Are you looking to appoint a discretionary manager (or managers) to provide a Model Portfolio Service for your clients?

“Due diligence, or at least inadequate due diligence, underpins a lot of the incidents of crystallised risk we have seen…

You can rely on third party providers for factual information but not for opinion…;

you have to come to your own view…”


Rory Percival, FCA Technical Specialist, 30 September 2014

“And so, as we see more and more intermediaries outsource investment management to discretionary fund managers (DFMs), we see a need, according to Rory Percival, not only for good due diligence to be readily available, but for intermediaries to come to their own opinion as to which DFMs they should embrace and work with” says Mickey Morrissey, Partner and Head of Retail Sales at Smith & Williamson.

In Mickey’s article How to select a Managed Portfolio Service (MPS), he outlines a number of important factors an adviser should consider when looking to outsource their investment requirements to a DFM offering a Managed Portfolio Service. While he stresses that the list summarised below is by no means exhaustive, it provides an excellent foundation for those who are just starting out.

A key takeaway for us here at DISCUS is the importance of – as clichéd as it might sound – not ‘putting all of your eggs in one basket’. If you are creating a panel of Managed Portfolio Services, consider how they might complement rather than replicate each other. That way at least there is a chance they will not all perform in a similar fashion when the markets go up, or importantly, when they go down.

1. Create your long list

Start by producing a long list of discretionary managers, somewhere in the order of 12 to 15, that offer a Managed Portfolio Service from which to begin your search. A simple ratings agency filter could help at this stage. Next, request an up to date due diligence questionnaire from those companies that you believe have committed the time and, importantly, resource, behind their Managed Portfolio Service.

2. Look at the discretionary manager’s culture and management

All too often a discretionary investment manager’s culture and management are over looked. However, if you are effectively going to work with a discretionary manager you should understand all there is about the background of the provider. How strong is the business and how well resourced are they? Do they have a reputable brand in the industry? Size is not everything, but it does give some comfort in an uncertain and volatile world; it demonstrates the ability of the management running the business and how it has performed during different economic cycles.

3. Understand their investment process

While this can be a pretty dry subject, nevertheless, it is important to have a clear understanding of what it is and how it has evolved; after all, you may one day be required to explain it to clients. It has to be logical, simple to understand and easy to explain. Who is involved? Does it rely upon one individual or is there a team approach? What resource is behind the process? If the MPS is actively managed, is there an asset allocation committee? Who provides the research?

4. Look at the features of the Managed Portfolio Service

When drawing up a (select) panel of Managed Portfolio Services consider how they might complement each other. For example, how many models are available from each provider and if they are mapped to a risk profile tool such as Distribution Technology or Finametrica. Do they have different objectives? Some may be designed for capital growth whilst others for income. Are they actively managed? Perhaps a passive MPS would be useful to offer clients.

5. Consider the experience of the team

The discretionary investment manager should be fully resourced, with a team of the highest calibre. Do they apply the firm’s asset allocation and investment process with rigour and are they committed to supporting the intermediary market?

An imaginative and skillful team will wish to invest in a blend of open-ended and closed-ended funds as well as ETFs. They may also wish to invest in funds that hedge currencies and provide access to opportunities not available in the wider market.

Finally they should be accessible and capable of articulating their view on the markets and the models they manage to financial advisers, both in individual meetings and at regional conferences and seminars.

6. Evaluate accessibility

Having decided upon those discretionary investment providers that you may wish to support, one very important factor to consider is how to access the relevant Managed Portfolio Services. A clear understanding of the MPSs availability on platforms is required, and of course the costs of the associated platforms.

7. Level of service and support

What level of support can you expect? What is the quality of their literature and reporting? How frequently will you be informed of changes that have been made to the models and how have they performed? Does the discretionary manager provide market commentary which will prove helpful to you and your clients? Will they support you when markets are challenging? A regular flow of information is essential.

8. The associated fees

Lastly, what are the levels of fees and costs associated with investing in the MPSs? Many are very similar in amount with a charge of 0.3% + VAT not being uncommon. Overall costs can vary depending upon the use of passive investments, which often bring down the costs. But at the end of the day a well thought out and constructed MPS, which delivers risk-adjusted performance for advisers, will result in happy clients.

For more detail on the steps outlined above download a copy of Mickey’s guidance paper – How to select a Managed Portfolio Service (MPS). If you have any feedback on this approach, or would like to share your own experience, please add your comments below.

The content for this post was sourced from a paper published by Smith & Williamson. You can find out more about their investment services here ›