With a firm understanding of clients’ needs and expectations, more advisers are looking to offer the perfect financial plan to cater for their circumstances, but where is the starting point for selection?
A discretionary management service is one of the tools that advisers have at their disposal to craft the perfect plan for their client. Although it comes at a cost, it takes away the day-to-day pressure of investment selection and allows an adviser to focus more on the client and other aspects of financial planning. As more advisers now seek out a discretionary fund manager, Money Marketing asks experts about what advisers should think about when hoping to select the right one.
What should be a starting point for advisers when selecting a DFM?
Mike Barrett, consulting director at the lang cat: The starting point should be the client – their needs and wants. Particularly post-Mifid II, the requirement for advisers is to segment their client bank and focus on their needs and identify which services and solutions are most suitable to client needs.
Fraser Donaldson, investment analyst at Defaqto: There are two ways to look at selection. One way would be to look at propositions. Advisers choose a range of portfolios from one DFM firm, and then they select the right one for their client. The other way would be to choose a lot of propositions, but for clients’ individual portfolios, so that they can have a low risk from DFM 1, medium risk from DFM 2 and so on.
Discus co-founder Gillian Hepburn: The key here is to start with segmentation and the client in mind. Why do they need or want a DFM? Do they want ethical investing? Advisers usually have a panel of discretionary managers that they can use depending on individual client circumstances. Then they filter it down to a shorter list during a detailed due diligence.
What are some of the things advisers should cover in their due diligence?
Donaldson: [Advisers] should be looking at the firm – that might include asset under management and growth in assets under management to make sure the firm has longevity, that it will last and will have resource to do what they promise to do. That is fundamental.
Hepburn: What the regulator is looking for is evidence that the adviser has undertaken a logical, thoughtful process. It is also important that the data they’re using is independent and that they can rely on that data.
Barrett: Unlike with platforms, there are no explicit guidelines. Whenever we work with advisers on this, we tend to look at cost, investment mandate – how the portfolio is expected to perform, what parameters are used to assess risk. We also hear increasingly from advisers that they are looking at ways of how to get out of the solution. In the platform land, advisers are getting bruised by some experiences, when something went wrong, and they wanted to move to a different platform. People are looking at it from a DFM point of view too – if they decide that the manager they chose isn’t performing, how easy is it to move to another?
Are costs linked to DFMs set fairly for the end client?
Barrett: These days, Mifid II made it a lot more transparent to compare costs, so you can work out what exactly is going on. Advisers are looking at the cost of the potential DFMs, but they are also looking at the cost of similar solutions – should they be actually using DFMs or would using a multi-asset manager be also suitable for the client? Mifid II made it a lot easier to compare, but the industry can still do a lot more so advisers can do what they want to do – compare solutions with their client.
Hepburn: When it comes to cross border fees, the key point is making sure that the right DFM service is delivered to the right client. When a client is investing hundreds of thousands of pounds, they need bespoke services, which includes a lot of corresponding, which brings additional charges. When they don’t need special inclusion or exclusion, or special management or capital gains tax, they might not necessarily need bespoke portfolios, which is more expensive than offering them a DFM solution that sits on a platform as a model portfolio. It is all about individual suitability, being clear about what the client needs.
Can using DFMs have an impact on advisers’ independence?
Hepburn: I believe it doesn’t make advisers any less independent – as in independent versus restricted. If the due diligence is comprehensive and the adviser is undertaking due diligence on the main businesses and has a panel together, that shouldn’t compromise their independence. It is important to remember that DFM services are not retail investment products. The independence rule means that the adviser needs to look at the whole market if they are looking for a retail product. So the same doesn’t apply here. Advisers need to demonstrate that they are researching a whole range of DFM solutions and they are producing a range of different DFM solutions for the type of client or type of segment they are managing.
Donaldson: It depends on the way the adviser looks at things. There might be a bit of caution over adviser charging fees and then getting someone else to manage the portfolio, but it is generally in the clients’ best interest to get an expert to run their money – although not always; there are some good adviser firms out there who run money very well. It wasn’t that long ago that the advisers would run their clients’ money. But now clients and advisers are sitting at the same side of the table, assessing third party investment, which is potentially a good thing for the adviser-client relationship – that is an upside.