Agent as Client – is your firm at risk?

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Aug 13, 2019

Who would have thought that two words could be the difference between a financial advice firm being mitigated from unexpected risk or open to perhaps losing it all should a disgruntled client decide to seek compensation?

No, the words aren’t ‘indemnity insurance’, although obviously that is essential for peace of mind. I’m referring to the difference between ‘Agent of the Client’ and ‘Agent as Client’. The two small words between ‘agent’ and ‘client’ in the former make it completely different to the latter – a difference that, if misunderstood, could leave advisers exposed to a whole heap of risk.

PFS spells out the dangers

Last week, the Personal Finance Society (PFS) released a paper that flagged the dangers for advisers who may be operating under an ‘Agent as Client’ agreement with a discretionary investment manager (DIM) or discretionary fund manager (DFM). 

Called ‘Agent as Client: What you need to know’, the paper is a must-read for any adviser who uses a third party to provide investment services for clients, including model portfolios.

We estimate that maybe as many as nine out of 10 advisers using model portfolios on platform supplied by discretionary investment firms are operating under an ‘Agent as Client’ framework. While such an agreement addresses the key issue of ensuring advisers are responsible for the suitability of recommending a portfolio management service, it also has some very undesirable consequences for the adviser, as detailed in the PFS paper.

Confusion with terminology

We also estimate that many advisers who are operating under this framework do not fully understand it and are unaware of the risks accepting this operating basis poses to their businesses. This is partly due to some confusion around the terminology: Agent as Client sounds very similar to Agent of the Client but the reality is there is a world of difference and it is essential that advisers check their agreements and understand where the risks for their firms lie.

We’ve never liked ‘Agent as Client’ and we were pleased when MiFID II opened the door to a new operating model for ‘service’ providers – ‘Reliance on Others’ – where the responsibilities of each party in the chain is much clearer making it easy for advisers to fully understand where their responsibilities lie.

‘Reliance on Others’ removes the ambiguity from who carries the can should an end client complain. It is an operating model that is gaining some traction from DIMs and DFMs but, with no requirement for discretionary managers to change their terms of business to adopt Reliance on Others, the onus is on advisers to demand a change, if they are uncomfortable with the risks Agent as Client poses to their business. 

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PortfolioMetrix are a multi-award winning, innovative investment manager that provides independent financial advisers with an alternative way to access discretionary investment management for their clients. Our proposition comes at a competitive price and doesn’t compromise the adviser/client relationship. The London winner of the Citywire Wealth Manager Regional Stars award for two consecutive years, voted the WM Small Business of the year, in association with ARC 2018 and, in 2019, have received the accolade of PA Discretionary Manager of the Year. Our proposition offers the convenience of online model portfolios yet delivers customised portfolios, tailored to individual client requirements. Investment performance has demonstrated consistent and reliable risk and return separation of portfolios that doesn’t undermine the financial planning process. This is achieved through our academically-robust, risk-based investment approach. WealthExplorer™ is integral to the PortfolioMetrix customised service. A proprietary owned and designed software system, WealthExplorer™, is purpose built to equip advisers with a broad range of tools designed to deliver unique client insights that add value to the adviser/client relationship and ultimately delivers better client outcomes, when utilised by financial advisers.

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