How to choose a discretionary manager

Of these, the proportion using discretionary fund managers (DFMs) is considerable, with 60 per cent utilising DFM services.

Certainly, this is a trend that many predict will continue to grow. There are four core steps that advisers need to undertake when considering using a discretionary solution:

- Get to grips with the complex DFM universe, its taxonomy and the benefits and implications of the different types of solutions available.

- Consider if and how using a DFM solution can support the advice proposition you offer to your clients.

- Select an appropriate DFM solution or solutions for your business.

- Effectively plumb the solution into your proposition, and undertake a regular review to ensure it does not conflict with other elements of your client offering and continues to deliver value to you and your clients.

Assuming that the first two areas have been worked through to a positive conclusion, at the third step an overriding principle is to ensure that you are in control of the process – the mantra being that you choose the DFM, rather than the DFM choosing you.

Key to this is ensuring that you make your central business decisions – for example, segmenting your clients and determining your service proposition – before starting the selection process.

But, from a practical point of view, what’s actually involved in a robust due diligence process? Advisers should consider seven key areas to ensure that they select an appropriate partner:

- The discretionary firms and its ownership – in particular the volume of assets that the firm has under management, both overall and under discretionary management, as well as the proportion of assets under discretionary management that is adviser business.

- The type of discretionary management solutions being offered – including whether the number and range of options on offer are sufficient to meet the needs of the majority of clients, what the objectives are of each option and how they fit with the adviser’s assessment of relevant risk bands.

- The performance of potential partners – it is sometimes difficult to obtain evidence of past performance, sometimes because services are new or perhaps due to the fact that this question rarely comes up in the private client arena. However, this is important information and if firms are reluctant to provide it this may lead to difficult conversations about progress when review time comes around. It goes without saying that any comparisons need to be made on a like-for-like basis.

- Investment process and philosophy – advisers need to make a judgement about whether the firm’s approach is in line with their views and matches the needs of their clients.

- The costs and charges involved – with discretionary management there are several charging points, so it is important that the adviser, and the client in turn, is clear about costs involved. Areas to consider include initial and annual service charges, additional trading charges, the firm’s policies on discounting underlying fund initial charges and rebates from fund management companies, in addition to the cost of transferring out of the service.

- Whether the discretionary firm and adviser will be able to establish an efficient and supportive relationship for the ultimate benefit of the client.

- Whether the discretionary firm will establish an effective relationship with clients that fits in with the requirements of the adviser – particularly for bespoke portfolios where there is a certain amount of interaction between the client and discretionary firm. This will in part come down to a culture fit.

The aim is that robust due diligence will result in appropriate discretionary manager selection, both for the adviser and client.

It is recommended that advisers meet the shortlisted firms to confirm their data gathering, iron out any issues and get an impression of how easy they will be to work with.

In addition, on an ongoing basis advisers should review the market to a similar depth at least annually – but the ultimate goal is that advisers make the right selection decision first time and reduce the probability of having to make a change further down the line.

David Cartwright is head of insight at Defaqto

What is on offer

The discretionary manager can offer a number of different types of service, including:

- A simple ‘advise the adviser’ arrangement, with the adviser still dealing with all the trading and administration.

- A bespoke service where the portfolios are designed specifically for the client and there is considerable interaction between the client and the portfolio manager. Given the bespoke nature of this arrangement, no two client portfolios will be exactly alike.

- A relatively new addition is the unitised discretionary fund; a fund (unit trust or Oeic) that mirrors the methodology, philosophy and decision making of the segregated alternatives.

- They can also provide discretionary management on a model portfolio basis, known as the managed portfolio service (MPS). Typically, discretionary managers will run a series of portfolios, each designed to match a specific client risk profile. Some of the service elements of discretionary management are retained, but as these portfolios are run on a model basis, clients in a particular risk profile portfolio will have the same portfolio.

Source: Defaqto