The agent as client arrangement has become increasingly common as more advisers outsource investment business since the introduction of the Retail Distribution Review in 2013. It means that advisers act as an agent and therefore absolve their DIM of any direct relationship with the underlying client.
Most DIMs that Portfolio Adviser spoke to use an alternative to agent as client whereby the DIM has some sort of relationship with the underlying client. However, Brewin Dolphin, one of the UK’s largest DIMs, uses the agent as client model for advised clients, as does Parmenion.
7IM last year introduced the model for those who want the option. The introduction of the new model was at the request of advisers.
However, Diminimis founder David Gurr, who consults on due diligence, says advisers do not properly understand the implications of adopting the model. Gurr says the model effectively means advisers represent their client as if they are that client.
Gurr says the FCA’s explanation on the agent as client relationship features in the Conduct of Business Sourcebook (Cobs 2.4), but a clarification of what agent entails, does not feature in the glossary.
In practice that has implications for complaints to the Financial Ombudsman Service (FOS), professional indemnity insurance, as well as client categorisation under Mifid II.
UK discretionary investment managers that use agent as client for advised clients
| Quilter | Alternative arrangements |
| Brewin Dolphin | Agent as client |
| Parmenion | Agent as client |
| 7IM | For some clients |
| PortfolioMetrix | Alternative arrangements |
| Charles Stanley | Failed to respond |
| Bordier | Alternative arrangements |
| Investec Wealth & Investments | Alternative arrangements |
| Brooks Macdonald | Alternative arrangements except for platform assets |
| Albert E Sharp | Alternative arrangements |
| LGT Vestra | Alternative arrangements |
| Tacit Investment Management | Alternative arrangements |
Portfolio Adviser was unable to access figures on how many advisers are signed up to the model, but feedback from the industry suggests they are fairly split on the agent as client framework.
Brewin alone manages £10.4bn on behalf of intermediaries and said in its full-year report for 2017 that net inflows from that distribution channel were accelerating. Parmenion AUM passed through £4bn in October 2017.
Market support
In the period since the agent as client model has become popular, markets have been “relatively kind”, says Gurr. “There haven’t really been cases that have gone out and really kicked the tyres on this and tested it,” he says.
PortfolioMetrix head of innovation Mike Roberts says it is an age-old adage in wealth management that clients tend not complain when they’re making money. The discretionary investment management company uses a reliance on others arrangement, which features in Cobs 2.4 as an alternative to agent as client.
Roberts says the industry has not faced difficult markets “for quite some time” meaning the agent as client model could be a ticking time bomb.
PortfolioMetrix published a paper earlier this year, Tangled, which argues the reliance on others model is better than agent as client.
Although the agent as client relationship involves taking on more risk, Gurr says advisers like the model because it prevents the DIM from poaching their client bank because there is no direct contact.
But Gurr says advisers are taking on an entirely different type of risk.
“You are the entity that gets taken to FOS if something goes wrong because if there’s no agreement between the underlying client and the DFM, the end client can only take you to FOS,” he says.
Client categorisation
Agent as client rules mean DIMs treat advisers as per se professional clients, according to the regulator’s rules. Gurr says he has seen client as agent agreements that allow the DIM to invest in “esoteric and very technical” investments.
“The DIM is not breaking any rules if they are investing in assets that are suitable for professional clients if they are serving professional clients,” he says.
Roberts says it’s unlikely many DIMs will be motivated to change the agent as client relationship, therefore change would have to come from the regulator.
“Advisers always complain that they’re the ones carrying the can when anything goes wrong, but unfortunately they’ve put themselves into this scenario,” Roberts says.
He says most would accept suitability risk, whereby they accept responsibility if a client argues they were recommended a product with an inappropriate level of risk.
However, under the agent as client relationship the adviser would also be held accountable if investments within a portfolio did not properly match the stated level of risk on that product.
Mifid II
There is also confusion about who holds responsibility for informing clients of a 10% fall in portfolio values, which is a requirement under Mifid II.
Gurr says: “If the discretionary investment manager truly has a client who is an adviser then they would probably argue they would have to provide that client with the information within the working day.”
He says an adviser could argue that as the client in the relationship they do not need to pass that on to the underlying investor; however, he argues that is not in the spirit of Mifid II.
“A discretionary manager might struggle to inform the client within the day that it is breached. Does an adviser have the infrastructure to respond to their clients and meet that timescale? I would question whether many have,” Gurr says.
Portfolio Adviser understands the FCA is currently in discussions with the industry about the agent as client model.
