Outsourcers compete as choice of models is ‘broader than ever’

This article is part of
Discretionary Fund Management - March 2015

Recent reports continue to feed the view that the trend to more outsourcing continues.

The latest report from The Lang Cat and CWC Research, Never Mind the Quality, Feel the Width, lends its support to that view.

The reality of course, for advisers with advisory permissions is that they have always outsourced. That is, if you are not an investment manager selecting the stock within an investment, then you have been outsourcing all along. What you should really be considering is whether you now need to outsource in a way that delivers consistent client outcomes and improves the profitability of your business. The answer to this is, probably.

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If you do decide to change the outsource model, the choice between multi-managers and discretionary fund managers (DFMs) is broader now than ever before. So what is the difference between these two? At first glance, not a lot. Some DFMs offer unitised and segregated investment ­propositions; multi-managers invariably offer only unitised.

For the adviser who likes the familiarity of products, a multi-manager offering a range of funds to accommodate different investor appetites for risk seems to be an appealing choice. The potential threat to the adviser is that the savvy client will also find it easy to access these funds themselves and not want to pay their adviser to do so.

Those advisers who deliver a financial planning service, as opposed to selling investments, may well feel less threatened. For these progressive financial planners who want to deliver a service rather than a product, the DFM offering is often seen as more attractive, with more options.

These can include personal investment preferences, such as ethical, stock/sector specific, income; capital gains tax (CGT) management; tailored reporting; portfolio look through; access to investment personnel for adviser or client; unitised or segregated options.

CGT is one area where there is much debate and some misunderstanding. Let us take multi-managers which invariably offer an open-ended structure such as a unit trust. In a unitised structure like this the CGT picture is clear – there is no tax liability until the client sells. What is less clear among advisers is the level of proactivity in advising when to sell, but that is another discussion.

This unitised structure can be useful then, but the investor is paying for the unit trust wrapper and if there is little CGT to be managed, why pay for it?

So what is the alternative? An unwrapped general investment account is a basket of investments which may comprise funds, closed-ended collectives and stock. This type of investment, a segregated account, is offered by DFMs.

Where portfolios are managed at an individual client level (sometimes referred to as full service or bespoke), then the CGT can be managed in a highly personalised manner, including the choice of stock to target specific income, timing the trades, managing withdrawals and maximising the use of allowances.