In the past, some relationships between advisers and discretionary managers were little more than an uneasy compromise based on necessity and characterised by mistrust. Advisers whose clients had money to invest needed the specialist and sometimes niche skills of a discretionary investment manager for research, stockpicking, portfolio construction and rebalancing, while the discretionary nature of the permission enabled the discretionary manager to invest the client’s assets largely without reference to the adviser who had made the introduction in the first place.

Old-school (and sometimes arrogant) discretionary managers like this often wanted a relationship directly with the adviser’s client, taking on the responsibility for Know Your Client (KYC) and suitability recommendations themselves, and leaving the adviser feeling more or less superfluous to the relationship. In extreme cases, client reporting and even client meetings with the discretionary manager to discuss portfolio performance were set up without including the adviser.

No wonder some advisers steered well clear of these predatory discretionary managers and instead took on the responsibility for investment recommendations themselves, despite the obvious drawbacks of the advisory permissions model!

But partnerships between advisers and discretionary managers today are very different – or at least they should be.

In today’s world of discretionary partnerships, the adviser remains the central ‘trusted professional’ in the eyes of the client, and the discretionary manager is a provider of investment expertise. Whether the adviser or discretionary manager conduct suitability assessments, the result should be the same: the client has a suitably invested and monitored portfolio, and the adviser is the central point of client contact for all things financial.

But discretionary managers today can also offer advisers much more service and support to add value to their client relationships. The starting point should be for discretionary managers to ensure that sufficient information is available to allow advisers to start building a shortlist of potential discretionary managers to accommodate their clients’ different investment objectives. For example, third parties such as ARC, FE, Dynamic Planner, DISCUS and Defaqto all offer discretionary manager and portfolio comparison tools to get adviser due diligence underway, and discretionary managers should engage with a range of these third parties for the benefit of advisers.

More in depth information can be gained from face to face meetings between adviser and discretionary manager, which should include discussions on risk and return parameters, performance track record, platform and wrap availability, rebalancing, charges, diversification, drawdown and so on. The process of selecting discretionary managers may also cover areas such as the detail and frequency of client reporting, the availability of back office data feeds and the market and investment commentaries provided to advisers for use with clients. At some stage, discussions should also cover the process and cost of switching to another investment manager, should the discretionary manager not perform in line with adviser/client expectations.

Discretionary managers can also support advisers above the individual client level; for example, by introducing professional connections, service and product innovation, hosting educational seminars and conferences, and referring their own clients to advisers where they identify a need for financial planning.

Clients need to engage with both financial advice and investment management if they are to secure the best outcomes. To achieve this advisers and discretionary managers need to work in partnership with each other, bringing their particular skills to the relationship for the ultimate benefit of the client. A return to the bad old days of discretionary manager ‘predation’ and adviser ‘protectionism’ is never going to work in the client’s interest.

How to spot a…

Predator

» Insists on direct client contract, responsibility for ATR/suitability and refuses instruction from adviser

» Infrequent or no communication with adviser; communications restricted to client only

» Calls or meets with client without reference to adviser

» Shares data with few or no third parties, limiting the due diligence that adviser can conduct

» Doesn’t engage with adviser beyond the limits of servicing clients

Partner

» Accommodates ATR/suitability or defers to adviser instruction, agrees areas of responsibility with adviser

» Full and open dialogue with adviser, sharing information as requested

» Agrees contact and meeting schedule with adviser and client

» Engages with third parties to help adviser conduct research and due diligence

» Provides professional introductions and events, refers clients to adviser for financial planning

Do you have a true partnership with a discretionary manager? Please share your comments or story below.


The content for this post was created by Thesis Asset Management and published on the DISCUS website. You can find out more about their investment services here ›