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online technical resource

portfolio-management agreements

A consumer with a mixture of investments may choose to ask an investment manager to manage their holdings. There are various types of investment that a consumer might ask a manager to manage – for example, cash, fixed interest securities, shares, unit trusts and investment trusts.

Our approach to portfolio-management complaints is different to our approach to general investment cases for several reasons:

  • There is a mixture of investments making up the portfolio – and it is primarily the overall mix rather than the individual parts that make the package suitable or unsuitable for the consumer.
  • There is an ongoing relationship with the manager.
  • Consumers looking to invest directly in the stock market generally go to stockbrokers.

The section of our website on stocks and shares describes the services supplied by stockbrokers and how they operate.

types of portfolio-management agreement

When a consumer chooses a manager to run their portfolio of holdings, an agreement is made about what type of service the manager will provide. This agreement sets out both the responsibilities and limits of the manager when managing the portfolio.

There is no standard way in which a portfolio-management agreement is written. But its aim should be to set out clearly the way in which a portfolio is to be run.

Complaints we see relating to portfolio-management agreements often turn on the particular wording of the agreement in question – and on whether the manager has carried out its role in line with that wording.

We see complaints about the following two types of portfolio-management agreement:

We also see complaints about execution only sales. There is information about our approach to these in the section of our website on “execution only” sales.

discretionary portfolio-management agreements

Under this type of agreement, the consumer gives the manager authority to buy and sell holdings in their portfolio without first gaining the consumer's consent. The agreement sets out the boundaries within which the manager will manage the portfolio.

Central to the agreement is how much investment risk the consumer wants their portfolio to be exposed to. For example, the investment risk agreed may be described simply as "medium risk".

Alternatively, the level of risk agreed may be described in more detailed terms - by listing the types of investment that the portfolio should contain. For example, the agreement might state that shares to be considered for inclusion in the portfolio will be listed on the FTSE 350 index, government bonds and corporate bonds.

Some agreements state the intended proportion of the portfolio to be invested in different categories of risk. So for example, an agreement might state that the aim is to invest 50% in low-risk assets and 50% in medium-risk assets.

Another objective often written into the agreement is whether the consumer wants to achieve capital growth, income, or a mixture of the two. A target income amount might be agreed.

Other aims of the portfolio which might be included in the agreement relate to areas of economic activity that consumers might want the manager to invest in - or alternatively, areas the consumer wishes to avoid.

As examples, the agreement might state that the consumer is keen to invest in the shares of pharmaceutical companies - or that the consumer wishes to avoid shares in tobacco companies.

non-discretionary portfolio-management agreements

Under these agreements, the manager makes recommendations to the consumer about which holdings it considers should be bought or sold within the consumer's portfolio. But the manager can only carry out these transactions with the consumer's permission.

Under advisory managed agreements, the manager is responsible for both monitoring and providing advice about the overall suitability of the portfolio. The consumer then chooses whether or not to accept the manager's advice.

An investment risk-profile will be agreed for the consumer. Often the consumer's requirement for capital growth and/or income will also form part of the agreement. There may be specific requirements written into the agreement about the types of assets that the consumer does or does not wish to invest in.

complaints we can't look at

The types of complaint that we are unable to look at are described in the section of our website on stocks and shares.

complaints we see about portfolio-management agreements

The cases we see about portfolio-management agreements generally involve the consumer complaining that:

  • there has been a failing in the administration of their portfolio;
  • the manager has failed to manage their portfolio on the basis agreed;
  • the manager has failed to diversify the investments made in the portfolio; or
  • the manager has made too many, or too few, changes to the portfolio over a certain period of time.

how we deal with complaints about portfolio-management agreements

suitability of a portfolio - and the consumer's understanding of the agreement made

A manager should only recommend an investment portfolio to a consumer when it is suitable for their financial circumstances. If we think the evidence suggests that an investment portfolio was not suitable for a particular consumer, it is likely we will uphold the complaint.

We will also look carefully at whether the consumer sufficiently understood the portfolio’s aims and the basis on which it was to be managed.

administration of a portfolio (both discretionary and non-discretionary)

Cases we see about the administration of portfolios include complaints from consumers that:

  • the manager has failed to transfer portfolio holdings to a new portfolio manager in an appropriate period of time;
  • the manager has failed to transfer some or all of their holdings;
  • the manager has applied unreasonable charges; or
  • the final value of the portfolio has turned out to be less than previously quoted.

Where the complaint relates to delays in transferring a portfolio’s holdings, we assess what we think would have been a reasonable timeframe for the manager to have arranged transfers. We take into account the types of asset involved as well as good industry practice.

Similarly, if some holdings have not been transferred, we will consider the reasons for that - and whether this is the fault of the manager.

For complaints relating to charges, we look at the terms and conditions of the portfolio to decide whether the manager has applied charges on the basis that it said it would. We also consider whether the charges applied were reasonable.

The value of a portfolio is likely to fluctuate in line with market conditions. But where there is a dispute about valuations provided by the manager, we investigate whether the manager has been at fault. If so - although we would not normally expect a manager to honour a valuation that was incorrect - we might tell the manager to pay compensation for any distress or inconvenience that has been caused to the consumer.

management of investments in a discretionary portfolio

Cases we see about the management of investments in a discretionary portfolio include complaints from consumers that:

  • the overall risk profile of the portfolio created by the manager was not in line with what was originally agreed;
  • the manager invested in particular assets that were outside the risk levels originally agreed;
  • the portfolio was weighted too heavily towards investments in a particular economic sector; and
  • the portfolio was not sufficiently diversified.

In these cases, we look at portfolio valuation-statements to decide whether the assets held were consistent with the requirements of the consumer - as set down in the discretionary agreement. We pay careful attention to the wording of the agreement, as this is sometimes tailored very specifically to the individual consumer's needs.

We also consider whether or not the evidence shows the consumer had sufficient understanding of the basis on which the portfolio was to be managed - and whether the discretionary basis agreed was suitable for their circumstances.

There is more information about our approach to assessing these issues in the section of our website on assessing the suitability of investments.

When we look at portfolio valuations, we take into account the overall level of risk that all the assets held represent. A consumer may have requested that a portfolio be managed on a "medium risk" basis. But this would not make it unreasonable for the manager to buy some lower and higher risk investments, to maintain an overall medium risk - unless the discretionary agreement stated otherwise.

However, an excessive proportion of holdings that were not medium risk in such a portfolio could result in the overall balance of the portfolio ceasing to be medium risk.

Sometimes a complaint relates to a discretionary agreement that specified the proportions of the portfolio to be invested in low, medium and high risk investments. In these cases, we assess whether the manager has succeeded in maintaining the investment balance requested by the consumer – subject to short-term tactical considerations.

We will also investigate whether the portfolio has been managed in line with any instructions in the agreement to invest – or avoid investing – in certain sectors of the economy.

Taking into account any specific restrictions like these, we consider whether the portfolio is sufficiently diversified.

Whenever we assess risk levels, we look at whether the manager was supposed to be balancing the risk of the funds managed within the portfolio against the risk of other financial assets held by the consumer. If the manager should have been taking into account the risk of assets outside the portfolio, we would expect this to be clearly documented.

investment advice provided under non-discretionary portfolios

Many of the complaints we see about investment advice provided under non-discretionary portfolios relate to the suitability of advice to buy or sell a share.

The consumer may feel that the share recommended was not appropriate for their attitude to investment risk - or that the strengths and weaknesses of the company which the shares were in were not all made clear.

In these cases, we look at whether the level of risk relating to the recommended share was suitable - and at how it was represented.

If the manager is obliged to monitor the overall suitability of the portfolio, we decide whether the manager’s recommendations unbalanced the consumer’s portfolio to the extent that the overall risk-profile of the assets held no longer met the consumer’s requirements.

trading frequency undertaken within a portfolio (both discretionary and non-discretionary)

We sometimes see cases where a consumer has complained that the manager has not carried out enough purchases and sales over a period of time (under discretionary agreements) – or has made too few recommendations (under non-discretionary agreements). The consumer may feel this has decreased the opportunities for their portfolio to increase in value.

Other complaints we see are the reverse of this – where the consumer feels the manager has traded assets excessively.

With complaints about the lack of trading in a portfolio, the consumer may feel their portfolio has been "neglected", or that the manager has failed to take advantage of buying and selling opportunities.

Given the speed with which the market can move, it is not usually reasonable for a discretionary portfolio to only be reviewed twice a year when a valuation is produced. But depending on the circumstances at the time, it can be a reasonable approach to avoid changing the assets held in a portfolio. So we would look at the reasons the manager gives for not making changes or recommendations during the period in dispute.

Where the complaint relates to excessive changes in the portfolio’s holdings, we look at whether trading activity is higher than we would expect. If it is we ask the manager to explain why this is.

We also consider whether regular trades to achieve short-term profits on individual shares are part of the strategy agreed between the consumer and manager for the portfolio. This strategy increases both trading costs and the level of investment risk – because investment in shares is generally seen as being for the long-term to avoid short-term fluctuations. So we assess whether this type of strategy was required by the consumer, understood by them, and whether it was suitable for their attitude to investment risk.

compensation

where the complaint relates to the administration of the portfolio

If we decide that a manager has caused a delay in transferring assets from an existing portfolio to a new one, we will look at whether this caused the consumer financial loss.

If it has, we will usually tell the manager to pay compensation to put the consumer in the financial position they would now be in, if the transfer had been carried out within a reasonable period of time.

If a manager has applied charges outside those permitted in its terms and conditions for the portfolio, we tell it to pay a sum equivalent to those overpayments – together with interest.

Poor administration does not always result in a consumer suffering financial loss – but it may still cause inconvenience or even distress. In cases where we decide a consumer has suffered material distress or inconvenience as a result of a manager’s errors, we tell the manager to compensate the consumer in line with our usual approach to compensation for distress, inconvenience or other non-financial loss.

where the complaint relates to investments made in the portfolio (both discretionary and non-discretionary)

If we decide to uphold a complaint, our aim is to put the consumer back in the financial position they would now be in if the portfolio had been managed in accordance with the terms and conditions.

consumers inappropriately advised to start an investment portfolio

In some cases we decide that the consumer’s attitude to risk or their financial aims meant they should never have been advised to start an investment portfolio.

In these circumstances, we try to determine where the consumer would have put their money if they had not invested in the portfolio. If we can do this, we are likely to tell the manager to compensate the consumer – by putting them into the position they would now be in if they had invested in that alternative asset.

If we cannot reasonably say where the consumer would have put their money, we are likely to tell the manager to repay the initial amount invested – together with a sum reflecting the consumer’s lost opportunity for investing elsewhere.

where it was suitable for the consumer to have an investment portfolio, but inappropriate holdings have been bought

We sometimes tell the manager to calculate how the money invested by the consumer would have performed if it had been used to buy a different share, or a different group of shares.

In cases like this, the inappropriate share or shares may be compared to the performance of an appropriate alternative investment. Or we might compare the performance of the inappropriate shares to the performance of the remaining suitable part of the portfolio.

However, it is often not possible to be completely certain which particular shares would have been bought if the manager had made appropriate recommendations (for non-discretionary portfolios) or appropriate purchases (for discretionary portfolios).

So in these cases, we will normally ask the manager to compare the actual performance of the portfolio with the performance of a particular benchmark. The benchmark we choose depends on the circumstances of the case.

Even if we decide that investments were unsuitable for a portfolio, we may find there has been no financial loss when the portfolio is compared with a suitable benchmark or other suitable investments.

The consumer would not then need compensating for financial loss. But compensation might still be appropriate if the manager’s actions had caused the consumer material distress and/or inconvenience.

where the complaint relates to trading frequency

If we decide that a manager’s actions have resulted in excessive trades occurring in a portfolio, we may tell the manager to refund to the portfolio the excess charges that it has incurred as a result of this activity.

We will also look at whether the trades themselves were in line with the consumer’s financial aims and attitude to investment risk. Where they were not, we may tell the manager to re-model the portfolio as if the excessive trades had not occurred.

If we decide that a manager did not sufficiently review a portfolio’s holdings – and so its trading frequency was inappropriately low – we usually compare the value of the portfolio to a benchmark. This is because it is reasonable to assume that the movement in the value of the benchmark would broadly reflect the value of a portfolio that had been monitored for its suitability more regularly.

In all cases where we consider the manager to have been at fault, we will consider whether this has caused the consumer any material distress and/or inconvenience for which the manager should compensate the consumer.

ombudsman news case studies

FSA "dear CEO" letter

FSA letter to firms involved in the wealth management industry to outline areas of concern following a review of the suitability of client portfolios.

help for businesses and consumer advisers

contact our technical advice desk on 020 7964 1400

This is part of our online technical resource which sets out our general approach to complaints about a wide range of financial products and issues. We would like your feedback on how helpful you found it. Please also use the feedback form below to tell us about anything you think we could clarify or explain better.

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  • The law requires us to decide each case on the basis of our existing powers and what is fair in the circumstances of that particular case.
    We take into account the law, regulators' rules and guidance, relevant codes and good industry practice at the relevant time.
    We do not have power to make rules for financial businesses.
    Our current approach may develop in the light of circumstances disclosed by further cases we receive.
    We may decide that fairness requires a different approach in a particular case.