I realise I’m at risk of becoming known as a PROD evangelist, given the coverage I’ve given the topic of late. I do, however, believe it will be a game changer for advisers’ Centralised Investment Propositions (CIPs). As a result, I’ve been talking to my adviser contacts and our DFM partners to see how they’re tackling the legislation in their businesses.

I recently caught up with Leigh Stephens, Head of strategic partnerships and Director at Tacit Investment Management and asked him to share his views, as a boutique discretionary fund manager (DFM). I’m pleased he allowed me to capture the discussion on video, which you can watch below.

 

CIPs, are they becoming a tick-box exercise?

The whole premise of a CIP is to bring consistency to the way investment solutions are delivered, across an advice firm. Gone are the days of old, where advisers built individual portfolios on a client-by-client basis. Where an adviser in one room meeting with a client with an agreed risk profile of level five (I take issue with this approach to labelling risk, but that’s an entire blog post which I’ll tackle at another time) recommends certain holdings, while at the same time the adviser in the room next door, with a client in the same risk band, is advising them to sell those very funds or securities.

Today, many advice firms run their CIP using asset level thresholds as the main criteria for investment selection. For example, a client with <£100k to invest will be offered a multi-asset fund. Clients with between £100k and £500k might be placed in the advice firm’s model portfolios, and those with £500k+ will automatically be deemed appropriate for a bespoke DFM portfolio.

To meet their clients’ individual investment preferences, they might offer portfolios with active funds, purely passive funds or a hybrid of active and passive.

Unfortunately, as Leigh rightly points out, these CIPs are inflexible and are often just a tick box exercise showing due process has been followed.

Under PROD this approach will need a complete rethink. Clients must be segmented based on their individual needs, investment preferences and life stage. The adviser must be able to demonstrate value, right across the value chain, from their advice service to the platform or product, through to the investments they recommend.

 

PROD and DFM selection

Another issue we see is that, often, when an advice firm has created a panel of discretionary managers those managers are delivering very similar investment solutions and portfolio outcomes. Recently I asked an adviser to tell me about the DFM panel used by his firm. He explained that they used four of the five usual suspects (I don’t need to list them) and their basis for selection on a client-by-client basis was personality.

He said:

“Once we know a client and understand their needs we pick the DFM on our panel who will best ‘fit’ with their personality. Older clients, with more traditional views will be introduced to the DFM with a long-standing heritage and more traditional client facing staff who deliver a very hands-on, personalised service. Younger clients with a more modern world view are introduced to our younger, tech-driven DFM partner.”

 

With PROD, advice firms will need to look more closely at the DFMs on their panel to ensure they deliver the right outcomes for the client segment to which they’ve been appointed.

The consequence of this is two-fold:

» DFMs need to be very clear in how they articulate their investment proposition and services, ensuring advisers can easily see the match between their client segments and what that DFM will deliver

» Advisers need to undertake deeper analysis on the DFMs they partner with to see where there is any crossover. They also need to carefully map the DFMs they work with to each client segment

 

The rise of the boutique DFM

In my view, I believe this will result in a rise in popularity for boutique DFM services. Advice firms will begin to see that boutiques can bring very different solutions to the table.

Watch the video below to hear Leigh’s view on this and what differentiates his firm from the bigger players.

Watch the video for more (it’s just 3:21 minutes)

 

 

(Please excuse the shaking in the video, it was filmed on my iPhone and Leigh kept knocking the table which meant my iPhone shook too!)

 


This article was created for the DISCUS website following an informal interview with Leigh Stephens, Head of Strategic partnerships and Director at Tacit Investment Management. To find out more about Tacit please visit their dedicated page here