Understanding the relationship between you, your financial advisor and your investments

So, you have seen your financial advisor and after providing them with all the relevant information, they have issued you with a report outlining their recommendations and the reasons why they are suitable to meet your needs and objectives.

Now, it’s fair to say that these reports are not the lightest of reads. They are full of important information on the products being recommended and this usually involves terminology jargon and abbreviations that, whilst common for those in the industry, can often boggle the unaccustomed mind.

One such term that is used on an ever-increasing basis is DIM.

Let’s start by explaining what a DIM is.

The term DIM stands for Discretionary Investment Manager. This is an investment management service where the investment manager has the discretion to make investment decisions on your behalf.

So why would your financial advisor recommend employing the use of a DIM?

Financial markets are fast moving with the prices of shares and commodities fluctuating on a daily basis. Therefore, keeping up to date with events that can impact your investments is becoming ever more difficult and time consuming. A DIM has the skills, expertise, experience and the backing of significant resources, including a research team, that enables them to build and maintain a portfolio in line with the investment strategy agreed with your financial advisor.

However, one important factor about employing the use of a DIM is that you now have another party involved in the relationship between you and your financial advisor. The manner in which your investments are set up may well impact on this relationship and dictate where responsibilities lie, what influence you have on investment decisions and the level of protection afforded to you.

Two of the main ways in which arrangements between you, your financial advisor and a DIM can be structured are;

• Agent as client
• Reliance on others (agent of the client)

Agent as client

Under the ‘Agent as Client’ arrangement, the regulatory system allows a DIM to treat your financial advisor firm as its client, typically under the classification of a professional client*. This is often used where your investments are held on a third-party platform** and the DIM will likely have no knowledge of who you are.

In this arrangement there is no direct contractual relationship between you and the DIM. An agreement will be in place between your financial advisor firm and the DIM, which means you will need to sign a separate agreement providing your express authority and consent to your financial advisor firm to act as your agent on your behalf.

Under the ‘Agent as Client’ arrangement, it is the responsibility of your financial advisor firm to ensure that the discretionary management proposition they recommend to you is suitable. This suitability assessment needs to be undertaken at outset and on an ongoing basis where you have entered into an ongoing service agreement.

It is the responsibility of the DIM to manage the investments in accordance with the mandate provided by your financial advisor firm. They will also need to ensure that decisions to trade are suitable and all transactions are consistent with the investment strategy that has been agreed.

Reliance on others

Under the ‘Reliance on Others’ arrangement, the regulatory system allows a DIM to operate under a formal agreement with both you and your financial advisor firm.

Reliance on others is so called because, in providing a service to you, the DIM can rely on information provided by your financial advisor firm. The DIM can also rely on the suitability of any recommendations provided to you by your financial advisor.

This tripartite relationship generally results in agreements;

• between you and your financial advisor
• between you and the DIM, and
• between your financial advisor and the DIM.

Under this arrangement, both the DIM and your financial advisor have contractual responsibilities towards you as the underlying investor and you will normally be classified as a ‘Retail Client’ which will afford you the highest level of protection under the regulations.

Typically,

Your financial advisor firm will be responsible for:

• The completeness and accuracy of any information about you that it shares with the DIM.
• The suitability of any advice or recommendations provided to you. This includes the recommendation to use a DIM as well as the process of setting the parameters of any investment
• Mandate under which the DIM is required to operate.

The DIM will be responsible for:

• Explaining its investment services / propositions clearly to your financial advisor firm to allow them to undertake the necessary due diligence. This should include information for its service, investment processes and the funds it uses.
• Managing your portfolio in accordance with the mandate agreed.

In Summary

It is important to state that there is no ‘right’ or ‘wrong’ way when it comes to structuring your relationship with a DIM and the most suitable arrangement will depend on your specific circumstances.

The level of protection afforded to you will be dependent on the investment strategy used and the relationship between you, your advisor firm and the DIM. It is important that you fully understand the level of protection afforded to you before you proceed with any recommended course of action.

Your financial advisor firm will only recommend you enter into a DIM relationship if they have conducted the relevant due diligence and oversight to ensure compliance with the regulatory requirements.

* Professional Client
One of the consequences of your financial advisor firm being treated as the client of the DIM is that some protections afforded to you under the regulatory system may not apply in the same way as they would do if there was a direct contractual relationship between you and the DIM.

Furthermore, where the DIM classifies your financial advisor firm as a professional client, some of the rules that would apply if you were classified as a ‘Retail Client’, may not apply to the same degree – such as disclosure of risks and disclosure of costs and charges.

These implications will be managed by your financial advisor firm and explained to you.

** Platform
An investment platform is essentially an online service which allows the buying, selling and holding of investments. It is web-based technology which provides your financial advisor firm with access to various services including administration, reporting, dealing, settlement and custody.