Gillian recently appeared in Multi Asset Review to share her advice to advisers when selecting the right DFM. Below is a high level over view of the points raised, but you can read the full article which we’ve linked at the bottom. 

Sometimes in life we overcomplicate things – and, when this happens, it can often be as a result of the myriad options and choices available. At a recent visit to a car showroom, for example, I was treated to a lengthy explanation of the various ranges, models and features, including wheel trims, steering wheels, headlights – all aligned to a bewildering array of pricing structures.

Once the salesman paused for breath, he finally asked what my requirements were. “Colour, Bluetooth for making phone-calls, budget and, of course, rear-assisted parking – simple enough?”

I am often asked how best to go about selecting a discretionary fund manager (DFM) and the showroom experience reminded me of how this process can feel at times. With more than 200 to choose from, all offering a range of propositions, is there a process that can help to make sense of this? Based on my experience of working with financial advisers, here are some suggested steps.

Remember – this not a provider-supplier relationship but a partnership

1. Start with your customer requirements

Unlike the car salesman, start with your customer requirements and consider the following:

» What are the client segments and which of those require a DFM solution?
» Having defined the client segments, what range of investment propositions are required?
» How should these propositions be delivered?
» What services do the clients and the business require and how do these vary based on the delivery?

2. Produce a ‘long list’ of possible partners

There are various sources that can be used for this and, in my view, a ‘long list’ should comprise around 20 DFMs. Some points to consider are:

» Try not to include just the ‘usual suspects’
» ‘Big’ is not always beautiful
» A DFM service is not a retail investment product

3. Establish your shortlist

In order to undertake detailed research, the long list should be reduced by around half. Suggested steps to help with this reduction are:

» Review the customer requirements and sort them into ‘must have’ and ‘nice to have’;
» Focus on key requirements on the list, which may be fees and charges (including the treatment of VAT), range of propositions, locations, investment process and philosophy, investment instruments used and responsibility for suitability;
» Use a range of sources for data collection. In its thematic review TR16/1, Assessing suitability: Research and due diligence of products and services, published back in February 2016, the FCA specifically stated: “Firms should consider whether they can rely on the information supplied by the provider.” The research must be robust, impartial, objective and based on fact.
» Map the data against the long list. Identify and exclude those failing the criteria. The regulator also commented in TR16/1 that financial advisers should not ‘retrofit’ – in other words, make the due diligence fit the current solution. Be warned – the FCA can spot this!

4. Do the detail

Some questions to consider when assessing culture are:

» What is the ownership and structure of the business? Is it limited, publicly traded, privately owned or is a private equity firm involved?
» What does the management team look like and is there an alignment of interests across both organisations?
» Are they an acquisition target? Where might the business be in five or 10 years’ time? Would a potential takeover significantly impact the way the business is run?
» What is the level of turnover? Are clients likely to meet the same investment manager for the next few years – and potentially manage intergenerational transfer of wealth?
» Working through the detail and assessing this against the requirements should lead to the production of the final panel, which should still contain a range of options.

5. Document and share

The golden rule is always ‘If it’s not written down, then it did not happen’ and, while documentation of the due diligence process and outcomes does not need to rival War and Peace, it should evidence a logical, thought-through process that demonstrates how the conclusion was reached. Many firms also use some of this documentation to help populate their suitability letters

Equally important is the sharing of this process within the adviser business. Ensure that the documentation does not just get put in the – online – filing cabinet and dusted down on an annual basis. Everyone should understand how the DFM panel was selected and the circumstances in which each DFM might be considered. Consistency of information and advice across the business is vital.

6. Individual suitability prevails

Last but not least is that individual client suitability prevails. The regulator was very clear in TR16/1 that clients should not be “shoehorned” into a centralised investment proposition. If the business operates a panel, then clients should be able to meet with prospective DFMs.

Individual suitability leads me nicely back to the car – for those interested, I am still deciding but I quite like grey.

You can read the full article on Professional Adviser, which first appeared in the new issue of Professional Adviser’s sister title Multi-Asset Review, which is now out. To make sure you receive your own copy of the next issue, please do register your interest here .