Advisers risk damaging their entire businesses if they do not have structured due diligence in place when choosing a discretionary fund manager, according to Nucleus.
Following the Retail Distribution Review, more and more advisers are choosing to use third parties to manage client investment strategies, with the wrap platform citing a recent survey by Defaqto that showed 43 per cent of advisers are now outsourcing their investment proposition, of which 72 per cent are opting to use DFMs.
Nucleus has seen, since the start of last year, a 333 per cent growth in its volume of assets under administration held in discretionary portfolios.
The wrap platform also warned that given the wide variety of investment propositions currently available on the market, the Financial Conduct Authority has made its expectations clear and is taking a much closer interest in the depth of due diligence that is carried out prior to selecting a solution for a client.
Nucleus’s latest white paper highlights the process advisers should consider when choosing to outsource investments and the due diligence questions to be asked to ensure best possible client outcomes.
Barry Neilson, the firm’s business development director, commented: “With the increasing activity in this area, the FCA will no doubt continue to review its regulation as the market grows.
“Therefore it is critical advisers carry out due diligence when choosing to outsource their investment strategies, otherwise there is a real risk of damage not just to their reputations but to their entire business too.”
He told FTAdviser that the regulator’s concern surrounds the emergence of concentration risk in the DFM space.
“Previously most advisers used a variety of life and pension companies, but now they’ll usually just have a couple of platforms and maybe one outsourced DFM, so if for some reason that goes wrong then it creates major issues.
“Adviser now need to conduct deep due diligence on their partners to assess suitability for clients and potential risks inherent in the relationship.”
Earlier this year the Personal Finance Society commissioned a good practice guide to help advisers develop their approach to due diligence on discretionary investment managers, with a follow-up planned for later this year.
The society’s chief executive Keith Richards stated that in the absence of a well-established due diligence model, some firms struggle to add the layer of additional cost that represents the best value for money for their clients.
peter.walker@ft.com
