Agent as client

This article has been produced by Dan Kelly of Onyx Insurance Brokers Limited, specialists in PI insurance for Intermediaries. Contact details are :

Mail: 1-4 Great Tower Street London, EC3R 5AA
Telephone: 0207 398 8142

ATEB believes “Agent as client” is generally misunderstood and in turn this misunderstanding has implications for the market place.


Agent as client

The ‘agent as client’ business model (“AAC”) has seen an increase in popularity in recent years; readers of this article will know that the growth in the use of this model coincides with the implementation of the RDR on 31 December 2012, following which advisers found managing funds in-house to be a less profitable venture. 

Fundamentally, the AAC model is where the advisory firm arranges for the investment management to be carried out by the Discretionary Fund Manager (DFM) but on the basis the client (the investor) does not have a contractual relationship with the DFM. Instead, the DFM treats the advisory firm as the client, and considers that the firm is acting as the agent of the end investor. The adviser firm must have the appropriate authority from their client to be able to commit and bind them to the discretionary management agreement and thereby to appoint the DFM. 

There are benefits of using the AAC model in that the adviser retains control of the client relationship, however, the model also carries risks for advisers, arguably more so than for the DFM. 

The risk advisers carry is that there is no direct relationship between the DFM and the client, so any complaints or claims from the end client would come to the advisory firm if something were to go wrong. If there was fault on the part of the DFM, then the adviser could theoretically make a claim against them for any losses but this is likely to be small comfort if they are facing a raft of Financial Ombudsman Service complaints and/or if the DFM fails. 

Let’s consider this in light of the current market position. Since RDR, we have generally experienced a lengthy bull-run in the markets but this seems to be changing. This could result in investment performance coming under closer scrutiny by the end client and, potentially, there could be an increase in investment related complaints. 

Furthermore, while the COBs Rules provide (at COBs 2.4) that the DFM may rely on information and assessments provided to it by the adviser, there is no specific corresponding provision giving comfort to an adviser who relies on information received from the DFM. 

With this in mind, there is an obvious risk; in recommending a third-party portfolio an adviser will be largely reliant on second hand information in respect of the construction and content of that portfolio. This raises questions about the degree of reliance that can be placed on information received from the DFM. If there are issues with the DFM that an adviser could or should have known about then this could leave them exposed to the end customer in the case of losses. 

This risk can be mitigated to some degree by completing full due diligence on the DFM (and keeping a record of the same) and doing so periodically. It also benefits the adviser to keep an eye on the construction of model portfolios and to ensure that they match the risk profile of the customers. 

A further consideration is that, as the adviser is treated as the client (and would qualify as a professional client), this could see the DFM include investments in the portfolio which are not compatible for the ‘real’ client (who would be a retail client). 

Another way to hedge against risk is to be absolutely clear with the end customer as to who will be responsible for what; clearly a DFM has responsibility for what goes into a portfolio and, whilst it will not absolve the adviser of all blame if something untoward does happen, it pays to be clear with the client that the adviser bears no responsibility for the administration or management of the fund. This can be addressed through clear and precise engagement letters and disclaimers, which are always good to have in any case. 

In summary, advisers should make it very clear to their PI insurers that this model of business is being used. PI policies frequently contain exclusions for certain types of product or investment which could be lurking within a portfolio and recommending certain types of fund could therefore jeopardise cover, potentially even if the adviser was unaware of the content. This further highlights the need for an adviser to keep on top of the content of all portfolios he or she uses and to keep abreast of any changes to the composition of portfolios.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

The AAC business model widely used by DFMs undoubtedly carries a number of risks for adviser firms. There are implications for PI cover as indicated by the article but also more fundamental problems arising from firm’s lack of understanding of the nature of the legal relationship with the DFM that they have signed up to and the implications that brings. For example, in our experience, many firms can point to no formal authorisation from their clients to act as agent.

Action Required By You

  • Ensure your client agreements give you the necessary authority to commit and bind your client to the discretionary management agreement; 
  • Ensure you understand the AAC approach and that you fully grasp the implications … the PFS has published a Good Practice Guide that is well worth reading; 
  • Ensure that your PI insurance covers this arrangement and potential outcomes; 
  • Talk to your usual ATEB consultant if you have any concerns or contact us here.
  • Feel free to contact Dan Kelly at Onyx Insurance Brokers directly, if you have any PII queries.
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About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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