Portfolio Adviser reported in March there are concerns the model places too much responsibility for investment risk on the shoulders of advisers and creates confusion around client categorisation, plus client communications.
While Brewin Dolphin is the biggest DFM that uses the ‘agent as client’ for bespoke portfolios, Portfolio Adviser understands nearly all investment managers use the framework for on-platform assets.
Parmenion, Aberdeen Asset Management’s platform subsidiary, admitted it used the ‘agent as client’ model but others did not own up until specifically questioned about platform assets.
One DFM told Portfolio Adviser in an interview that it used the ‘agent as client’ model but later denied it, highlighting confusion in the industry.
There is no data available that shows how many advisers are signed up to the model but a report from PortfolioMetrix describes it as the most popular relationship type for DFMs and advisers.
The Retail Distribution Review and on-platform model portfolios have helped drive growth of the ‘agent as client’, according to the report.
Defending the model
According to Brewin Dolphin, the model goes down well with its advisers because it’s easy for them to understand.
“The advisers love this because they know exactly who owns the client relationship,” says head of digital channels and investment services Gareth Johnson (pictured). Advised assets under management is one of the fastest-growing areas of the business.
Inflows from Brewin Dolphin’s intermediary channel reached £1.5bn in 2017, up from £900m in 2016. It added more than 100 adviser relationships in 2017, taking its total above 1,600. Johnson disputes the claim that an adviser shoulders too much risk when subscribing to the ‘agent as client’ model, stating Brewin Dolphin takes responsibility for managing the portfolio under the risk mandate.
“If an adviser gave us a cautious risk mandate and we invested 100% of it in emerging markets then the adviser isn’t on the hook for that; we are,” he says.
Johnson says Brewin Dolphin does not use professional investment instruments in advised client portfolios, which has been one criticism thrown at the agent as client model, given advisers would normally be “per se professional investors”.
“Just because there isn’t a direct client relationship that doesn’t mean we just put blinkers on and throw whatever into a portfolio,” he says.
In a blog post last August, Brooks Macdonald said it used ‘agent as client’ for platform assets but otherwise had a direct relationship with the underlying investor.
Explaining the rationale, the DFM says: “When offering our services through investment platforms we have no direct relationship with the underlying client. We are simply appointed to provide discretionary investment services by the client’s adviser in their capacity as an agent.”
Head of intermediary sales at 7IM, Robert Hardy, explains that his firm is currently considering using the framework. He says: “It would be subject to what comes out from a compliance point of view whether we would be happy to work within that framework or whether we believe it would become too onerous with the due diligence checks we would need to do.”
Call for clarity
David Gurr, founder of consultancy Diminimus, is campaigning for light to be shed on the ‘agent as client’ model. He believes advisers would avoid it if they had a clearer understanding of the responsibility it entails.
‘Agent as client’ is one of four main operating frameworks that can be used by advisers and DIMs, according to Diminimis.
The options on offer range from a direct contractual relationship between the retail client and the DIM at one end of the scale to an adviser with discretionary permissions who is responsible for all aspects of the investment solution at the other. In the middle is the reliance on others, where both the adviser and DIM have a contractual relationship with the client and therefore a duty of care, and ‘agent as client’.
A 2017 Personal Finance Society good practice guide, co-written by Gurr, warns ‘agent as client’ advisers to check their client agreement grants them the appropriate level of authority to act as an agent. The guide also recommends advisers check their professional indemnity insurance covers ‘agent as client’ arrangements and that they consider requesting to be treated as a retail client, if appropriate for the underlying investor.
