We love a sensational headline and this week we were drawn to an article written by our friends at Defaqto. The title was along the lines of ‘IFAs are still in the eye of the storm’ when using DFM (or ‘managed assets’).

Of course, as I’m sure you are aware, we are passionate about all things discretionary management related. We were therefore intrigued and wanted to learn more about this so-called storm. Is it a big, dark, scary storm or more of a storm in a teacup?

The article started with an overview of the changes we’ve seen in the market since RDR. How advisers, and providers, have had to transform their businesses to conform to the new world. A client-centric world free from commission and other product or investment biases.

It went on to discuss the requirement for a Centralised Investment Proposition (CIP) and how many advisers have turned toward outsourced investment service, rather than building portfolios in-house.


The growth in investment outsourcing

We concur with the trends mentioned. In our experience, advisers are evolving their CIPs and using discretionary investment services (or ‘DFM’) for the following reasons:

1. They have found the process of managing advisory portfolios onerous, particularly as their business has grown. Seeking client permission before trades can be placed causes time delays and can lead to some clients holding out-of-date portfolios where they haven’t granted their approval. The adviser is also limited in their ability to take advantage of investment opportunities as they arise or respond to changing market conditions.

2. They would like to differentiate their investment offering for different client segments. For example, they would like to use a more sophisticated service for their top tier of clients, those with specific investment requirements. Or, at the other end of the spectrum, use a multi-asset fund solution for clients with less sophisticated needs and lower portfolio values.

3. They would like to focus on their core competencies. Market conditions have proven quite challenging of late and many financial advisers would prefer to focus on their core competence: providing quality financial planning rather than researching and selecting funds.

4. They want to streamline their investment process and ‘de-risk’. In the current regulatory environment, many advice firms are looking to de-risk. Rather than take full responsibility for investment management where the downside could be catastrophic, they are looking to outsource to a dedicated team of experts with 100% focus in this area. I’ll come back to this point later.

5. They plan to evolve their client value proposition. Tying your client value proposition to your investment proposition carries inherent risks. Advisers realise that by appointing a discretionary manager, or panel of discretionary managers, they then sit at the same side of the table as their client, collaborating to help them achieve their goals – rather than (potentially) defending performance. Another benefit is the ability to switch discretionary managers if performance, mandate drift or another issue arises.

In response to these changes in adviser business models and the increased appetite for discretionary management, we have seen an explosion in the use (and availability) of DFM services. This is the reason we established DISCUS. To help advisers to understand the intricacies and implications of investment outsourcing, particularly the use of discretionary services, and to find the right DFM partners for their clients and business (cue our Compare tool).


DFM is so much more than a bespoke portfolio

Rather than DFM = bespoke discretionary portfolios, as was the case in days gone by, DFM now equates to a wide range of services. In addition to bespoke portfolios, with minimums between £200k and £500k for clients with very specific requirements, DFM also includes:

» Managed Portfolio Services (MPS). These portfolios are pre-defined to match specific risk or return objectives. The adviser and client are responsible for deciding the option that is most suitable for their needs.

» Discretionary Funds (or Unitised DFM). Essentially a managed portfolio service, wrapped in a collective structure (unit trust or OEIC). The funds can be unitised multi-manager or multi-asset and tend to mirror the methodology, philosophy and approach of the discretionary manager’s MPS. Operating as a fund, they do not offer the personalised approach of a usual discretionary service. One of the benefits of the unitised structure is that the client will not be subject to CGT unless they sell all or part of the fund.

Many of the advisers we work with utilise the full range of discretionary investment services for their clients. Multi-manager or multi-asset for clients with smaller portfolios, MPS (typically on platform) for mid-tier clients and ‘full-fat’ bespoke discretionary at the very top end.


What about that storm?

So up to this point in my post everything seems fine. Businesses are evolving, as are the solutions available to meet the needs of different clients and the advisers who service them. What storm could possibly be brewing?

The article points to a regulatory storm. And on multiple fronts.

» No. 1 – due diligence. This refers to the requisite due diligence advisers must undertake before appointing a discretionary manager. This is an area we cover quite often on this site. We even hosted an event with Rory Percival on the topic last year (read his Five step due diligence process here).

One thing that strikes me about good due diligence, is that it simply comes down to common sense (Fraser Donaldson, the author of the article referenced throughout, shares this view).

It’s about putting your clients at the centre of your process. What service is most appropriate for their needs and why? Who is best placed to deliver that service? Operationally is the third-party set up to deliver against their promises? Do you share the same ethos and values when it comes to client service? Does the investment approach deliver ‘what it says on the tin’?’.

In point (4) above, I referenced ‘de-risking’ an advice business. When you outsource you take over the risk of whether the DFM you appoint is appropriate for your clients. This is tackled by in-depth due diligence and ongoing monitoring. The risk you transfer is that of the investment process, which is now handled by the DFM.

Undertaking a formal due diligence process makes good business sense. When you establish a partnership of this nature you want it to be for the long-term –  without any surprises. It wouldn’t look good if you handed the investment reins over to an expert team, entrusting your clients to a manager and then having to back track and explain that the relationship didn’t work out. Or worse still, the DFM made headlines with a large regulatory fine or is for some reason being shut down.

»  Item no. 2 – MifID II. This is another area we focus on extensively. Most recently this week with the challenges of Mifid II and last week, the key regulatory issues facing advisers (and how to address them). Advisers will need to look at areas such as telephone recording, aggregated costs disclosure, product governance and suitability reporting. This adds further complexity to an already packed agenda for advice firms.

»  Item no. 3 –  consultation papers. There are numerous consultation papers that have been released or are set for release in the coming months. All of them appear to follow similar themes, including transparency, cost and ensuring the very best client outcomes.

I could go on, although I think you get the point. There is a storm brewing, however I believe those advice firms with good processes and controls, an unwavering focus on ensuring suitability and achieving the very best possible client outcomes will have nothing to fear. I guess that boils down to a storm in a tea cup.


This post was created for the DISCUS website based on a recent article in FT Adviser by Fraser Donaldson of Defaqto. You can read the article here. If you would like to compare discretionary investment managers based on your own criteria, try our Compare tool ›