Describing the relationship between discretionary fund managers (DFMs) and financial advisers presents a real challenge.

As model portfolio services (MPSs) took off during the run-up to the Retail Distribution Review (RDR), the word ‘outsourcing’ became widely adopted to describe the working relationship between financial advisers and DFMs.

However, if we take a closer look at the use of the word – it isn’t a perfect fit. It describes a company’s decision to:

 Reduce costs by transferring work to third-parties rather than completing it internally. Outsourcing is an effective cost-saving strategy when used properly.

The big question to consider is whether appointing a DFM ultimately reduces your costs. To an extent, building a relationship with a DFM can lower costs because it allows a financial advice firm to devote less time and resource to managing their clients’ investments, allowing them to focus on higher-value revenue generating activities.

However, more often than not the decision to appoint a DFM is taken because an adviser is looking to tap into a third-party’s investment expertise. The driver is not always cost-focused. For example, they may also be looking to improve operational efficiency by moving client portfolios over to a discretionary mandate.

It is also worth noting that a financial adviser is not absolved of their responsibilities when they appoint a DFM to manage their clients’ investments. In fact, they are very much on the hook for making sure that the portfolio is appropriate to the client’s risk profile and objectives. What’s more, advice firms devote a lot of time and resource to the due diligence process associated with selecting a DFM, as well as the ongoing monitoring of the investment managers they have appointed.

Tony Allan, a Partner and Head of Business Development at LGT Vestra, hates the word ‘outsourcing’. Watch the video (it’s just 2 minutes) to find out more.

Can’t watch the video?

Here’s why Tony hates the term ‘outsourcing’:

“I think it is the wrong word to use. As a DFM, we are asking financial advisers whether they want to insource our services to their business. We don’t describe it by saying they should ‘outsource their investment process to a third party’.

 

I think the terminology is misleading to a certain degree and I am very much in favour of talking to advisers about insourcing our services. This is how we have positioned the offering to our current customers.

 

Our service is very broad; we are there to support advisers, not just on the investment side but on the marketing and sales side too.”

 

Is the term ‘insourcing’ more appropriate?

At DISCUS, we define investment insourcing as buying in specialist skills or expertise to support the delivery of your centralised investment proposition, while maintaining a certain level of control over that process.

Of course, this definition is open to interpretation, but we feel the last statement about maintaining a degree of control over the process is important to consider. It could describe a scenario where model portfolios are created by a discretionary manager, bespoke to a specific advisory firm.

In this situation, the discretionary manager will sit on the adviser’s investment committee and contribute ideas and expertise to shape their centralised investment proposition. The firm can also benefit from the DFM executing changes to the portfolios using discretionary powers, which is quicker and more efficient than running the portfolios on an advisory basis.

Several of our discretionary investment partners are happy to strategically partner with advisers to deliver this form of ‘insourcing’ solution. Indeed, a few of them only operate in this way.

While this term goes some way towards describing the adviser-DFM relationship, there are many instances where advisers do not maintain a level of control over the process. In fact, they are happy for the DFM to take the lead.

Having said that, we agree with Tony that ‘outsourcing’ is the wrong word to describe the adviser-DFM relationship because ultimately responsibility lies with the adviser to make sure that the DFM delivers the right outcome for the underlying client.

So, what’s the answer?

There are no hard and fast rules. For what it’s worth, we at DISCUS believe that the most appropriate description of the adviser-DFM relationship is that of a partnership. Both businesses must have a ‘cultural’ fit for the relationship to succeed and are effectively relying on each other to grow and prosper.

What are your views? Please add any comments in the space below.

 


This article was created for the DISCUS website following a DISCUSsion with Tony Allan of LGT Vestra. You can find out more about the LGT Vestra discretionary investment services here ›

This month LGT Vestra celebrate their 10th year anniversary of offering a fresh approach to wealth management. Their plan has always been simple: putting their clients first by providing a transparent service, designed around what is right for each of them. In the years since they have turned their vision into reality. The partnership ethos of their business has allowed them to attract some of the best talent in the industry and draw together in-depth experience across multiple disciplines. They offer an experienced, personalised, flexible and direct approach to investment planning and management across a wide range of asset classes. Happy 10th birthday LGT Vestra and here’s to your next decade!