Do you have authority to use a DFM?

16 October 2019 Alistair MacDougallCompliance

We have published articles previously about the issues around ‘Agent as Client’ (AAC) when using Discretionary Fund Management (DFM) solutions for clients.

One of the issues is that few firms, if any, have disclosure or client agreement documents that actually give firms authority to actually appoint a DFM or to do so on an agent as client basis.

Most of the time an adviser is acting in an advisory capacity. For example, in making a recommendation that the client invests in a DFM portfolio, where the DFM will take full responsibility for all suitability aspects then, from a regulatory perspective, the adviser is operating within their standard terms.

However, Agent as Client, the basis on which many platform based portfolios managed by DFMs operate, is different and authority from the client to do so is required.

There is a variation on the theme. Some DFMs agree to engage the end investor client as their retail client but are still relying on the adviser to have the authority from the client to appoint the DFM in the first place. So again the adviser needs to have this explicit authority from the client.

Don’t forget to check Our View about this article and the Actions Required By You

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Our View

There are risks in using a DFM on an AAC basis. Our previous articles cover these in detail.

However, the risk is significantly exacerbated if a firm does not have client authority to:

– appoint a DFM
– operate on an agent as client basis

ATEB has created a specific authority for firms to use as an addendum to standard disclosure documents where a DFM solution is being implemented. This is available on the Members’ Area of the website.

Action Required By You

If you use DFM portfolios for clients, ensure that you are fully aware of the basis on which those portfolios operate and the implications for the firm and the client;
Read our previous articles;
Contact your usual ATEB Consultant for further information or contact ATEB here.