“The obligations on each party will depend upon the nature and extent of the respective service provided…” (FG 12/16 Assessing Suitability: Replacement Business and Centralised Investment Process – FSA July 2012)
It is a given that responsibility for suitability of the discretionary firm selected lies with the adviser. In the majority of cases, responsibility for selection of bespoke portfolio management over an MPS will also fall with the adviser.
It is possible however, the bespoke discretionary manager could conclude an MPS portfolio is the best option for the client. In this instance, the discretionary manager should be accepting responsibility for suitability of the selection of the investment solution.
We have already commented MPS portfolios are run by the discretionary managers for targeted client segments. In other words, the portfolios are run to a mandate that will suit certain groups of clients.
It is therefore up to the client and their adviser to decide which portfolio is most suitable. This also means in practice, similar to fund investing, face-to-face meetings between discretionary manager and client are unnecessary as client and adviser will have no influence over the investment approach.
In terms of the portfolio investment decision making, responsibility lies with the discretionary manager. For bespoke portfolios they need to stick to the mandate set for the individual client. For MPS portfolios, they need to stick to the mandate they set themselves for the portfolios and target market.
In terms of due diligence, regular reviews with the client are crucial to check the portfolio mandate is still suitable for them. This responsibility should lie with the adviser.
The regulators are particularly concerned it is not always clear who accepts responsibility for what is in a discretionary arrangement. Discretionary managers and advisers not only have to be clear on who is doing what, but this has to be articulated in any agreements and terms of business and made clear to the client.
The firm
Looking at the discretionary firms and selecting one suitable for the client is a combination of fact find, need and client preference. There is rarely one right answer in due diligence.
For instance the client or adviser may have a preference for a small firm judged to be fleet of foot in decision making and potentially offering a better service to a fewer number of clients. Others may prefer the bigger, well-resourced firms that are well established and offer consistent, tried and tested service.
In broad terms the areas for investigation would cover:
• Experience and background of the key decision makers, both operationally and from an investment point of view.
• Financial strength. Indications of this could be interpreted from Group AUM, discretionary AUM and growth in assets. Note that some smaller DFM firms do have ‘rich parents’.
