Picking the best DFM for your client

Past performance is important, but given the bespoke nature of portfolios and a historic lack of transparency, such information is not often widely available and may not always be relevant. Most commentators, therefore, focus on qualitative questions advisers should consider.

Advisers should ask about the research inputs into the investment process, as well as determining the criteria for selecting and implementing investment ideas, Mark Rockliffe, head of intermediary sales at Heartwood Investment Management, says.

The adviser should also ask about the DFM’s approach to risk, assessing whether it will appropriately meet clients’ risk objectives, he adds.

Mr Rockliffe says: “Evidence can be found through a review of risk-adjusted returns over various time periods (one, three and five-year periods, for example).

“From a servicing perspective, advisers should ask about the availability of information, such as client reports, and the level of access to investment professionals. Furthermore... the adviser should ask whether the DFM provides initial and ongoing training.”

Questions should also be asked around the DFM’s distribution strategy, according to Mr Rockliffe.

Advisers should determine whether IFA-introduced customers are invested in the same way as direct clients, he says.

Mr Rockliffe says: “Is there a dedicated team responsible for managing intermediary relationships?

“It is important to identify if safeguards are in place to protect the IFA business model, avoiding potential conflicts of interest between the DFM’s direct clients business and the intermediary channel.”

The adviser needs to ensure they have sufficient information to guarantee that they can fulfil their regulatory obligations, says Mark Stevens, head of intermediary services at Investec Wealth & Investment.

He says the adviser needs to ensure that the introduction to a discretionary investment manager provider enhances the client outcomes and builds on their relationship with their clients.

Mr Stevens says most DFM firms will be asked for due diligence information on a regular basis and often have a standard response for requests for information.

The questions asked should address the core aspects of the relationship with an adviser and investor and the service to be delivered for the adviser’s clients, he says.

Mr Stevens recommends asking about:

1) Company history, structure and ethos.

2) Regulation and client protection.

3) Resource and personnel.

4) Investment process and philosophy.

5) Research capabilities and committee structure.

6) Performance.

7) Risk management.

8) Administration.

9) Custody and nominees.

10) Reporting.

11) Systems.

12) Compliance monitoring and controls.

13) Fees and charges.

According to Emma Wall, director of UK intermediary sales at Morningstar, the key due diligence questions to ask are:

a) How financially strong is the firm?

b) How experienced and qualified are the firm’s personnel?

c) What asset allocation methodology does the firm use?

d) How strong are the firm’s research capabilities?

e) How good is the firm’s track record?

f) Is the track record simulated or real?

g) What services and support can the firm provide?

h) What is the range of its proposition?

i) What makes the service different?

j) How much/complex are their charges?

In terms of the number of DFMs you need to have on your radar, Investec’s Mr Stevens says while any DFM would be most appreciative of an introduction to all of the adviser’s clients, in practice a DFM panel is essential in order to reflect the different needs and objectives of each client.

He says the adviser may create their DFM panel based upon their segmentation of their client book, minimum investment criteria, and service propositions (for example, model or bespoke), via a platform/s, location of the DFM or a combination of factors.

Mr Stevens says: “A one-size-fits-all approach cannot be adopted and the adviser will use their experience, supported by their due diligence, to identify the most appropriate discretionary investment manager provider for each client.”

Advisers also need to remember that once a DFM is selected, that is not the end of due diligence.

He says: “All aspects of the discretionary investment management service need to be monitored and preferably reviewed with the client and investment manager on a regular basis.

“Ensuring that there is an acceptable level of investment performance over an appropriate time period is an important factor but it is not the only aspect to be considered.”

In terms of ongoing monitoring, Eric Clapton, chief executive of Wellian Investment Solutions, says financial advisers should expect regular information to be supplied to them by DFMs on their panel, both to maintain the adviser’s knowledge of the investment service offered and also to ensure that the DFM remains suitable for inclusion.

He says: “DFMs should provide financial advisers with regular investment reports, detailing performance investment reviews and any changes to the portfolio.

“This regular feed of information to the financial adviser allows general knowledge to be maintained and for more in-depth reviews to be undertaken as the adviser deems necessary.

“The adviser should expect to be the first to receive any client queries so a regular information flow ensures all parties are suitably informed.”