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From Adviser Guide: Outsourcing fund management part 1

Q: What are the pros of outsourcing?

Discretionary fund managers may have more expertise in managing investments than an adviser.

By Emma Ann Hughes | Published May 09, 2012 | comments

David Lumley, director of Arena Wealth, said with discretionary fund managers better outcomes for clients might be expected in terms of overall investment performance.

He said outsourcing may also help make your business more profitable by allowing advisers to spend more time focusing on other areas of their businesses.

These might include higher level reviews of investments, wider financial planning, client relationship management, business developments and other areas.

Mark Soonaye, product director of Octopus Investments, said advisers who outsource get more time to take care of their clients.

There are thousands of different investment funds in the UK marketplace, and building and overseeing investment portfolios capable of consistently keeping up with the evolving needs of clients can be quite a challenge.

Mr Soonaye said outsourcing key responsibilities including fund research, fund selection, and asset allocation can help to free up an advisers’ time and enable them to offer a more holistic financial planning approach for their clients.

Outsourcing can also reduce the adviser’s business risk, he added.

Advisers have historically taken on the role of constructing and overseeing investment portfolios designed to meet the investment needs of a wide range of different clients.

But such activity takes time and expertise, said Mr Soonaye, and the ongoing management of an investment portfolio exposes the adviser’s business to liabilities.

What happens if your clients are disappointed with the investment performance?

What about ensuring that the investment you have recommended meets the risk tolerance of the client?

Outsourcing your investment to a high-quality discretionary manager can help an adviser reduce these risks substantially, effectively transferring the investment risk to the DFM, according to Mr Soonaye.

Furthermore, he said because the DFM has full discretionary powers, it is capable of changing the investment portfolio at short notice and without seeking the client’s permission.

Mr Soonaye said: “This rapid response to changing market conditions can be vital during periods of high volatility.”

Getting access to the skill set and the resources of a DFM should mean the investor benefits from a greater depth of investment knowledge and expertise, Mr Soonaye said, and greater diversification at the portfolio level.

Plus Mr Soonaye said the DFM will take on the management of all those investments, including active asset allocation, rebalancing the portfolio when appropriate and replacing the underlying funds when necessary.

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