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Third party solutions

One survey of advisers, completed in November 2012, found that 52 per cent have chosen to outsource some or all of their investment process. The proportion using discretionary fund managers was considerable with 60 per cent utilising these services.

The make-up of the DFM universe is a complex one. From bespoke, to unitised and managed portfolio services, there are a whole host of solutions in the market. In my view the spectrum of solutions spans tailored, managed portfolio services and unitised model portfolio solutions. Each can involve direct or third-party custody, primarily through a platform.

Bespoke portfolio services:

– Portfolios are constructed for the individual client, usually with a named investment manager.

– The portfolios take into account the client’s individual circumstances, goals and preferences. In theory, every bespoke portfolio within a discretionary firm is likely to be different.

– An average minimum investment of £300,000.

Managed portfolio services:

– Discretionary firms will construct a range of portfolios with typical clients in mind.

– It is up to the client, or his adviser, to select a portfolio that is the closest match to his own needs and goals. All clients in a managed portfolio service will have identical portfolios.

– An average minimum investment of £75,000.

Unitised portfolio services:

– These are collective investment schemes ªunit trusts or open-ended investment companies) that mirror, and in some cases replace, the managed portfolio services of a discretionary manager.

– They have been made available in some cases to complete a discretionary manager’s suite of offerings, generally having a much lower minimum investment, or to make it administratively easier to host on a third-party system or platform.

It is important for advisers to note that bespoke and managed portfolio services are segregated, whereas unitised is not so there will be different tax implications when trading takes place.

Direct custody:

– Where discretionary services are taken directly from the discretionary manager, all associated services such as reporting, trading and valuations are supplied by them.

Third party custody:

– Where discretionary services are accessed through a third party, such as a platform, custody of the assets lies with the platform. In effect the discretionary manager is also outsourcing some of the services to this third party. For instance, a platform would send out the trading reports, income and capital gains tax documentation and carry out the trades.

– If a discretionary manager had a particular solution available direct and on a platform, it should be borne in mind that there could be differences in service, cost, reporting and even holdings, depending what assets are available through the third party.

A key issue for advisers is where responsibility lies for the suitability of advice that is given to the end client. This very much depends on the type of discretionary solution being used.

Rules

From a regulatory standpoint, there are no defined rules as such about the division of responsibilities between adviser and discretionary manager, other than the discretionary manager has a duty to run the portfolios to the mandate given and the adviser has to provide the service as promised for the fee charged. What is demanded is that all responsibilities are taken on between the adviser and manager.