According to the paper, which dealt with the suitability of clients for various products and services, an adviser has the choice of putting in place a contractual agreement between their client and the DFM, or retain responsibility for the discretionary management of a client’s investments, but outsource the actual management to a third party.
Numerous studies have been carried out into the topic of outsourcing, all of which suggest that it is becoming increasingly ‘the norm’ among the adviser community. However, there are some key considerations that must be made before that decision is made.
It could be that an adviser outsources to a DFM on a case by case basis, rather than with every client on their books. But regardless of whether an adviser outsources a client’s investments, the client must remain a top priority.
By outsourcing to a DFM, the adviser’s client may get better returns on their investment.
Advisers that choose to outsource some, or all, of their clients’ investments could see their business become more profitable because they can spend more time enhancing other areas of their business.
Outsourcing reduces risks to the adviser’s business because the ongoing management of an investment portfolio exposes the business to liabilities - disappointing investment performance, for example, or inappropriate exposures to different risks.
A DFM has the skills and experience to research the thousands of different funds available in the UK marketplace. It has the ability to change an investment portfolio at a moment’s notice when necessary.
The use of a DFM introduces an extra layer of fees that are typically borne by the end client. This also introduces a question mark over how the adviser can justify their fee to the client if they aren’t actually making the investment decisions.
There is a risk that the adviser could lose business as their clients opt to effectively ‘cut out the middle-man’ and deal directly with the DFM. For those worried about this, it is important that the DFM and adviser have an open discussion about how the client is dealt with and, perhaps, sign a no-poaching agreement.
Although outsourcing to a DFM gives advisers time to deal with other aspects of their relationships with clients, they do have to keep on eye on what the DFM is doing and review that relationship on an ongoing basis.
The adviser’s regulatory responsibility for the management of their clients’ investments isn’t transferred to the DFM if they outsource it.