FSA warns against a ‘box-ticking’ approach to DFM suitability

Typical FSA comment - no boundaries, just a simple comment saying sort it out yourselves; which will of course lead to misunderstandings and errors.

Imagine this; several years down the line a DFM manages to spend a sizeable proportion of the funds on a sure fire thing - wood from a Brazilian rain forest without authorisation; or the DFM Manager transfers the funds to an untracable offshore fund.

Who is going to get the blame?

In any such scenario the first complaint that goes to the FOS will be against the advising firm as the FOS will use a causation arguement saying that the client would not have invested in the DFM without the advice from the adviser and therefore pay up.

Here we go again!

How does this Mr Percival know so much about everything? Was it is his time as compliance officer at Thinc?

Crikey, which DFMs have you been using Colin?! If the tripartite model is used and the DFM's agreement clearly specifies which investments are permitted and which are not, then they do as you suggest and those investments were excluded under the agreement with your client, then liability would clearly lie with the DFM.

Get things right at the start, which is all the FSA are saying.

Problem is that so many DFM solutions these days are plain vanilla, off-the-shelf, supposedly risk-graded funds/portfolios that purport to do the job for IFAs with little (extra) thought required, IFAs aren't being encouraged to do the legwork and get it right.

This is a bit like going to court and being told by the judge that you should have agreed a resolution beforehand!

Classic tip-toe and sidestep - the reality is that the majority of existing arrangements are not clear and it would be far more helpful to be told what the default position is in the absence of any clear documentation.

I could be wrong but I believe DFMs are generally operating on the basis that the 'agency' arrangement is the default which of course places the responsibility for suitability squarely on the IFA. This despite the fact the arrangement is often sold to IFAs as de-risking their business...

IFAs are probably just viewing the arrangement (particularly where it is platform based) as an easy way of organising client investments whilst maintaining control of them.

The problem is what happens when clients complain? I think Colin H is correct though I think the reason will be because the FOS won't be interested in looking through the arrangement to the DFM. They don't need to use any argument other than what is 'fair and reasonable' in their view. Period. If the DFM is culpabale then the IFA will have to claim from them directly themselves... good luck.

It is also worth considering who one of the biggest promoters of these arrangements are. For platforms, assets are king and DFM models are easy to market and encourage with no obvious risk to the platform. It would be interesting to know their view on the distribution of responsibility in the event of a client complaint.