Recently we’ve received a lot of questions around the relationship between advisers and Discretionary Investment Managers (DIMs)* and in particular about Agent as Client agreements.
First, the scary bit. Not getting this right can open up your business to a number of issues, such as:
Ok, with the seriousness of it made clear, the first step is to know what arrangement you have in place with your DIM, in order to understand what you need to do. There are two types of arrangements:
This is where the DIM will treat you, the adviser, as a professional client under COBS 3.5.2(b). You are able to invest in products that are only available for professional clients. The investment manager is only accountable to you as the adviser, not the end client. This is very likely the agreement you will have in place.
This is where you arrange for the client to have a direct relationship with the DIM. Under this relationship, the DIM relies upon you to provide relevant information about the client. The responsibility and the liability for the suitability of the portfolio construction, both initially and ongoing, lies with the DIM in regards to a bespoke discretionary service. However, where there are pre-defined model portfolios, the responsibility and suitability lie with you as the adviser to select the most suitable portfolio from those available.
Under this arrangement, it is easier to understand and know who has responsibility for what. This agreement has become more popular in recent years, and it’s clear to see why.
While Agent as Client and Agent of the Client sound similar, they are in fact very different from one another. The following table (as summarised by the PFS document linked at the end of this blog) can help to illustrate this:
In line with COBS 2.4, if you have a DFM who is providing services to you and you are taking the recommendation on board for your clients, then you are acting as an agent and therefore have an Agent as Client agreement in place. In this case, there are a few things that you need to do.
The main issue here is that a standard Client Agreement between you and your client is unlikely to give you the level of permissions you actually need in order to act in this capacity. Therefore, if you have an Agent as Client agreement with the DIM, but nothing specific if your own Client Agreement to allow this, you will be in breach.
This can be easily sorted out by firstly determining the correct arrangement with your DIM, and then be ensuring your Client Agreement / TOB reflects this.
If you are to be an Agent as Client, your Client Agreement should cover:
If you are to be an Agent of Client, your Client Agreement should cover:
All of the above must be disclosed to the client and you must get consent before you proceed!
* Also known as Discretionary Fund Managers (DFMs) – because one acronym is never enough!
We would also recommend reading guidance provided by the PFS which can be found here.