Skandia has warned advisers they could be breaching Financial Services Authority rules if they fail to use discretionary fund managers correctly.

The FSA recently issued a suitability paper stating that advisers should either have a contractual agreement in place between the customer and the DFM or retain responsibility for the discretionary management and outsource the actual management to a third party.

For the latter scenario, if the adviser does not have relevant discretionary permissions in place then they will breach FSA rules.

Advisers must also carry out appropriate due diligence to ensure the models are suitable for their clients and consider the charges being levied on the customer.

Some DFM arrangements can consist of a platform charge, plus adviser fee, plus DFM fee and underlying investment manager charge.

Graham Bentley, Skandia UK head of proposition, said: “The fact of the matter is, customers expect a tailored investment management service when they use a DFM and many may not be getting that.

“The FSA thematic review suggests a number of arrangements shoe-horn customers into off-the-shelf DFM portfolios, which were not created to match a specific mandate.

“Customers wouldn’t expect such service when buying a tailored suit for instance; they would expect it to be at least a matching size, if not made to measure.”

DFM was a topic spoken about by Nick Cann, chief executive of the Institute of Financial Planning, at this week’s Morningstar Investment Conference.

He told delegates that even if they outsourced work to DFM’s this should not reduce their own business risk as they would still have to ensure they carried out appropriate due diligence.