The past couple of years have seen more advisers choosing to incorporate discretionary management services – bespoke and managed portfolio services (MPSs) – into their businesses as part of their investment proposition to clients.
Bespoke is where a portfolio, and often the service around it, is developed for the individual client. An MPS is where a range of portfolio options is built to a variety of specific mandates and advisers are tasked with finding the best, ‘off-the-shelf’ match for their client.
Both bespoke and MPS essentially fulfil the same function in that clients own a segregated portfolio of investments, designed to be suitable and achieve their investment outcomes.
The key differences are around flexibility, service and ability to deliver the required outcomes.
In terms of flexibility and service, you may have a simple MPS at one end of the scale with a choice of portfolios, perhaps only using collectives as the building blocks. At the other end, you would have a fully bespoke solution, where service, flexibility, investment options and even cost can be ‘bespoked’ to the client.
It is unlikely that advisers would need to compare an MPS with a bespoke solution, as these are more likely to form separate peer groups for comparison.
The choice of MPS versus bespoke will be a function of client preference, client sophistication and the level of assets for investment.
Defaqto is finding that advisers are constructing investment panels of several discretionary fund managers (DFMs): big, small, bespoke and MPS, each of which would appeal to, and be suitable for, a different client segment.
So, when looking to compare DFMs in the market, within each of the segments, what due diligence should be undertaken?
The FCA has provided some big clues on this in its final guidance paper ‘FG 12/16: Assessing Suitability: Replacement business and centralised investment propositions’ (Cips). It suggests that adequate due diligence would include:
• Terms and conditions;
• Charges;
• Provider’s reputation and financial standing;
• Range of tax wrappers that can invest in the Cip;
• Type of underlying assets in which the Cip invests;
• Flexibility and whether it can be adapted to meet individual client’s needs and objectives; and
• Cip provider’s approach to undertaking due diligence on the underlying investments.
A huge amount of time and resource could be spent researching and gathering the data required to undertake ‘whole-of-market’ analysis, and subscribing to a service that provides the majority of this information is a must.
But even with all the information in front of you, how easy is it to compare?
Believe it or not, it was only a few years ago that many discretionary firms were genuinely baffled as to why they were getting requests for details of performance or costs from advisers. Things have moved on considerably since then, but we are still a long way from any kind of standardised approach.
It is fair to say that good due diligence in the DFM market is not so much difficult, but fraught with pitfalls. Approach with care would be the mantra.
But there is also one last piece of guidance to hold on to from the FCA. The regulator expects whole-of-market due diligence, but at the same time it has added a pinch of realism.
With regards to due diligence, it says: “Without completing this necessary step, firms cannot assure themselves that the Cip is likely to be suitable for their clients and therefore should not adopt the Cip”.
This could mean that robust and relevant due diligence does need to be undertaken on a regular basis. If any firms are unwilling or unable to provide the requested information, it is reasonable to move on as there are many more that will.
Finally, once all information has been gathered and analysed, it is vitally important that engagement with the firm is undertaken, preferably on a face-to-face basis. Test your findings, ask for more and see what its service to you, the adviser, is going to be like.
The chances are – assuming good, initial due diligence – significant amounts of client monies will be invested with the DFM over a number of years, so the personal relationships start to become as important as the contractual ones.
Fraser Donaldson is insight analyst, investments, at Defaqto
