Discretionary/platform relationship looks for better solutions

There are a handful of visionaries in the market who appreciated the sea-change that discretionary managed investment solutions could bring into advisers’ businesses and how platform technology would be instrumental in delivering this.

The historic payment of relatively large commissions led to notable inefficiency throughout the fund management and advice industry. With the introduction of the RDR and its wider implications, came the demise of commission. In this climate, inefficiencies must end and advisers, who are facing continued downward pressure on margins, must also demonstrate consistent and robust advice processes for their clients.

Through the adoption of platform-based DFM solutions, advisers’ businesses become far more efficient. Client portfolios can be managed automatically according to their individually agreed investment mandates and advisers are no longer dependent on clients responding promptly to recommended adjustments. Client reporting and management information, too, are taken to a new level. Portfolio drift can be corrected through periodic rebalancing and there is the consistency that dedicated investment management processes bring.

Article continues after advert

Some larger advice firms have responded to the changing regulatory landscape, with the decision to develop this dualism internally. They have chosen to apply for their own DFM permissions and subscribed to a platform technology provider.

This not only involves huge investment and resourcing, but also increases risks to the adviser firm, with the responsibility for best execution and the odd, inevitable trading error. Many have found the platform technology available to them difficult to work with and inflexible.

Platforms have been quick to ‘bolt on’ as many DFMs as possible – there are now roughly 50 DFMs available across some 20 platforms. Here, the platform is just the technology and the discretionary fund manager is just the DFM. The adviser maintains separate relationships with both. Advisers can fear leakage of client loyalty to the DFM and also feel under increased pressure to demonstrate their own continued value for money.

Therefore advisers who in the past had great involvement in a client’s day-to-day investments, can end up feeling totally isolated.

Some platforms fully maximise the platform and DFM dualism through successful integration of both elements. The result is DFM delivered through technology which puts the adviser right back at the heart of the client relationship.

The integrated platform technology does not just host the investment solutions, it manages them. They become more flexible and sophisticated than the standalone model/managed portfolio services available. With a sufficiently wide range of options, advisers can avoid shoe-horning clients into inflexible or limited solutions.

The key consideration under any of these options is who retains the regulatory responsibility for suitability. This is the key role for advisers, with many insisting on remaining responsible for assessing the client’s risk and agreeing the client’s investment strategy and asset allocation. This is the part of the investment process that clients perceive to be of most value. Everything after that right up to the next review is simply investment administration.