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Discretion required in outsourcing portfolios

One of the key questions for advisers in reviewing their strategies for the RDR is how they will deal with clients’ investment portfolios.

Many will conclude that delegating investment decisions to a full-time investment specialist will be in the best interests of their clients.

We have already seen a trend towards outsourcing on the part of advisers. Our recent survey of 232 platform users found that 51 per cent are already outsourcing some or all of their investment process. Within this, 26 per cent of advisers say they had outsourced to a discretionary manager.

This research found that outsourcing through a discretionary manager is now the most common route for platform users – more deployed than multi-managers (23 per cent say they are currently outsourcing through this channel).

There are many potential reasons why advisers would want to outsource to a discretionary manager. Some of the key drivers include:

  • A growing belief that the resource and experience of full-time professional investment teams may give the client a better chance of achieving their goals.
  • The RDR will create a very wide investable universe, which will require extensive research and create a significant challenge for IFAs.
  • The shedding of the investment process should give advisers the opportunity to focus on their core competencies.
  • Recent FSA business reviews have identified a need for IFAs to have a robust, consistent and auditable process in place for the selection and ongoing management of a client’s investment portfolio and discretionary management would certainly provide this.

The surge in interest in discretionary management is relatively new. It is really only over the last couple of years that discretionary management has been considered by most advisers as an investment outsourcing choice.

Because of this, the discretionary market is relatively unknown which does present a challenge in terms of conducting effective due diligence. However, when employing a discretionary manager, advisers are effectively entering into a long-term business partnership and they need to conduct robust due diligence to ensure the partner they select is right for them and their client base.

To help advisers in this area, we have published a discretionary management guide which sets out seven areas that we believe advisers need to focus on when selecting a discretionary manager:

  • The discretionary firms and its ownership – in particular the volume of assets that the firm has under management, both overall and under discretionary management, as well as the proportion of assets under discretionary management that is IFA business.
  • The type of discretionary management solutions being offered – including whether the number and range of options on offer are sufficient to meet the needs of the majority of clients, what the objectives are of each option and how they fit with the adviser’s assessment of relevant risk bands.
  • The performance of potential partners – it is sometimes difficult to obtain evidence of past performance, sometimes because services are new or perhaps due to the fact that this question rarely comes up in the private client arena. However, this is important information and if firms are reluctant to provide it this may lead to difficult conversations about progress when review time comes around.
  • Investment process and philosophy – advisers need to make a judgement about whether the firm’s approach is in line with their views and matches the needs of their clients.
  • The costs and charges involved – with discretionary management there are several charging points, so it is important that the adviser and the client, in turn, is clear about costs involved. Areas to consider include initial and annual service charges, additional trading charges, the firm’s policies on discounting underlying fund initial charges and rebates from fund management companies, as well as the cost of transferring out of the service
  • Whether the discretionary firm and adviser will be able to establish an efficient and supportive relationship for the ultimate benefit of the client
  • Whether the discretionary firm will establish an effective relationship with clients that fits in with the requirements of the adviser, particularly for bespoke portfolios where there is a certain amount of interaction between the client and discretionary firm

The aim is that robust due diligence will result in appropriate discretionary manager selection, both for the adviser and client, but this is just the start of the process.

We would recommend that advisers meet the shortlisted firms to confirm their data-gathering, iron out any issues and get an impression on how easy they will be to work with.

On an ongoing basis, advisers should review the market to a similar depth at least annually but the ultimate goal is that advisers make the right selection decision first time, and reduce the probability of having to make a change further down the line.

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