When I meet with financial advisers new to investment outsourcing, I often find that they hold preconceived notions about what it’s like to work with a discretionary manager. From whether clients will be ‘at risk’ of being stolen, to high associated costs, barriers to entry for the average investor and difficulty moving clients out of a discretionary service once they’ve been introduced. Another common concern is how they will justify their role and ongoing fees. In this installment I will explode the five most common discretionary management myths. 

In no particular order, here are five of the most common discretionary management myths I come across:

 

1. A discretionary investment manager will steal my client

Only a short-sighted discretionary manager would do this. A reputable manager will be interested in building a long-term relationship with you, with the aim of providing a service for many of your clients.

The discretionary manager you elect to work with should focus on complementing your advice proposition, helping to enhance the relationship you have with your client and adding value to the services you offer.

It’s also important to note that most discretionary investment managers do not carry the necessary permissions to advise clients in all of the areas a financial adviser can. Furthermore, an investment management service without financial planning is unlikely to be in the best interests of the client.

 

2. Discretionary management is expensive

Defaqto recently carried out a survey that found financial advisers often underestimate the cost to the client across a range of investment solutions and they don’t necessarily take into account the total costs a client would incur. Interestingly, just 26% of the advisers surveyed were using the most accurate cost calculation for funds in terms of their ongoing fund charge (OCF).

Remember that funds will normally form a part of a discretionary portfolio, but very often this is in addition to an exposure to direct stocks, which obviously don’t carry annual charges like funds. The inclusion of direct holdings will tend to bring the overall cost of a portfolio down.

You need to compare solutions on a total cost basis, armed with all of the facts, in order to gain a genuine like-for-like comparison – the results could surprise you. A fully bespoke portfolio with an exposure to direct stocks can compare quite favourably with model portfolio services operated on an external platform. The key is to not be fooled by the headline management fee.

And remember, discretionary management is not a product, it’s a service. The value is in the service and for some clients it is a price that they feel is worthwhile paying.

 

3. Clients have to be wealthy to qualify for a discretionary investment service

This is a myth I hear all of the time. You might be surprised to learn that it is not uncommon for a bespoke discretionary service to be accessible from just £100,000. A threshold I’m sure quite a lot of your clients could meet.

What this means is that through comprehensive financial planning and consolidating a client’s various assets accumulated over previous years, they could have a lump sum large enough to benefit from active discretionary management.

In some instances you may need to look no further than a client’s ISA investments that they’ve accumulated over the years. Ignoring growth, a couple maximising their ISA allowance each year since 1999 would have accumulated a pot of about £300,000.

If they’ve not sought advice, often client’s invest their ISAs each year without too much consideration for their overall investment objectives or current strategy. Many clients may have fallen for billboard advertising and invested their allowance into accounts or funds based on past performance or what might be currently in ‘fashion’. Furthermore, if you start to factor in other legacy holdings such as pension plans and investment bonds, then the sums potentially available for a discretionary service are even greater.

Bringing these pots together into a single discretionary mandate provides an opportunity to apply active management to this money, and adopt a cohesive investment strategy to suit the client’s current objectives and circumstances.

 

4. I will struggle to justify my role and ongoing fees if I introduce a client to a discretionary manager

I covered this in my last post do you really need to justify your fees when you outsource?

When working with a discretionary manager, your role as the adviser is just as important. You are charged with acting as an independent ‘policeman’ for your client, ensuring that the discretionary investment manager continues to deliver against their objectives. Due diligence and governance of the discretionary manager is a valued task and one that should be charged for.

Outsourcing investment decisions will enable you to focus on client suitability for the part of the client’s planning arrangements that frames everything else – their wealth strategy. The tactics you deploy to deliver the strategy might involve the use of a discretionary investment service, a multi asset fund or indeed a model portfolio service. On their own these serve no purpose without the context of what they are seeking to achieve for the client; setting the context for this is best achieved by you.

When you outsource to an investment partner it is easier to manage client expectations, because those expectations are to be delivered by others. Suddenly you and the client are on the same side of the desk and together you both assess and agree whether those brought in to enact the tactical plan are the best people for the job. This is a much easier conversation than having to spend half an hour defending your position regarding one of your own previous investment fund selections.

Do not underestimate the value of due diligence and the necessary governance you will undertake on behalf of your client.  There is much to do here if the job is performed properly, and importantly, this work is chargeable. Of course you might be helped in this task if your firm provides you with a panel of approved discretionary managers.

 

5. Once a client is introduced to a discretionary manager, it’s hard to move them back out

In line with Treating Customers Fairly (TCF) principles there should be no barriers to exit to the detriment of the client, should they or you decide that a change of DFM is necessary.

If for example, a move is triggered by the client being let down by poor service, the in specie transfer route is normally the means to move portfolios from one manager to another without having to sell off the portfolio.

You, the adviser, will play an important role in this decision by taking into account any costs incurred in doing so.

As you can see, there are numerous discretionary management myths (even more than I have listed here), which will fall away once you experience the service of a good discretionary manager and begin to work together in genuine partnership. Your clients will benefit from the joined up approach a marriage of financial planning and focused investment expertise can bring, setting them on their path towards achieving their goals.

If you have comments or ‘myths’ to add, please post in the space below and I’ll happily address them for you.

 


This post on Discretionary Management Myths was published on the DISCUS website by Rathbones. You can find out more about their investment services here ›