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Was it in my best interest to sign a Category II mandate?

A discretionary mandate is used by an investor and a financial services provider to assist in the ongoing positioning of a portfolio as circumstances change.

I’ve been investing with a well-known financial services provider (FSP) for many years. The FSP recently acquired a Category II mandate along with its own funds.

Is it in my interest to have signed a Category II mandate and power of attorney over my investments with my FSP? A very large portion of my portfolio has recently been switched, without me knowing, into the new funds recently acquired and owned by this FSP. 

I’m now paying all the normal FSP fees as well as another fee to be in the funds owned by the FSP, which seems to be a conflict of interest. I think this is a gross misuse of trust. It seems the switch that was done was more in the interest of the FSP than my portfolio.

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Dear reader,

Thank you for your question.

For the benefit of other readers, let me first explain what this mandate is.

A Category II Discretionary Mandate is only available from financial services providers (FSPs) who hold a Category II licence issued by the Financial Services Conduct Authority (FSCA).

A discretionary mandate is an agreement signed between the Category II FSP and an investor where the investor provides permission to the FSP to perform certain actions on the investor’s behalf.

Discretionary mandates are very tightly controlled by the FSCA, which has to approve the draft discretionary mandate before the Category II FSP is able to ask investors to sign them. Should there be any changes to the wording of the discretionary mandate after the FSCA has provided approval for the mandate, the amendment also has to be approved.

In most cases, a discretionary mandate is used by an investor and an FSP to assist in the ongoing positioning of a portfolio as circumstances change without the FSP needing to contact the investor for each and every portfolio change.

In essence, the investor is providing this permission up front to the FSP with the understanding that the FSP will always act in the interest of the investor for as long as the mandate is provided for in terms of the agreement.

To answer your question, “Is it in my interest to have signed a Category II mandate and power of attorney over my investments with my FSP?”:

It is often in the interest of an investor to enter into a discretionary mandate with a Category II FSP because the FSP can then react very quickly to changing market conditions without needing to get the investor’s go-ahead in the form of a signature. Obtaining permission from an investor to adjust their portfolio can take a long time, especially if the investor isn’t readily available to attend to the required documentation (they may be travelling or simply busy at the time); as a result, the investor may miss an opportunity in the market or may experience a delay in moving into less risky assets when markets are moving into bearish territory.

We also need to remember that a discretionary mandate is designed to give the FSP the ability to always work in the best interest of the investor.

We have to remember that for an FSP to have been provided with a Category II Licence is an indication that the FSP has the right skills and experience to be able to provide its clients with the opportunity to enter into a discretionary mandate with them.

So the purpose of a Category II Discretionary Mandate is to allow the FSP to use its discretion to structure the investor’s portfolio as the FSP sees fit without requiring explicit authorisation from the investor every time the FSP wants to make adjustments to the portfolio.

“A very large portion of my portfolio has recently been switched, without me knowing, into the new funds recently acquired and owned by this FSP.” 

It is quite difficult to comment on your statement without knowing the specific detail of what fund and how this fund is structured and the fees. However, my advice would be for you to analyse what type of fund this is (is it a unit trust, a model portfolio, a multi-manager fund or a fund of funds? Also, you should analyse the fees charged on this fund and compare your analysis to the total fees you were paying on the funds that were in your portfolio prior to the switch.

Many more-advanced advisory firms have been forming their own funds in recent years. In many cases, they have partnered up with specialists in this field and are able to provide the investor with a fund solution that is made up of well-diversified solutions at a lower total fee in comparison to the solution of having direct exposure to funds within your portfolio. In most cases, these advisory firm funds are still investing in pretty much the same funds you were directly exposed to before they switched into their fund.

The advantage of having an inhouse fund of funds or multi-manager fund is that the FSP can negotiate lower fees with the unit trust companies due to providing the unit trust company with a large bulk of capital to manage, and then pass these lower fees on to you, the investor. Thus, what the FSP is trying to do is provide you, the investor, with a solution with similar performance at a lower cost. 

However, since you state in your last point that you seem to be paying a higher fee than you were prior to this particular fund switch, I would advise you to:

  1. Approach the management of the FSP in question and enquire about the fees.
  2. If their response does not satisfy, ask that your portfolio be switched back to the generic unit trust funds you were invested in prior to the switch at no cost. (Just a word of caution here, if this is a discretionary investment, take the capital gains tax implication into account).
  3. If you do not trust their judgement with reference to doing portfolio switches on your behalf, read through the discretionary mandate. There should be a clause that provides you with the opportunity to terminate the mandate (usually with a 30-day notice period). After the termination of the mandate you can:
    1. Ask to enter into another discretionary mandate with different terms and conditions; or
    2. Revert back to the FSP communicating with you with regards to providing approval prior to affecting a switch on your investment.
  4. If the relationship of trust you had with this FSP is completely broken down, then you simply need to find a new FSP to advise you.

Remember, the money you have invested through an advisory firm is yours and you remain ultimately responsible for how it is invested and managed. If you are ever unhappy about how an advisory firm advises you or how they provide the ongoing management of your investment, express these concerns to the advisor or advisory firm.

Good luck out there, and if you need further assistance please contact me directly.

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