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Discretionary assured

The list of business challenges and considerations facing IFAs in the run-up to RDR is lengthy and it is clear that they will need third-party assistance in order to deliver compliant advice service propositions to their clients.

A robust partner selection process is therefore paramount to ensure that third-party systems and services can meet the needs of both the IFA business and its clients. We believe that two of the main considerations for IFAs during 2011 and 2012 will involve potential partnership with platforms – fund supermarkets and wraps – and discretionary fund managers.

We provide research tools and consultancy services to IFAs and here we outline our suggested due diligence framework for IFAs who are appraising the suitability of potential DFM partners.

DFM due diligence process 1: What type of investment outsourcing service? 

Why should IFAs consider using this partner? Ascertain the core type and level of investment service offered and the type of IFA/client the provider is targeting.

Bespoke or pooled approach? Another consideration will be whether the IFA is seeking a bespoke approach to the design and management of the client’s portfolio or is content with a pooled investment solution. This decision will impact on cost and service level considerations.

Which business risks are being outsourced? IFAs should ascertain the risks and processes that they are trying to eliminate or outsource from their business and then match these to a DFM solution which takes these risks and processes on board.

2: How does the investment partner, IFA and client relationship dovetail? 

How do the parties work together? IFAs need to be sure of, and comfortable with, the roles and relationships of each of the parties entering into the new tri-partite arrangement.

How is the service proposition sold to the client? IFAs will need to ensure that the combined financial planning and investment service packaged for the client is positioned and priced favourably.

3: How should IFAs appraise investment performance? 

How can IFAs compare past performance? Although IFAs can access past performance for funds, such information can be difficult to obtain for DFMs. The level of portfolio personalisation can have an impact but IFAs should seek out a DFM which strives to provide performance indicators.

How can IFAs benchmark ongoing investment performance? IFAs need to agree a desired benchmark with the DFM and client at outset and then ensure that the portfolio meets the benchmark and associated risk parameters on an ongoing basis. This will remain a key IFA responsibility.

4: What investment expertise is offered? 

What is the DFM’s process? One of the key reasons for IFAs to consider investment outsourcing has been the lack of process and consistency present in their existing approach. It is therefore important to appraise and be comfortable with the DFM’s process.

What asset types will be used within the portfolio? IFAs may wish to check the range of asset types being considered and employed by the DFM. They should feel confident that there is sufficient expertise within the DFM’s ranks to manage these assets.

What is the market research capability of the DFM? When assessing potential outsourcing partners, IFAs should appraise the research resources available to the portfolio managers.

5: How does the client access the DFM service? 

What are the entrance requirements? The IFA should check minimum investment requirements when assessing DFM service suitability for their clients as this basic check may rule out many options. Similarly, the entrance requirements may vary by level of service and investment

Which product wrappers can the DFM work with? As part of their financial planning role, IFAs will be recommending tax wrappers to meet client needs. The DFM service will need to dovetail with these wrappers.

What portfolio reporting services are provided? IFAs can appraise the frequency of reporting to ensure that clients receive regular portfolio valuations and they can appraise the reporting depth to ensure that clients receive a detailed breakdown of their holdings.

What is the provider’s online service proposition? The growth in availability of online services across markets has meant that DFMs are being compelled to develop their online capability for IFAs and clients and IFAs should ensure they explore such functionality.

6: How should the IFA appraise charges? 

Try to compare like-for-like propositions: It is important for IFAs to make meaningful comparisons when comparing charges. The market sifting process is therefore vital and once IFAs have identified a peer group of providers who can meet the client’s needs they can undertake a more meaningful charge comparison exercise.

Which charges should be taken into account? IFAs should seek out DFMs who provide charging clarity. Finding out the opinion of IFA peers who have dealt with the provider can offer useful insight and we suggest that IFAs seek face-to-face meetings with potential partners

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