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Rules of discretion

Experts suggest discretionary fund management services can be a cost-effective way of outsourcing investment management responsi-bilities as long as client relationships are managed carefully.

DFM services have been growing in popularity and it is a trend that is expected to continue following the retail distribution review. However, some advisers are wary of using these services in case they lose clients to fund groups.

Rathbones investment director Robert Hughes-Penney says: “I understand there are concerns in some IFAs’ minds that they might lose clients.

“However, the engagement of a DFM should give IFAs more time to manage relationships with their clients that they would otherwise have had to spend on asset management.”

Hughes-Penney says IFAs should avoid DFMs that do not allow them full access to their clients’ portfolios.

He says: “IFAs have to make sure their DFM gives them online access on a day-to-day basis to their clients’ portfolios so they are up to date with trades and transactions.

“IFAs need to make sure they are in the loop about the investment process. Do they receive their strategic allocation reviews? IFAs should be aware of any changes that are likely to take place in the weeks ahead.”

London and Capital managing director Richard Leigh says IFAs must ensure there is a clause in their contracts with DFMs stating they cannot take on an adviser’s client.

He adds IFAs should insist all communication with the client goes through them. He says: “In our DFM contract, we cannot access clients directly or communicate with them. We do not have client emails, addresses or phone numbers.

“When there are meetings with the DFM, the IFA and the client, it should be part of protocol for the DFM to tell the client they can only work through the IFA so that both the IFA and the client know where they stand.”

Hughes-Penney agrees. He says: “DFMs should involve the IFA in meetings with clients so they can give holistic planning alongside the DFM’s asset management.”

Seven Investment Management marketing director Justin Urquhart Stewart says: “IFAs are concerned their client may become the fund manager’s client within a few weeks or months of using a DFM service. It is a risk but bypassing IFAs destroys the whole concept of what we are trying to achieve, which is to grow IFAs’ businesses and run good DFM services.”

Urquhart Stewart says IFAs should make sure the DFM’s income is aligned with their own to establish an incentive for the DFM to keep working with them.

He says: “This could be done through trail commission but if that is not allowed after the RDR, IFAs need to make sure that as investments go up, the income for the DFM and the IFA both go up.”

Leigh adds it is important for advisers to do their homework before appointing a DFM.

He says: “IFAs should do aggressive due diligence when they investigate DFMs. They should look at their reputation, processes, procedures and compliance.”
Leigh warns that some low-cost solutions currently in the market are unsustainable.

He says: “Many low-cost models will have to put their prices up. These DFMs often do not have the infra-structure to allow IFAs to access client portfolios, so they will either have to invest a lot of money in technology or offer a restricted service to maintain their current charges.”

OPM Fund Management chief investment officer Tony Yousefian says: “The RDR is asking IFAs to focus as much on investment management as they do on financial planning.

“There are not enough hours in the day to do both, so a big sector of the IFA industry will want to outsource without losing control of their clients.

“We acknowledge the IFA’s relationship with their clients and we do not deal directly with clients. If there is a meeting, the IFA comes along.”

Affluent Financial Planning managing director Carl Melvin says: “Some IFAs might feel threatened but that has probably got more to do with their confidence.

“IFAs need to have an undertaking that clients will not be contacted or marketed to at any point. If IFAs have any doubts about that then do not deal with that particular DFM.”

Informed Choice managing director Martin Bamford says: “I would like to think that protection measures are not needed. I have not yet seen an example of a DFM exceeding the mandate of the role but from a professional and commercial stance, it is a good idea just in case.

“We always make sure we attend all meetings between clients and DFMs and that any communication is channelled through us. But I think the risk to the IFA client relationship will come more from product providers who need to move into the direct sales arena after the RDR comes into force.”


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