Providing clarity to clients when outsourcing investment management to a third party is one of the themes which emerged from the recent Money Marketing Wired debate on the cost of advice. The conclusion that can be drawn from this is only when the client is clear about the roles of the adviser and the third party that their respective fees can be justified. But can advisers achieve this?
Discretionary fund manager Wellian Investment Solutions investment director Chris Mayo says DFMs add value in providing services such as fund research and rebalancing client portfolios. He says at Wellian there is a clear line between the role of the adviser and that of the DFM.
It deals only with the adviser, so does not encroach on adviser/client relationships. “Our job is to run money and research funds, not financial planning and seeing clients,” says Mayo.
This view is shared by True BearingChartered chairman George Critchley, who believes most IFAs are better at things like financial planning and tax issues. “I’ve always believed IFAs should not be selecting funds. There are some IFAs who know their stuff but the majority of advisers are not the right people for fund selection,” he says.
Critchley believes fees for advisers and DFMs can be justified because they are doing different jobs. “There is a lot more work involved in being an adviser than outsourcing but that is an important part of the chain,” he says.
Skandia head of UK proposition marketing Tom Hawkins says: “The key is ensuring the total cost to the client is not increased by using an outsourced investment solution. Our research has indicated that an increasing number of financial advisers are looking to outsource their clients’ investments and as the market grows there will be healthy competition that will lower the cost of outsourced investment solutions.”
Andrew Power, a partner at Deloitte’s UK consulting group, points out that if an adviser has moved away from fund selection and stockpicking to focus on financial planning and has passed investment management on to a third party, fees should be justifiable because there are two different roles to be played. But as with many things in life, things are not always that simple. Power says: “The challenge is to make sure advisers add value. An important issue is if the discertionary manager has poor performance which is nothing to do with the adviser.
“But the client will say to the adviser you’ve put me with this investment manager, why am I paying you an ongoing charge of 0.5 per cent or whatever it may be.”
Lorica Wealth Management believes the FCA will increasingly scrutinise the activities advice firms undertake and the value they provide to the customer. It believes that to justify an ongoing advisory charge, firms need to provide an ongoing service which is clearly defined, easy to replicate across their client base, has demonstrable value to the customer and show evidence that they have provided the services they promised to clients.
To do this, Lorica has created its own range of risk-rated model portfolios for clients rather than outsource to a DFM.
Intelligent Financial Advisers is another firm which does not outsource. Managing director Derek Gunningham says this is to protect client relationships and keep control of asset allocation decisions: “We have a personal relationship with clients and feel that by outsourcing we lose that personal relationship with clients. It’s better if the adviser keeps the client and retains ownership of asset allocation decisions.
“Asset allocation isn’t managed in quite the way we want by outsourcing to a DFM, which we have done in the past,” he says.
Gunningham admits post-RDR it is more difficult to retain investment management in-house from a compliance point of view and he is not sure whether the firm will be able to do so in the future. “We are looking at acquiring a discretionary office ourselves or we may be forced down the outsourcing route,” he says.
Harrison Spence managing partner Brian Spence points out that the regulator requires advisers to prove they can administer investments as well as manage them, meaning clients have to be serviced in a systematic way while historically IFAs have managed client portfolios on a bespoke basis. Advisers have been given the impression by the FCA that they are not qualified to manage client money anymore. It has indicated advisers will have to have the Investment Management Certificate to look after clients’ investments although it hasn’t specified that.
“Over the last 30 years, the regulator has wanted ‘vanilla’ retail financial services, not necessarily for the benefit of clients but because it’s simpler for them. It’s better for them to work with large companies and large revenues rather than small IFAs, which is why small IFAs are disappearing,” says Spence.