The days of life companies serving up all the needs of advisers are of course long gone. Traditionally discretionary fund managers were seen as peripheral and only used for the very wealthy client and trust work.
This picture has changed considerably but there is still a lack of maturity in the market. Financial advisers and DFMs are still in the stage of forming relationships and often have not yet settled on a proposition that they are fully comfortable with. This means there is a lot of activity right now on thinking, developing and implementing new strategies.
In the lead-up to RDR advisers were fully occupied ensuring their current model was ready for 1 January including, of course, professional qualifications and statement of professional standing requirements.
With that work largely done it is perhaps not surprising that advisers are increasingly turning their attention to modernising their client proposition which includes the investment solution.
What a financial adviser demands from a DFM largely depends on what they see as their own role. An adviser who sees himself as provider of investment products will be reluctant to refer that work to a DFM. If he is not doing the fund picking himself, what is he doing for his money? This is potentially dangerous to clients and the adviser’s business if the knowledge, skills and resources are not sufficient to deliver a good client outcome. It also means that the strength of the relationship between adviser and client is heavily dependent on investment markets which the adviser cannot control.
This picture appears to be changing rapidly. Advisers I speak to understand that they offer great value to clients by concentrating on financial planning. Financial planning means different things to different folk but my view is that this is the future for successful advisers. Financial planning is also something investment managers are not skilled at and is a differentiator for advisers. The emotional engagement good advisers achieve with their clients is not easily replicated by online competitors either. This is the crux of the issue which leads advisers to rethink whether they wish to carry on picking investment funds or spend time on what clients value most: time spent with clients understanding their lives, hopes, fears and aspirations. To do that requires skill and focus.
What advisers are now looking for from DFMs is more varied than in the past and is changing. Bespoke discretionary management for individuals is still a requirement and for many advisers being able to appoint a manager on behalf of their client gives them the satisfaction that the client’s investment needs are given personal attention. The financial adviser usually owns the client relationship, and periodically reviews the effectiveness of the DFM. FCA guidelines for advisers may mean they have to justify the DFM they selected on behalf of their clients.
The financial adviser usually owns the client relationship, and periodically reviews the effectiveness of the DFMTo retain the business, DFMs are expected to be more proactive in servicing the adviser and respond rapidly to their demands. Reporting and attribution analysis from the DFM is more detailed, more relevant and more adviser-friendly.
Different types of DFM suit different advisers and their clients. There are those who are well established and with long pedigrees; typically the big clearing banks, insurance companies and fund management houses. However they may also be impersonal, with high staff turnover and subject to restructuring. Worse, they may try to cross-sell other services direct to the underlying clients.
Regional stockbrokers often offer dealing and custody as well as advisory and discretionary management. On the plus side is local access and personal service, but there may be no central disciplined process for managing portfolios that may rely on the whims of one individual. Centralised control of risk mandates within DFMs is not universally available. Periodic mergers, acquisitions or restructuring can mean high staff turnover and changes to systems and service levels.
Boutique fund houses portray themselves as not following the herd, and offering potential outperformance. Rather like designer clothes, they may not be cheap and seek to attract high net-worth and ultra-high net-worth accounts.
Medium-sized DFMs have tended to service financial advisers and other professional referrers, but may also have their own solid base of direct private clients. Some may only offer unitised solutions.
However even the traditional offerings are evolving. Advisers will want to know that the risk profile of the portfolio matches the needs of the client, not just at outset but throughout the lifetime of the arrangement with the DFM.
In addition to these requirements financial advisers typically ask us about agreements to prohibit cross-selling. This makes good sense. A DFM setting up shop in the same town as a financial adviser may be perceived as a threat to the adviser. After all an adviser does not want to refer business to a DFM which is simply building up business at the expense of his own.
Beyond the traditional bespoke work, DFMs now provide much more to IFAs. Model portfolios are a mainstay for many advisers. Whether active or passive they offer the adviser control of risk profile and critically remove some of the ‘legwork’. An advisory process that requires clients to sign pieces of paper every time portfolios need to be rebalanced is going out of fashion.
Unitised offerings are also popular for advisers who want to minimise tax liability. The switching of holdings within a typical unitised offering means there is no capital gains tax on disposals. Advisers will typically need to consider whether the potential extra cost of a unit trust wrapper is worth the savings in tax. For many advisers, perhaps, the familiarity of many unitised fund-of-funds is the main attraction and gives them the feeling of being more hands-on.
Aside from the various investment structures there is the question of investment style or philosophy. Some advisers enthusiastically take up a very focused approach to investment and will demand one particular style which reflects their beliefs. I use the word ‘belief’ rather than knowledge since no one really knows, at least until you reach for the hindsight glasses.
We are now seeing more advisers question the merits of certain investment religions and looking for a common-sense approach and provision of different options for different clients. For instance a passive option where cost is the main focus but also an active option for clients that need it. In particular clients at retirement who intend to remain invested do need careful attention and tracking the market will just not do for many in this situation.
Lawrence Cook is director of marketing and business development of Thesis Asset Management
Key questions to ask DFMs
Advisers intending to appoint a DFM to invest their clients’ money should be prepared to make sufficient enquiries in order to find the most appropriate DFM. For example, advisers may wish to ascertain the following:
· The DFM’s investment process
· Whether there are tracking errors on benchmark indices and, if so, why?
· The actual performances of DFM clients’ portfolios compared to the four Asset Risk Consultants indices
· The DFM’s definition of the level of risk for the different asset classes
· Whether there is a preference for investment trusts over unit trusts. Stockbrokers tend to prefer the former, but they generally have a greater propensity to underperform falling markets and can be difficult to trade.
