This should be done within 24 hours of the drop occurring.
This seems straightforward, but what if that discretionary portfolio has been bought on-platform? Who owns the client? The adviser. Whose job is it to inform the client? The discretionary fund manager (DFM).
What if the fund has been recommended by an adviser and the client has bought it on platform? Still it is the DFM’s responsibility to inform the client.
Advisers may not be responsible for notifying the client but they will have to provide up-to-date contact details to allow the DFM to contact the client. This means a third party will have access to adviser’s clients – not a situation with which many advisers will be comfortable.
Therefore, any wealth manager discretionary permissions will need to ensure they have a mechanism in place to track portfolio performance and notify clients of a 10 per cent drop.
This could be difficult because, as reported earlier this year by FTAdviser, DFMs may be following a portfolio model and not the individual client’s actual portfolio – and some divergence in performance may not be picked up.
In FTAdviser in February, Fraser Donaldson, a wealth management analyst at Defaqto, said the delegation of responsibilities must be made clearer across the value chain and suggested a four-way written agreement.
He commented at the time: “There are gaps in the chain and there need to be formal arrangements. There are some propositions where they would write a four-way agreement between platform, client, adviser and DFM but most prefer not seeing the client.”
In this case, the adviser should inform the client – but who informs the adviser? Not all advisers will have in-depth investment monitoring systems to allow this.
Heather Hopkins, head of Platforum, comments: “We don’t think advisers running models on an advisory basis are on the hook for this communication – although they should check their compliance teams.
“However, be warned if you are using a DFM to run models on platform, your clients will be notified within 24 hours of a 10 per cent drop in value.
“You aren’t responsible for the communication – the DFM is – but your clients will no doubt call you immediately.”
It seems like a complex web of communication. What could possibly go wrong?
Moreover, the rationale behind the rule seems very arbitrary, in that the notification only must be given for a discretionary managed part of a total portfolio. Should the overall portfolio drop 10 per cent, there is no need for a notification.
In a blog post for platform Nucleus, Phil Young, founder of support service Zero, commented the 10 per cent rule was “nuts”.
