Understanding the IFA duty of care in outsourcing

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When a client engages an independent financial advisor (IFA) to take care of their assets, many expect the firm to do the actual investing, however, this isn’t always the case as many firms outsource to fund managers or other investment experts.

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According to a recent report looking at the value of discretionary fund managers (DFMs), the Rathbones report found roughly 40-50% of IFAs outsources to a DFM.

Why Outsource?

Financial advisors suggest by using the services of a DFM, they free up time and energy to focus on the client relationship and wider wealth planning requirements, such as pensions and tax considerations, while the DFM focuses on choosing specific funds or shares based on the information gathered by the IFA.

Companies such as Intelliflo provide software for IFAs; allowing firms to manage outsourced portfolios and keep track of their performances as well as ensuring clients’ needs are being met at every stage.

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Duty of care

Although outsourcing may make sense for the IFA and client in terms of ensuring the best are focusing on their own area of expertise, outsourcing client funds raises questions of where the duty of care lies when it comes to protecting client money.

According to Dan Russell, managing director of SimplyBiz, if a third-party fund manager is not providing the service expected, this remains the responsibility of the IFA. He recommends advisors continuously use expert software for IFAs to check the investments continue to deliver as expected, and take responsibility if they don’t. Particularly if the client is incurring additional fees.

MiFID II

Following the implication of MiFID II legislation, there has been a change in the “model of engagement” between advisors and DFMs, moving to a “reliance on others” model; allowing DFMs to rely on an advisor’s assessment of the client in order to select the best funds and stocks available.

In practice, this allows the IFA to focus on the client – fact-finding, establishing risk attitudes and loss capacity – while the DFM actually constructs the portfolio based on information gathered.

This framework allows the client to establish an agreement with the advisor and DFM by way of a tripartite agreement and ensures their duty of care is met by establishing a clear relationship and duty for each of the parties.

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