Check your agreements… ‘Agent as Client’ could put you at unnecessary risk

When was the last time you reviewed your agreements with your providers? If you haven’t done so for a while make it a priority, especially if your PI insurance is soon due for renewal. Why? You may be operating under an agreement that your insurer will find too hot to handle – Agent as Client.

Confusion between Agent as Client and Agent of the Client (also known as Reliance on Others) can mean advisers without discretionary permissions are operating under agreements that have serious business risk implications. Understanding the difference is essential, yet even articles that aim to clear up confusion can end up muddying the waters.

A recent article is a good case in point, as it maintains that the difference between the two is subtle and advisers shouldn’t ‘beat themselves up’ if they get it wrong.

Let’s be clear: there is nothing subtle about the differences in the basis of these agreements. If you get it wrong, it has potentially disastrous consequences for your business.

There are subtle differences in the operational side of the two agreements, but it’s the basis of the arrangements that you need to fully comprehend, and then make a conscious decision that this is the way you want to operate.

Under Agent as Client, continuing to operate under an advisory agreement with your client means you are potentially exposed because you may:

• have exceeded your client’s authority;
• have given a legal undertaking to the DIM that you do not have the authority to give; and/or
• be in breach of the FCA rules on client agreements.

Understand the differences

Part of the problem is that Agent as Client sounds very similar to Agent of the Client.

When established correctly, Agent as Client means the relationship with the investment manager sits with the adviser, not the end client.

While this appears to be advantageous – it means you don’t have to expose your clients to the third-party – the reality is most advisers do not have the authority from their clients to act in the capacity of agent and deal directly with a third-party investment manager on their behalf.

Also, under Agent as Client, a third-party investment manager can treat the adviser as a professional client. This means they could make investment decisions that are only suitable for professional clients, but not suitable for your retail client.

Obviously, your clients trust you to make the right decisions for them, yet once you have ‘outsourced’ the investment management, do you really scrutinise every last element of every investment sitting within the model portfolios?

Advisers who have signed an Agent as Client agreement are exposed to any complaints from their clients about the suitability of the investments.

The investment manager is only accountable to the adviser, who, as a professional client, should be aware of what investments are being made and the subsequent risks attached to them.

We estimate that Agent as Client is the most widely used agreement between advisers who are using model portfolios provided by a discretionary manager.

If you are operating under Agent as Client, this means there is a good chance you and your firm are at serious risk of being hit with compensation claims should something happen to make your clients question the investments in their model portfolio.

While this has been the case for a long time, it’s only recently that PI insurers are realising the implications of this operating model, and are starting to ask for proof of reviews of agreements. This is why there is no time to waste in dusting off those agreements and making sure you fully understand what you have in place.

The Personal Finance Society paper, Agent as Client, What you Need to Know, is an essential read if you have any concerns about your potential exposure to unquantifiable and unnecessary risks within your business.

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About the author

Dave Chessell

Dave was one of the pioneers in the development of the investment platform market at Skandia UK. Prior to joining PortfolioMetrix, he was Chief Commercial Officer at back office software producer, Intelliflo – experience that gives him a unique insight into the needs of the independent adviser community and its customers.

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