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

by Danielle Levy on Feb 26, 2013 at 07:36

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

Advisers must avoid taking a ‘box-ticking’ or ‘one size fits all’ approach when selecting a suitable discretionary manager, and focus on what is right for the individual client, Financial Services Authority (FSA) technical specialist Rory Percival has warned.

Percival reiterated the FSA’s stance that it is not prescriptive about who takes responsibility for suitability between the discretionary manager and the adviser who refers on investment business to them, as long as this is decided between the two parties. The most important thing is to be clear about who has responsibility for what, he said.

‘Our view is we don’t mind [who has responsibility]; you can split that among yourselves with suitability responsibilities between the advisory firm and discretionary manager. However, what we need you to do is make sure you are clear about whose responsibility it is to do elements within the suitability assessment,’ Percival told a room of intermediaries and investment managers at the Quilter Cheviot Investment Symposium.

‘We are completely neutral how you split responsibilities between the two parties. All we require is for you to be very clear between you who has what responsibility.’

He added that one of the regulator’s main concerns in this area is how the client’s risk level is assessed and the link-up between the risk profiling method and the risk definitions underpinning a discretionary portfolio.

‘How do you ensure that the way you assess the level of risk the client is willing to take matches up with the level risk that applies in the portfolio? Who is doing the assessment of the client’s risk profile – is that the advisory or discretionary firm? It does not matter which, so long as it is clear that the client ends up with the right solution.

‘One of the things that keeps me awake at night is the idea that advisory firms might assess the client using their mechanism for risk profiling as, for example, a cautious client and asks the discretionary manager for a cautious portfolio without further review whether that is the right match or not,’ he added.

Percival (pictured) also stressed that advisers must make sure they avoid taking a ‘box-ticking’ approach when deciding whether a discretionary manager is appropriate for the underlying client.

‘When it comes to due diligence, although we put a number of suggestions in the guidance about due diligence issues you might want to look at, I don’t want you to think it is an FSA checklist of things you have to do. There is no FSA secret checklist,’ he said. ‘What you have to do is the right things for your clients, and think about what it is you want to be the right solution for your client.

‘On the back of that, the due diligence you want to undertake is going to be very focused on your firm and your clients,’ he said.

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4 comments so far. Why not have your say?

Colin H

Feb 26, 2013 at 09:26

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!

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Ric Green

Feb 26, 2013 at 09:34

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

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Feb 26, 2013 at 09:37

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.

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Feb 26, 2013 at 10:49

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.

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