Jon Yarker explores the world of ‘agent as client’ agreements and assesses key concerns such as whether advisers end up bearing the risks of their DFM
Among IFAs who outsource, many use agent as client (AAC) agreements where they are the client of the DFM and their own clients are kept at arm’s length from the discretionary. However, last summer the Personal Finance Society (PFS) issued a paper highlighting several risks to this model, fearing these weren’t being recognised by advisers. But what is the reality?
“Sometimes there’s an inference that AAC is simply the easiest thing for IFAs but it’s much more than that,” says Lawrence Cook head of UK intermediary distribution Sanlam. “AAC helps deliver market access to quite sophisticated discretionary services and without it, I’d question what availability would be like.”
For Jane Hodges, managing director of Honey Money Financial Planning, AAC is the standard way of working with their chosen DFM: “This is how they work and we didn’t see this as an issue. We think we are responsible for the advice and ensuring ongoing suitability anyway.”
A key concern with AAC is the adviser may end up bearing the risks of their DFM. Here, RTS Financial Planning managing director Carl Roberts takes a pragmatic view: “[After the PFS paper] I know a lot of us, myself included, queried our DFMs just to understand the position.
“If you’re dealing with reputable and established firms then they’re not going to try and screw advisers over as it’s not in their best interest. However, you need to do due diligence.”
Unfortunately, counterparty risk is something advisers need to stay alert to. One adviser, speaking to us anonymously, explained how Brewin Dolphin pushed them to take on investment responsibility for a client’s self-invested personal pension (SIPP) even though the adviser was not involved in this particular account.
“As well as the DFM service, Brewin forced the client to have their financial planning service, which duplicated what we were doing so we complained,” explains the adviser. “But Brewin insisted we sign a contract as agent, which I’ve refused.
“[With the SIPP] I don’t make the investment decisions, and I’m not party to the conversations they have about their portfolio. We’re already advising independently on the SIPP to keep our client within the rules, but I’m not going to take on the investment responsibility.”
In response, a Brewin Dolphin spokesperson said: “Both SIPPs and offshore bonds are now very complex tax wrappers, which we believe require specialist financial advice from a Financial Conduct Authority (FCA) regulated adviser. Our investment manager’s role is to build portfolios that meet the customers’ targets, their expertise isn’t in selecting the SIPP/offshore bond provider or understanding the complex circumstances shaping a client’s requirements in this specialist area.
“Therefore, we ask the client to appoint an FCA-regulated adviser to complete the suitability, Know Your Client, attitude to risk, capacity for loss and to set the client’s investment objectives.”
Suitability fears stem from risk profiles potentially being lost in translation. “Most risk tools are now 1-10 categories and I defy anyone to categorise clients perfectly within this,” says Hodges, who instead focuses on financial planning implications. “We need to make sure [clients] have access to cash when needed and that investments align with their expectations and emotional/financial tolerance.”
Here, Cook argues using a wrap can help reduce miscommunication: “It means there aren’t two different languages going on about risk.
“Without AAC the DFM will also need to have their own risk assessment of the client with their own language and process. There’s potential for confusion between these so we recommend parties get together to properly map risk between them.”
In addition, Hodges thinks more could be done by the regulator: “I think the FCA should introduce one risk tool and all funds/MPS should benchmark their offerings to avoid confusion and give some regulatory ground rules to everyone.”
Unfortunately, there are signs of miscommunication and confusion on a wider scale. Sense network, which has since been bought by Adviser Services Holdings for £9m, did some research of its members on ACC in late 2019, finding confusion was rife around responsibilities, who agreements applied to and especially concerning the 10% drop rule under MiFID II which was determined as flawed and impractical to execute.
As a result, Sense has asked for greater clarity from DFMs on these points and members need to now gain approval before taking up an MPS from a discretionary (for the first time).
“In essence, AAC seems attractive but only really works for tripartite agreements or where the business is vertically-integrated,” says Phil Young, former chairman of Sense, “because the DFM should really undertake ongoing diligence on the adviser and advice.
“That would mean sample checking the files or something like that, which neither party wants. The problem with the contracts is they are vague and at times dishonest.”
Ironically, Roberts has found AAC reduces the 10% burden as in the regulators’ eyes he is the client: “Our DFM will send us the 10% drop reports and then the advice really is for us to communicate that to clients in a reasonable timeframe.
“We see most clients quarterly or half-yearly and we will pick this up with them when we next see them. We don’t have that reporting burden.”
With risks potentially lurking in the small print, and ignorance still rife, better understanding and transparency are advocated to make AAC work successfully.
“My advice would be just to understand [AAC] – don’t be afraid of it as many DFMs operate this way,” says Hodges. “Know where risks lie and what roles each party has.”
Roberts agrees and says his situation benefits from clear understanding of responsibilities: “The adviser is responsible for choosing the correct investment mandate for the client and the DFM for all transactions for that mandate.
“I have more protection as it is clear where responsibilities lie and I’m happy with the areas I can control.”
“More education needs to be done and more dialogue needs to be had, with IFAs as well as other interested parties such as PI insurers, FOS etc that need to be more aware of the setup,” adds Cook. “Also, don’t be afraid to question or challenge your DFM: it’s a service, not a product.”