value...

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Stephen Baxter

Feb 27, 2013 at 13:24

I would have to agree that this seems one of the more sensible statements to come out of the FSA in recent times.

It is a constant source of frustration that discretionary managers use different terminology for risk to each other and the risk profiling tools that an adviser may use.

As a firm we work very closely with Asset Risk Consulting (ARC) to ensure the initial and ongoing suitability of our recommendations to DFMs.

In addition to this our back office system, Enable, provided by Best Practice has data feeds from our DFM's which are graded for risk so we accurately measure how much risk the clients portfolio is taking and whether this is within their tolerances on an ongoing basis.

Common sense and all part of providing on ongoing valued service to the client...

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John Wayne impersonator

Feb 27, 2013 at 13:32

@Stephen Baxter.... and worth 0.5% p.a. of anyone's money for your service!

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Andy King

Feb 27, 2013 at 13:46

what one man thinks is cautious another man thinks is high risk

and how do we square that circle

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Feb 27, 2013 at 14:15

@ Stephen.

Who do ARC use to rate their asset allocations or do you shoe horn clients into a pre determined risk category? What happens if you and ARC are wrong in your assessment of clients wants and needs?

If you feel you need the security of outsourcing both your client risk profileing tool (what ever happened to a question and answer session), your ongoing risk management service and your investment proposition to others, does this benefit the client? Why not discuss in depth your clients needs, risk and capacity for loss, research and propose a portfolio tailored to these needs, then periodically meet and discuss the portfolio in light of changing needs and asperations?

If you continue with tyour tick box service, trying to absolve you from any responsability if things do not go in line with clients expectations, there will eventually be tears. If your linked risk modeling back office systems identify someone whose equity holdings have increased so their holdings are in excess of your risk model, would you tell the DFM to sell equity and buy bonds? What would then happen if the bond market fell like a stone? Who gets blamed? Asset allocation models can be dangerous if kept to religiously.

If you use a fund of funds from a DFM, I would question why? In fact, if you use a fund of funds from anyone I would think you are unwilling, unable or untrained to provide a suitable portfolio yourself.

Mind you, perhaps you only recommend your own in-house investment schemes, run by a tame DFM, who knows!

I hope you do not use the disconnect between your risk modeling tools and a DFMs ones as an excuse to recommend your prospective clients transfer to your system, as you are complying to the FSA model.

Anyway, it is not common sense but tick boxing.

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Feb 27, 2013 at 14:18

Whilst I agree with the article it should include all attitudes to risk, all funds and investments.

The problem is that the regulator will not commit to an industry standard Attitude to Risk profile, which frankly they should design and implement. Until then we have varying models that can and do very in the risk taken.

The regulator does not want to commit to them designing the model as it will mean that they cannot use their powers of retrospective judgements, hindsight and ability to pass the buck. If they did arrange such a system or process it would actually make their lives, the fund managers and our lives much easier.

As the regulator will not take this responsibility, the solution is for the whole industry to adopt one risk profiling tool, designed by the industry, used buy all the industry. In this way there can be no confusion and the funds and DFM’s will have to manage within the industries agreed rating.

Why is it that something so simple cannot be implemented, it just dumfounds me.

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Feb 27, 2013 at 14:21

@ Marion Mitchell Morrison impersinator

are you sure you can provide this excelent service for only 0.5%? By Stephen's discription, I thought it is worth at least 1% or more!

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Feb 27, 2013 at 16:26

Ladies and Gentleman, please.

Why is it that every adviser that picks funds thinks they are doing a better job and will get a better outcome than and adviser that uses a DFM or Manager of Manager offering and vice versa.

There is no right or wrong, what is more important is the client’s outcome.

As for charges, that is down to the client and the adviser. Why do so many of you try to push your business model to everyone else. Why do you assume that because and adviser charges in a certain way or invests funds in a certain way, that you know their service position and what they actually do and provide to a client.

It’s like watching gamblers who only tell you when they win and not what they have lost.

Both methods have their advantages and disadvantages, costs and issues. Neither method is right or wrong. What is important is the client is invested within their attitude to risk and understands the potential loss, which with any investment could be all their money.

All too often people assume they know better than someone else, when the truth is we could all produce information to support all options and horror stories as well.

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Mr Jones via mobile

Feb 27, 2013 at 20:40

Why would anyone here be suggesting the FSA design a risk profiler? Have they not proved time and time they are not fit for purpose? If the FSA risk tool suggested 100% cash or gilts (which wouldn't surprise me) would you still do it?

Do you all follow asset allocation tools which will suggest a large usage of cash and gilts even though you are guaranteeing a loss for your client (currently anyway)? I expect you do to satisfy your compliance robots...even though the client should already have their allocation to cash elsewhere. Some advisers need to strap a pair on and have faith in their knowledge and judgment...or is that the problem perhaps?

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phil castle via mobile

Feb 28, 2013 at 07:59

I agree with MartinIFA at 14.18 . We need an agree definition from industry or regulator. NOT a risk profiling tool, just agreed definitions. We should profile our own clients using tools of our own choice, just definitions need to be just that, defined!

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Chartered Mark

Feb 28, 2013 at 09:06

Just a couple of points.

Again the FSA states the bl**dy obvious. After the horse has bolted. They have created the rules for the game and on a regualr basis, seem to have to highlight another glaring gap in their brilliant new world.

Also, if I have 2 DFM clients, one with £100K and one with £200K, there will be probably be very little difference in the work involved for each one. But I get twice the trail from one than the other. This does not sound like a professional charging for his services, but more like Commission. Just calling it a Fee or whatever, does not change that.

Also a clients ATR or Risk Tolerence that is set by whatever method, gives a label by which the client is treated for the future. (Obviously the professional IFA would redo it everytime he interfaces with the client ?) The problem is that on the day that the IFA ticks the box, and calls the client Cautious, or whatever, the answers and the result could have been influenced by factors in the clients personal situation that we do not know. 3 months down the line, those factors could have changed, or faded, and his ATR or RT would now be Balanced. Just wondered, who will be responsible for amending that. As the client is not the "Expert" and the IFA is probably deemd to be, the FSA/FSCS/Ambulance chasers will say that it is the IFA who should be psychic and know when the clients mind changes, because the client does not set the ATR the IFA does. The client does not know the workings of the ATR tool, the IFA does, or should.

This is just another stick that the FSA has created to beat the unwary IFA in the future.

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Feb 28, 2013 at 10:02

Here we go again, percentage fee, hourly rate, which is right, both, neither, why? What is important is value for money, client outcome and results. Stop trying to push one or the other, there is no point, there is no right or wrong. It assumes you know what the service position is for the payment received.

Since everyone seems so hanged up on this, let me point out a few facts.

Hourly rate, how do I know it has taken you 10 hours at £200 per hour (£2000) you may have completed the work required in one hour, but charged me the other 9 hours for the research you have done for 100 other clients, which may have taken 9 hours to complete.

Percentage fee 0.5% on £100,000 (£500) on £200,000 (£1000) work maybe the same, but the risk is higher to the adviser should a claim arise.

If you take the average IFA fee I am told is charging £150.00 per hour then £1000 is 6.6 hours, you most likely spend a dam site longer than that with any client with £200,000 savings and save the client more than this in tax.

Why, why, why does everyone keep pushing their business model and attacking anyone that does not think like them. Once and for all there is no right or wrong.

Final point, percentages fee are charged by Solicitors for probate, conveyance and many other services, we are told they are Professionals.

Accountants charge fees, we are told they are Professional.

They are, they do not attack each other or tell another Professional how to charge for their services.They let the consumer make a choice.

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Mark Hassall

Feb 28, 2013 at 11:48

I was at the presentation given by Mr Percival, he articulated the FSA position very clearly. It was very helpful in my understanding the adviser job in out sourcing investment to DFM - delegate but don't abdicate and keep the clients understanding at the centre and under review.

It was a very worth while meeting. well done to the organiser Defaqto

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Michael Brown

Feb 28, 2013 at 12:46


Yes, but it depends what else you add? All information etc is to be charged for and then this will lead to the VAT question so as they say the wheel of the truck go round and round etc!

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Ian Lees

Feb 28, 2013 at 13:46

I have been extremely critical of the failures of Hector Sants and his night hood - for which I make no apology. However, given his introduction to Barclays and the changes being applied - perhaps he is more compfrtable in this " educational position ? "

I laughed when Stephen Hester claimed that Europena Law ammendments and restrictions to bonuses - means he will " lose talent ? " That will be the incompetent, feckless and reckless talent he is currentlyemploying and working with ?

What an opportunity to put in place competent employees or committed employees - to look after customers rather than fiddling Libor rates and customers.

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Ross D

Feb 28, 2013 at 13:56


You're absolutely right. One of the major problems we have as an industry is we can't agree on anything, and we all think our own business model is the right one. I'm no different - my comment above shows my dissagreement with IFAs outsorcing to DFMs and still charging their fees. But you're right, who's to say I'm right or they're right? I shouldn't be so quick to judge others.

The bigger picture is poor Gill Cardy, trying to put together a trade body representing all of us. How is that possible if we can't agree on anything?

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Feb 28, 2013 at 14:40


Perhaps the difference between ourselves and solicitors and accountants is we have an opportunity to charge clients an ongoing fee from their investments. A solicitor once paid his percentage probate fee has no ongoing income from that job, an accountant has to hope that next years accounts will be done by him and not someone else.

however many solicitors and accountants charge clients an ongoing fee that enables clients to access so many hours worth of work in a year.

We do not agree as a whole because we are all confident, client centric individuals that have found job satisfaction by helping people to get closer to achieving their dreams. We are all individuals, as are accountants and lawyers. I bet they disagree all the time, especially lawyers!

So each to their own, we may privately dispise certain firms, certain practices etc, but these comments are only a public expression of our private thoughts. We know that if you rubbish clients existing plans you question their ability to make decisions. So we dont rubbish them, or any other IFA unless it is obvious they have caused a fraud on your clients money. Then we report them.

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Chartered Mark

Mar 01, 2013 at 07:37

Just to stir the sh*t on fees.

As others say, there will never be any agreement on what is correct and what is fair.

But using the comment made by many that they feel they can justify the fee that they charge because the advice they gave has saved the client a shed load of tax or IHT or whatever. The problem with this is that I told my Motor Technician this, and the greedy bast*rd has just charged me £50,000 for a new set of brake pads. Well he did save my life, so that's fair enough.

If we get rewarded by fees that we relate to the savings etc that we make for the client, it does look rather like the bonus culture in the banks, which I have not seen a lot of support for on these boards.

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Ian Lees

Mar 01, 2013 at 08:40

Accountants are rewarded by way of fees ! Solicitors are rewarded by way of fees ! for their " guestimate" of their worth to a consumer. I have just has a convesation with a client whose accountant was moaning at the amount of commissions I received in comparison to his annual fees ( £ 1,000 ) until I pointed out that his working life of 30 Years he would be paying £ 30,000 plus inflation - over the period. Fees are so much better ! Also his accountant didi not like pensions . He had a commercial ( office and flat ) as his " pension " - took on two partners and sold the accountancy business, on the bais he would get rental from the partners " as his pension income". The partners once in control of the business bought their own property three doors down - and the accountnat cannot rent out the property, or sell the property , without taking a massive losss ( to income and ego ) and cannot rent the flat beciase you have to go through the office to get to the flat. I wonder if the account would think my advice on e.g diversification of assets, rather than rely on one asset would be worth my fees, or in those days my commissions, or if had had taken my advice to have a back up - a pension plan which is liquid, and can pay income ( for that is what it is designed to do) .I wonder if he would pay my fees now - with the benefit of hindsight and my warnings - which he ignored. I have made some clangers along the way for my client , and we have discussed the merits and the opportunities - and he still has a portfolio of just over £ 2,000,000 . His accountnut is retired now, living on the state pension and some other savings and investments upon which he took his own advice. My point is we all need advice - pay for it review it monitor it - and you will be successful in your lifestyle financial planning.

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