Clarity on where the adviser's responsibility ends and where the discretionary investment manager's (DIM) begins is crucial, yet advisers still fail to seek it, consultant David Gurr has warned.
Speaking at PortfolioMetrix's ‘The Mix Forum' conference, the Diminmis founder argued advisers needed to ensure they were clear about what they are responsible for in their agreement with the DIM, as in the end they were the ones carrying the risk.
Gurr said he recently conducted research that found 28 of the 30 DIM representatives he spoke to did not correctly articulate the legal and regulatory basis on which they offered their services to the adviser.
What's more, at a seminar last year Gurr said a mere two of 160 advisers said they had read their intermediary terms of agreement with their DIM.
He said: "I believe the balance of risk has shifted far too much against the adviser - that exposed you in areas you probably don't have any idea about."
Gurr pointed out the end client could take their complaint about the adviser to the Financial Ombudsman Service (FOS) but the adviser could not take the DIM to the FOS.
He said: "Both you and the DIM have suitability responsibility with the investments chosen but if you don't know what that is then there is a chance of a suitability gap."
He referred to a 2012 review of DIMs by the regulator that found about 73% of client files did not support suitability of the advice given to the end client. He said in another review in 2016 this had decreased to 50%.
Former regulator Rory Percival, who also appeared at the conference, listed the common suitability pitfalls that advisers can avoid.
Product vs. investment service
Gurr said confusion remained particularly over who carried responsibility for the investment product and the investment service.
Under current regulation responsibility for the "designated", or external, investment product lies with the adviser. However, for the designated investment service the responsibility is with the DIM, he said.
He pointed out many advisers were not clear on the difference, and in some cases were therefore falsely asked by the DIM to take on responsibility for both, the service and product.
Gurr also pointed to confusing terminology used by the regulator in regard to outsourcing, which many in the industry did not fully understand.
For instance, the official definition of ‘outsourcing' in the regulatory sense meant you have to have the "appropriate permissions" to outsource, but that only applies to the DIM, he said.
"If you don't understand the regulatory connotations then there's already room for confusion. If you currently use that term then what are you actually doing?"
Second, there was a difference between ‘agent as client' versus ‘agent of the client', said Gurr.
"If you operate on the basis where you are the client of the DIM as opposed to being the agent of the client - so you're now the agent as client - you have additional responsibilities in legal terms to address," he said. "But the industry doesn't understand this."
Understanding the difference between who is the professional and who the retail client is another confused definition, said Gurr.
"A DIM can invest in assets that are suitable for professional clients, the adviser, but your clients are retail clients," he said.
"So have you got controls and systems in place to pick up if they are [investing in permissible assets]? As you don't have a say in it, how do you report back to your client when they're invested in assets they're not allowed to be in?"
Gurr said this issue was highlighted by the regulator in its warning about SIPPs and underlying discretionary investments in January 2017.
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