How to choose the best DFM

This allows them to focus more of their time on financial planning and less on the administration of portfolios.

However, choosing which DFM to work with is not always easy for advisers. With the plethora of due diligence service companies now thriving in the UK, there is clearly a need to understand more about DFMs and which are best suited to support an adviser business.

The answer probably lies in the history and DNA of the DFM. For instance, a stereotypical, old-fashioned discretionary manager, which sprang from a stockbroking background, would perhaps be more likely to favour individual investment managers running money on an individual basis, rather than working to a centralised investment process.

On the other hand, the modern asset-managing discretionary firm has a strong centralised control over risk and asset allocation.

The pressure on advisers to ensure suitability for their clients is considerable. This can make choosing a DFM very difficult.

An adviser has to be absolutely sure the DFM fully understands what the adviser’s definition of risk is. The resulting portfolio should therefore be the one they expected.

Not surprisingly, advisers increasingly think clients with similar risk requirements should get a similar investment solution; for example, a model portfolio of some description. Modern asset managers are better placed then to deliver this because it is how they have designed their business.

Aside from what is in the investment DNA of a firm, taking a look at their distribution strategy will give some clue to their long-term ambitions.

If you were a discretionary manager primarily interested in having a relationship directly with clients introduced by advisers, you would be keen to meet the client and get involved in the suitability process.

You might even open up offices all round the country so that you could usurp the introducing adviser and develop a direct relationship with the client.

Alternatively, a discretionary firm that is happy to accept the adviser is responsible for setting the financial planning strategy and suitability may be more attractive. A firm that doesn’t compete in the same town for similar clients may also be a draw, as they are less likely to be seen as a competitor.

Spending time on the operational issues pays dividends for the adviser and ensures the whole of the firm is comfortable with the proposition.

In short, advisers increasingly need DFMs and DFMs also need advisers. Financial planners, in particular, tend to have deeper and broader relationships with clients, which means fully understanding the client’s needs to enable more effective recommendations and investing for the right reasons.

That’s got to be good for clients, and what’s good for clients tends to make good commercial sense, too.

Lawrence Cook is director of marketing and business development at Thesis Asset Management

DFM and advisers: questions to ask

Once you have selected which type of discretionary manager you want to work with, you then need to find out if you can devise practical working arrangements.

Some questions to ask include:

• Can the DFM deliver the investment service in a way that supports your existing business processes, such as back-office data feed to the adviser?

• Does it have model portfolios available on a wide range of wraps?

• Can it offer practical help with risk mapping from suitability to investment solution?

FCA’s view: CIPs

Many adviser firms post-RDR have changed their business model and offer a centralised investment proposition (CIP). This includes portfolio advice services, discretionary investment management and distributor-influenced funds.

However, in its guidance, the FCA notes: “We recognise there can be benefits to offering a CIP for both clients and firms. Clients can benefit from more structured and better researched investments and firms can benefit from efficiencies in the management of risks associated with investment selection. However, we have concerns that, in certain circumstances, a CIP may be unsuitable for a retail investor.”

Therefore, it states that a firm either selling or intending to sell CIPs should:

• Consider the needs and objectives of its target clients when designing or adopting a CIP;

• Ensure that it is not ‘shoehorning’ clients into the CIP;

• Establish a robust risk identification and control system to mitigate risks that might arise from the specific characteristics of its CIP.