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How to approach DFM due diligence

Support services firm Aim Two Three is helping advisers drill down into the discretionary fund management market

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Many advisers are outsourcing their investment management responsibilities to discretionary fund managers. Choosing from a range of options that include fully bespoke portfolios, model portfolios and unitised DFM offerings frees them from the burden of fund selection. But advisers still have to select the right discretionary fund manager for their clients, so due diligence is crucial.

From a regulatory viewpoint, due diligence must stretch beyond the marketing brochures and literature provided by DFMs. However, because there is no common approach to information on past performance and fees, it can be difficult and time-consuming for advisers to scrutinise DFMs in order to make meaningful like-for-like comparisons.

But support services firm Aim Two Three, which was set up in 2011 by former Threesixty co-founder and founding member of the Institute of Financial Planning David Ingram (pictured), has created an online tool tohelp advisers find the DFMs that best suit their needs.

The DFM Short List Generator is a filter system that enables advisers to select the ones they want to compare, as well as the criteria that will provide the basis for comparisons.

For example, they can drill down into the investment process by looking at the number of investment mandates offered, use of fund of funds and the maximum number of stocks on average per portfolio. They can also compare aspects of client services, such as the minimum amount required for clients to have bespoke portfolios. Other areas of comparison include details of the company, key management personnel and the range of services provided, such as tax and estate planning.

“We found most adviser firms didn’t know which DFMs to look at or they had outsourced to one for years but didn’t really know why. Lots of them have refrerred to the same DFM for the last 10 to 15 years and didn’t feel the need to prove why. There is no reason they had to but the pressure is now for due diligence to become more important,” says Ingram.

The DFM Short List Generator is free for subscribers of Aim Two Three’s Support Hub but non-subscribers can gain access with a £280 a year charge, which is the same as the cost of Aim Two Three’s annual subscription. 

The tool started out as a questionnaire that Aim Two Three used to go through the DFM due diligence process themselves. 

“However, the DFMs provided answers to the questions they thought we should have asked, not the ones we had asked,so that didn’t quite work,” says Ingram.

Next, they put together a spreadsheet that they made available to advisers.

”While we found it was a more helpful approach to get DFMs to fill in the answers themselves, it didn’t quite work as they filled it in badly. They even changed the questions in some cases.”

But Aim Two Three found advisers liked the spreadsheet and the way it put pressure on the DFMs to fill it in. So Ingram and his team took the idea for a web-based system to the company which designed the Aim Two Three website and it became the online tool it is now.

“We’ve set up 20-odd DFMs with a link to populate the system that they can access with a secure password,” he says.

Ingram says Aim Two Three reviews all responses it gets from the DFMs. “Not just for accuracy but to make sure they answer the questions and publish their answers to the website,” he adds.

Prior to the introduction of Aim Two Three’s online system, DFMs who felt they were different to their peers resisted attempts to categorise their offerings in a way that makes like-for-like comparisons. But the online system has remedied that.

“The only way to get through the system is to answer the questions. It wont let them through unless they put particular information in the boxes and we’ve limited the bigger boxes to 4,000 characters so they have to really think about the responses they put in. They used to put responses like ‘see the brochure’ or ’see answer above’ but now they recognise that if they want the adviser to refer to them they have to go through this process of comparison.”

The Aim Two Three tool is designed to filter information about DFMs in order to make it easier for advisers to decide which are right for them. “We are not taking the decision-making away from advisers, we are not telling them this one is better than that one. Advisers use the system as a filter. For example, if they don’t want to deal with DFMs that have their own client-facing sales forces, they can filter those out,” says Ingram.

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. All good stuff.

    Is there something similar for when a DFM needs to refer a client to an IFA?

  2. Is this whole of DFM market or pay to play?

  3. Bloody amazing. As Chris Gilchrist has said – if you can’t do it don’t get involved.

    Anyway I just can’t understand how a client will stand still for being charged a funds under management ‘cut’ by an IFA for in effect doing bugger all.

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