Advisers should ask themselves “what am I great at?” and “what do my clients really value?”, says Gareth Johnson, head of managed investment services at Brewin Dolphin.
Invariably, Mr Johnson says the answer to these questions should be financial planning, ensuring tax efficiency and “making sense of it all.” Although all clients will expect some return on investments, Mr Johnson says the financial planning aspect is more important.
As such, his pitch to advisers to use his firm’s services for clients is to concentrate on that part of their business and outsource the investment management to a specialist.
Mr Johnson says: “The advisory model has proved difficult for many in terms of rebalancing portfolios and being nimble in changing markets. Utilising a DFM can bring efficiency and reduce risk.
“We see this model in many other industries. For example, Apple would see their added value in design rather than production or chip manufacture, so these are outsourced.”
Eric Clapton, chief executive of Wellian Investment Solutions agrees the main advantage is the time gained to manage the financial planning and strategy for their clients, without the need to continually monitor the investments and deal with the subsequent administration.
Mr Clapton says: “The combination of an expert financial planner with a specialist investment manager can provide considerable value to a client.”
Emma Wall of Morningstar UK, says the main benefit of DFMs is they are experienced and highly qualified investment professionals managing client’s money.
With a DFM, she points out your clients will enjoy constant monitoring of investment markets and performance, giving them the best chance of maximising returns. Portfolios are also managed and monitored within agreed risk parameters.
Ms Wall says DFMs typically have teams of analysts who meet with the underlying fund managers regularly, analyse investment funds in detail and have access to a wide range of investment solutions including Oeics, investment trusts, ETFs and individual stocks.
The downsides
On the downside, costs are the most often quoted disadvantage of DFMs. Not only are they likely to cost more than some other centralised services, but costs and the value you are buying are not always the most transparent.
Mr Clapton cites two major issues in this respect. The first is that the additional - and high - cost of the investment manager is certain, whereas the value added by using the service is only proven over time.
In fact, data have consistently questioned the value that is being offered by many managers, with a recent report suggesting that as many as half of managers have been failing to add any real value for clients.
Another recent report by noted sector consultants The Lang Cat even raised questions over the degree to which costs are certain, saying that it was “impossible” to draw comparable data on fees and charges.
The second major disadvantage cited by Mr Clapton, particularly for larger portfolios, can be the incidence of capital gains tax. Mr Clapton says the investment manager in maintaining his mandate is not constrained by the concerns of taxation and liabilities can therefore occur without prior notice.
Ms Wall agrees a DFM service may cost more than a self-built portfolio - and she adds advisers must dedicate resources to choosing a manager as there are many DFMs to pick through in today’s market.
She says all the DFMs that are out there have different propositions and resources “so picking the right DFM to work with involves lots of due diligence and also trust.”
This latter issue, trust, is the other key drawback most often cited by advisers, who fear losing control of a client relationship to an investment manager taking over a share of responsibility for the client’s interest.
Mark Stevens, head of intermediary services at Investec Wealth & Investment, notes: “Historically there was the perceived loss of control or risk to the relationship, but advisers and investment managers work together to ensure the seamless ‘transfer of trust’.”
More details on how to make sure you don’t have to worry about a loss of control and losing your client to your DFM can be found in a later section of this guide on avoiding ‘poaching’.
