AJ Bell’s decision to switch to a reliance on others (ROO) arrangement for its managed portfolio service has been hailed as a positive breakthrough for advisers and one that could pile pressure on other DFMs to adopt similar changes.
Up until August 6, the company had adopted the adviser as client arrangement, or AAC, which meant the adviser was treated as though they were the client by AJ Bell.
The change to a ROO model removes the onus from the adviser and allows AJ Bell to treat the client as the investor.
See also: AJ Bell ditches agent as client for MPS following adviser demand
Concerns about the ‘adviser as client’ model have been mounting for years, with the use of outsourcing surging since the Retail Distribution Review.
Back in 2018, Portfolio Adviser found that several discretionary managers utilised the adviser as client model, with stark warnings from some in the industry that the underlying risks were generally unclear to advisers.
In 2019, the Personal Finance Society published a paper, entitled ‘Agent as client: What you need to know’, that spelled out the dangers of the arrangements. One of the most common misconceptions with this arrangement, according to the PFS, is that advisers think that being FCA regulated is sufficient to be categorised as the agent.
“The agreement with the client is the important document whereby the client must give you the appropriate authority,” the PFS stated in the paper. “If you permit the DIM to treat you as its client with no regard to whether the assets are suitable to its underlying clients, there is an argument that you do not comply with your duty to act in the best interests of your client.”
See also: Ticking time bomb for advisers outsourcing investment
‘It just doesn’t make sense for advisers to put the liability at their own door’
Scott Gallacher, chartered financial planner and director at Rowley Turton, said he expects the decision from AJ Bell was a result of commercial pressure and that it is likely the AAC model was having a negative impact on sales.
“This is good news for AJ Bell and good for the advisers,” he says. “The market pressure will come to bear on other firms too as why would an adviser choose to outsource to a company where the liability, should something go wrong, remains with them?”
AJ Bell appears to have been one of the early movers when it comes to emphasising a relationship with the end client on its managed portfolio service, but Gallacher says it will have a snowball effect.
“It just doesn’t make sense for advisers to put the liability at their own door. If you are slow to make the change then you won’t be the preferred partner firm. If you are the last, then it will appear to the industry that you have been dragged, kicking and screaming.”
No right and wrong on arrangements between adviser and client
For Damian Davies, head of development at The Timebank, it is vital that advisers take the time to consider the implications for themselves and their clients when it comes to the arrangements of a managed portfolio service.
“There is no right or wrong answer on these relationships. What is important is that you understand the risks, responsibilities and logistics for each relationship and have appropriate agreements in place to match,” he explains.
“Furthermore, it is essential that you match the characteristics of the service being provided with the characteristics of the clients the service is being provided to.”
Possible suitability concerns with AAC model
Many discretionary management firms that adopt the AAC arrangement treat the adviser as a ‘per se professional client’ and, as a result, could invest in things that would otherwise be deemed unsuitable for a retail investor.
The PFS said: “[Advisers] are responsible for not only advising the client as to the suitability of a DFM managed portfolio but also the selection of that portfolio and monitoring that the portfolio is suitable for the client and the client is suitable for the portfolio, at all times.”
In February 2021, Momentum Investors teamed up with Oxford Risk to study the inconsistencies in the investment advice process and found that there was a large amount of variation in the recommended risk level based on client case studies.
The report explained that, based on the entropy analysis carried out, the adviser assessments were closer to being “totally random” than “totally consistent”, and that the largest influencer of this was the judgements made on risk capacity.
Greg Davies, head of behavioural science at Oxford Risk, says: “Advice isn’t a single event, but an ongoing relationship, and that the regulations care not whether you get it right on average, but whether you get it right for each individual.”
