The body is urging advisers to review their discretionary investment management agreements amid fears that thousands may be working with inadequate terms.

The PFS said in a statement: “These agreements often treat the adviser as the (professional) client of the DIM/DFM, acting as authorised agent of the underlying investor. However, many advisers who may not appreciate the important technicalities have signed these agreements when they do not have the appropriate authority from their client to do so.

“If not properly engaged, an adviser is not a true agent and ought not to be treated as the (professional) client of the manager. In the event of a client complaint, for whatever reason about the investment, this leaves the adviser potentially exposed.”

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David Gurr, from the independent due diligence consultancy Diminimis, which has been working with the PFS on developing best practice, said: “This is a problem that has been building for years. The issue has slipped through the cracks and it is only the benign market that has kept it from blowing up.

“Billions of pounds of assets are being managed with widespread confusion in the market as to who is responsible for what in the client relationship."

PFS chief executive Keith Richards said: “We have identified widespread confusion in the market on this issue. The lack of clarity around responsibilities where advisers and DIMs are providing services to the same underlying client means many advisers believe the DIM is responsible for far more than they actually are, creating a potential ‘suitability gap’.”

The PFS has issued a good practice update on ‘agent as client’ arrangements to help advisers address the problem.

The update seeks to clarify the requirements of the adviser when operating within the ‘agent as client’ framework. Whilst it applies mainly in managed or model portfolio services, it can apply to other services too.

Research undertaken by Diminimis last year revealed that one in five advisers had never reviewed their existing DIM relationships. In response, Diminimis and the PFS developed question sets last year, aimed at simplifying and systemising qualitative research and due diligence on DIMs. More than 1,000 copies of the question sets have been downloaded.