An issue that many financial advisers face with the decision to use a discretionary fund manager (DFM) is how do they justify charging an ongoing fee.
This stems from the belief that choosing a DFM is pretty much a tick-box exercise.
Run through the know your client procedures using your own or third-party psychometric questionnaires; decide with your client their tolerance to risk and capacity for loss and arrive at a portfolio rating. Then from a list of appropriately rated portfolios from a range of DFMs select the one you know best; file a copy of their due diligence questionnaire on file; job done.
If you were a client you certainly would not pay very much for that level of ‘service’ and as for the regulator, it should be getting out the pack of ‘go to jail’ cards.
Before starting to think about ‘which DFM’, the first step is segmentation of the client base. If your clients have relatively small portfolios a bespoke DFM with a minimum of £2m won’t need to be on your radar.
There is then a bewildering array of options to consider; fund of funds, models on third-party platforms, models on DFM platforms, bespoke with and without banking options, passive managers, active, absolute return, conventional benchmarks, no benchmarks, CPI plus, cash plus, are the portfolios risk-rated, risk-targeted or risk-budgeted… And this is all before worrying about charges, tax wrappers and of course looking much more closely at the investment processes.
According to the latest Brooks Macdonald survey, there are 224 DFMs available. Filtering this list down, say, by using total funds under management reduces this number to roughly 60 running more than £2.5bn.
The list of possible candidates needs to be filtered down further to roughly half a dozen looking at the options mentioned above and suitability for the client bank.
The DFMs then need to be asked to complete a questionnaire covering financial strength, operational strength, quality of investment team (experience and strength in depth), investment process, risk and compliance controls, reporting and responsibility for portfolio suitability where the DFM assumes this role.
Ideally, this questionnaire should be yours, not theirs, to make comparisons easier and more valid.
Having completed this process and written up reasons why a particular DFM(s) has been chosen don’t forget the reason ‘why not’ for the others that were considered. This is an important consideration in the eyes of the regulator.
Even then the job isn’t finished as an ongoing review is a necessary requirement which, in an ideal world, will be done by an internal investment committee with perhaps an external member for additional oversight.
Has the investment process generated the anticipated performance outcome and does the portfolios risk assessment still match that of the client?
DFMs should be partners in the relationship providing training on investment processes and products so that all advisers within a business tell the same story. DFMs that don’t engage should be avoided.