Centralised investment propositions that may include outsourcing to discretionary fund managers have to be personal enough to suit the individual needs and objectives of clients, so they are not shoehorned into unsuitable investments. Yet from a compliance perspective, a systematic approach needs to be taken to ensure consistency, so clients with similar needs and circumstances do not end up with drastically different portfolios and outcomes.
Fully bespoke services tend to be economic only for very wealthy clients. Morningstar co-head of investment consulting and portfolio management Dan Kemp says: “There are some clients for which fully bespoke is ideal. Unfortunately they tend to be less widely available because of the costs involved so most clients are excluded from fully bespoke services.
“The real problem with them is that you do not know quite what you are getting and clients are entirely dependent on the individual portfolio manager – some are good, some are less good. But you cannot dig down into what they have achieved in the past as they are bespoke. And they are not compatible with platforms.”
As a result, risk-rated model portfolios, which are compatible with platforms, have become popular for the majority of clients. But the potential for shoehorning clients into them has been a concern for the regulator.
Russell Investments head of UK advisory distribution Nick French points out that discussions about the suitability of model portfolios need to consider whether portfolios are constructed by the adviser for their clients or a third party. He also takes issue with the term “outsourcing”.
“Outsourcing implies that you are unable to do something so you give it to someone else. I prefer the term “insourcing” because the adviser is researching potential investment partners and that is important. As long as the adviser is doing due diligence, they can demonstrate they have researched the market for an insourced partner,” he says.
Thomas Miller Investment head of intermediary business development Matt Lonsdale thinks advisers do not spend enough time looking at whether model portfolios suit their client base, which impacts on the lines of communication between the adviser and the DFM.
“This is where we are getting it wrong as an industry. As investment managers, we should be saying to advisers, ‘What do you need?’ and help them to use our product. Models can be perfect for a client base if correctly mapped to that client base. But on the private client side we do not talk about how to set an investment policy mandate,” he says.
Lonsdale believes advisers and DFMs should have a more open dialogue. “We might work with chartered financial planners who have gone through their clients’ long-term objectives and attitude to risk but they have not given us a mandate that reflects everything they need.
It is not difficult for advisers to say what they want.
“We did a couple of mandates recently you might call bespoke models. A couple of IFA firms liked our investment process but said: ‘This is how we categorise our clients, can you build portfolios for us?’ The way you get the most out of us is to ask us questions and we can build it that way.
“There is a lot of confusion about costs but you are just paying for the investment management and that is the same whether you use existing models or build new ones.”
Equillibrium Asset Management does financial planning and discretionary management, so partner and investment manager Mike Deverell understands the issues from both sides. He points out that advisers may not want to share information with the DFM because they would not want to jeopardise their relationship with clients.
“Advisers want to make sure that the client stays with them rather than dealing with the DFM. But my view is that everyone should work together.
“Advisers should have confidence in their clients knowing they add value and not worry about them going direct to the DFM. Trust is important for all parties.”
FE head of research Rob Gleeson says: “It is fine to outsource the investment process but you cannot outsource the expertise. Advisers are focused on what clients want to achieve and how they achieve it.
“What they cannot say is ‘We have five model portfolios, this is not quite the right portfolio for you but we will shoehorn you in anyway’.”
Gleeson points out the danger when outsourcing to a DFM is there may be a small number of clients for whom the proposition is unsuitable. This is why he is in favour of off-the-shelf portfolios for clients with standard needs, which then frees up the adviser’s time to spend on building their own portfolios for other clients. “Only by a combination of the two can you offer an option for everyone and get the efficiency in the business for clients,” he adds.
Amanda Newman Smith is features writer at Money Marketing