When it comes to outsourcing, one of the challenges an adviser might face is the conundrum of “how do I justify fees to my clients?”. Particularly so when working with a Discretionary Fund Manager (DFM) means the adviser is essentially outsourcing some of the advice work they were previously responsible for. In this post I will talk through the implications of working with a DFM and the opportunities it creates, thereby demonstrating the value it adds (and your ability to add a new service), rather than detracting from your current proposition.
The concept of investment outsourcing is not new. And whether it’s the number of advisers choosing to outsource or the value of funds that have gone down this route, both metrics highlight an upward trajectory in a relatively short space of time. Catalysts could be the Retail Distribution Review or the FSA’s paper on centralised investment propositions published back in July 2012. Certainly advisers appear to see the opportunity for outsourcing and its ability to create business efficiencies, which in turn allow them to provide value added services to their clients.
Click the images to see the growth in outsourcing in terms of advisers and assets (use your back arrow to return to this page).
We expect this trend to continue. Some advisory firms are electing to outsource in order to deliver greater investment expertise to their clients and others are looking to reduce their business risks, possibly based on a tightening of compliance requirements or maybe an intention to reduce PI costs.
The switch to outsourcing
If you’ve always run your own investment proposition, how do you make the switch to outsourcing and justify your fees?
It’s best to start with an understanding of what clients value and are willing to pay for. A few years back, in the run-up to the RDR, JP Morgan commissioned a survey among prospective high net worth consumers. The intention was to identify the exact type of services these clients value from a financial adviser and more importantly what they are prepared to pay for.
Click the image to see what clients value and are willing to pay for (use your back arrow to return to this page).
What’s interesting about these findings is that a good DFM should be able to support an advisory firm with regard to the top five service attributes most valued by clients. From ongoing portfolio adjustments to face to face meetings, regular portfolio reports, early warning of market volatility and ideas on new investment opportunities. Indeed a good DFM wouldn’t just support these but could in fact enhance them, thus making you, the adviser, look really good in front of your client.
Two heads are better than one: justifying your fees
The client value proposition should focus on how delivering a joined up service in collaboration with a DFM partner will lead to better client outcomes. You, the adviser, are free to focus on your areas of expertise (financial planning, tax mitigation, estate planning and risk minimisation etc.) without the distraction of managing and monitoring client portfolios – the domain of the DFM who is armed with a team of experts focussed in this area.
Your responsibility is to set the financial planning strategy for the client, then decide on the tactics to deploy to deliver that strategy. This might involve the use of a DFM, a multi-asset fund or a Model Portfolio Service. These investment options on their own serve no purpose without the context of what you are seeking to achieve for the client. Setting the overall strategy and context for this is best achieved by you, while the investment related aspects are best handled by the outsourced provider. This delineation between the two roles is illustrated in the following table:
ADVISER SERVICE RELATED TASKS
» Assess client situation and lifetime goals
» Holistic reporting
» Identifying client’s attitude to risk
» Cash flow forecasting
» Ongoing suitability (of advice, not investment portfolio)
» Tax planning
» Assess suitability of products, wrappers and platforms to client’s situation
» Due diligence of product, wrap and platform providers
» Reviewing and revising client’s overall financial plan
» Assess client suitability to DFM service
» Identify clients attitude to risk and ensure it aligns with adviser’s understanding of the client
» Research of entire investment market with appropriate quantitative and qualitative analysis
» Asset allocation and individual stock selection
» Assess suitability of the portfolio
» Ongoing monitoring of client portfolio and managing to client mandate and attitude to risk
» Providing client reports relating to investment performance and valuation
» Providing information for end of year tax return
» Reviewing clients’ investment portfolios with the adviser
» Attending client meetings
» Answering queries and acting as point of contact
The table illustrates the concept of two heads are better than one. Two professionals working towards the same objective bringing their own individual expertise to bear for the sake of the client. Financial planning strategy the adviser, investment tactics the DFM.
Outsourcing also takes into account a wider range of tactics than if you tried to achieve all of this on your own. Ensuring you are able to deliver whole of market advice to your clients and demonstrating your independence (if you are seeking to remain independent).
Managing client expectations
Outsourcing to an investment partner also enables you to better manage client expectations. Suddenly you and the client are on the same side of the table and together you can assess and agree whether those brought in to enact the tactical plan are the best people for the job – a much more client-focussed interaction than having to spend half an hour defending your position regarding one of your own previous investment fund selections.
A new service proposition?
Don’t underestimate the value of due diligence and the necessary governance you should be undertaking on behalf of your client. There is much to do here if the job is performed properly and importantly chargeable (see the table below). Of course this can be made easier if your firm has established a panel of approved DFM providers.
Rather than detracting from your current service offering, or the perception that you’re passing on tasks that you previously managed in-house and therefore devaluing the work that you do, working with a DFM creates the opportunity for a new service. One specifically related to the integration of your services with those of the DFM.
An advisers principle tasks when working with a DFM are:
- Monitoring portfolio performance and ensuring the strategy is in line with the client’s objectives
- Keeping your client informed of performance and notifying the manager if their situation changes
This could be packaged up into a new DFM related service offering, such as:
NEW ADVISER/DFM SERVICE RELATED TASKS
» Assess client situation and lifetime goals
» Ongoing suitability of discretionary proposition
» Regular reviews of client requirements and circumstances
» Regular discussions with the DFM about client portfolios to ensure alignment with client objectives and attitude to risk
» Analysis of portfolio performance and comparison with benchmarks
» Face to face meetings with the DFM manager
» Regular audit of DFM investment reports
» Ongoing due diligence of the DFM chosen
There is a lot of value in this new service offering, especially when you package it in such a way as to reinforce your skill set as an adviser and the long-term benefits of financial planning – without the distraction of trying to also do the heavy lifting when it comes to portfolio management.
Appointing a DFM, a leap of faith?
There is always a leap of faith involved in introducing your first client to a DFM. A result of the fact that it is a service on offer, rather than a tangible product. Therefore you don’t experience the benefits of the service until such time as you trust the DFM with your first client.
It is important to recognise that this can be a much bigger decision than simply deciding to allocate client assets to a fund. Particularly if you are introducing a client to a fully bespoke discretionary service, it is highly likely that the client in question might be one of your biggest and most valuable.
You might have some other reservations as well. These are very real barriers for many advisers but are actually unfounded once you recognise the benefits of the DFM engagement process (in my next installment I will look to explode some of the myths of the DFM industry. Be sure to subscribe to the DISCUS eNewsletter to see my next post).
» A Financial Planner and discretionary manager working together is a powerful combination. Each party is able to focus on their strengths and skills, whilst delivering better outcomes for the client. Two heads really are better than one in our experience
» By appointing a DFM you will change the dynamic of your relationship with the client. There is still much for you to do (and charge for) having made the decision to outsource. Although you are now sitting at the same side of the table as the client. Together you are monitoring the suitability of discretionary management and the provider you have chosen to perform this task.
» Remember, bespoke discretionary management is a service and not a product. This means you will probably have many questions that need answering regarding the ‘softer’ aspects of the working relationship with the DFM before you take a leap of faith with a client and experience the service for real.
Until next time. I hope you like what you’ve read. Feel free to post a comment below.
This post was published on the DISCUS website by Rathbones. You can find out more about their investment services here ›