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FSA warns against a ‘box-ticking’ approach to DFM suitability
by Danielle Levy on Feb 26, 2013 at 07:36
Who has ultimate responsibility for suitability between advisers and DFMs has been something of a grey area between both parties, causing the FSA to outline rules last July.
Percival said the FSA recommends avoiding confusion by having a clear arrangement between the client, discretionary manager and adviser, which should be classified as a tripartite arrangement, formal outsourcing, or an agency model (see box below).
‘It makes sense to have clear letters of engagement with the discretionary manager to set out responsibility for who does what in the process,’ he said. ‘Having commonality in the language used in documentation and conversations between the client, the adviser and discretionary manager is also something to think about.’
Three types of arrangements between a discretionary manager, client and adviser (according to the FSA)
- Formal outsourcing arrangement: Where the adviser outsources investment management to a third party firm. In this context, the adviser firm needs to have permissions for managing investments.
- Agency model: Where the advisory firm acts as an agent to the client and refers the client on to the discretionary manager, but the client does not have a direct contractual relationship with the manager. The adviser firm is a client of the discretionary manager rather than the underlying client.
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