Warning over DFMs ‘devaluing’ adviser-client relationship

Concerns have been raised over the management of outsourced investments and the relationship between the client, adviser and DFM.

Widespread predictions have suggested an increased use of outsourced investments by financial advisers post-RDR, whether through funds or discretionary managers. In the case of the latter, there is a risk of advisers not fully understanding the implications of using such services.

Stefano Del Federico, head of UK financial intermediaries at Société Générale Hambros Private Banking, said some advisers are not managing the process properly, which could be detrimental to the adviser and client.

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“There are so many advisers handling discretionary managers in completely the wrong way,” he said.

If the relationship is not managed properly, he said, it could end up devaluing the business as the client may not longer be seen as ‘belonging’ to the adviser, but instead split with the DFM.

Lessened value

“It has got to be a tripartite agreement,” Mr Del Federico said. “The moment you introduce another ‘relationship’, the value of that client is lessened. When you have two relationships, you muddy the waters.”

But Tim Cockerill, head of collectives research at investment manager Rowan Dartington, said such concerns are unfounded.

“Using a DFM shouldn’t get in the way of the IFA and client relationship at all,” he said.

“It should be no different from setting up a whole-of-life policy.”

Fees could prove another sticking point in the use of DFMs. The FSA has made clear that advisers should not accept commission from DFMs for new agreements, meaning any client involved in a three-way relationship with a discretionary manager and an adviser will have two charges.

“It is going to be quite startling for some people when they haven’t had that before,” Mr Del Federico said, adding that even a small percentage of, say, a £500,000 portfolio will look large in numerical terms.

Much focus has been placed on advisers showing the true value of their proposition. If advisers choose to outsource investments, they will have to show the value they are adding in addition to the DFM fee.