Portfolio management – what is the right choice for clients?

This article is part of
Discretionary Management - March 2014

Let us start at the beginning, as Julie Andrews once said. An adviser meets a client with investable assets and/or cash and ascertains that they want not only advice on the efficacy of various methods and investment vehicles but also on the continuing management of the portfolio.

The adviser must then make the decision as to whether they wish to personally take on the responsibility of day-to-day portfolio monitoring.

This can include producing regular valuation reports; year-end tax reports; recommend changes to the portfolio and enact them once permission has been granted; ensure that it remains within the criteria befitting the risk profile and objectives; and, last but certainly not least, accept full responsibility for expediting all these duties in a timely and expert manner.

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In many cases the answer to that question will be yes. However, many advisers are recommending to the client that their portfolio is managed by a third party.

The choice of investment manager(s) follows all the necessary enquiries and thorough due diligence, to one’s own satisfaction and that of the regulator.

Naturally, size is material and it is unlikely that clients with a portfolio of less than £60,000-£100,000 will receive the full benefit.

The adviser should explain that there are basically two sorts of management: one which involves recommendations being made by the manager and requiring the client’s agreement before action (advisory), and one under which the manager takes all the decisions without reference to the client (discretionary).

Should the client decide on the former the field will be narrowed dramatically, as few managers now offer the service. The main reasons being:

1) the time between the advice being given and the permission being received can often be protracted;

2) the efficacy of ‘best execution’ is often lost;

3) in spite of clients considering that the service is of lower value, it entails greater risk and time to the manager;

4) there is always a risk of misunderstandings or poor communication, and

5) the client is unlikely to benefit from the aggregation of deals that should result in lower expenses.

Having dismissed the above, the adviser can opt to recommend discretionary management as it not only obviates most of the advisory risks and disadvantages but has a number of advantages, both for the client and for the adviser.

For the client, it means that all decisions are taken and implemented in a timely fashion; all the reporting is both comprehensive and accurate; instructions regarding objectives and risk are continually monitored; flexibility is built-in should circumstances change, and hopefully, performance is enhanced.

So, how does an adviser find an appropriate investment partner?

As times have changed and stockbrokers have found that their traditional execution-only business has shrunk dramatically, most of the large quoted firms are now actively turning their lower-value customers to discretionary management so that they can charge regular fees and drastically enhance the value of their business.

The problem for an adviser in dealing with such firms is that they all have their own financial advisers and are thus in direct competition.