DFMs should supply data in a way that meets advisers’ needs

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Discretionary Fund Management - November 2015

The number of advisers outsourcing investment decisions to discretionary fund managers (DFMs) and model portfolio providers has been rising in recent years.

This is largely due to an increased focus on investment risk and costs following the RDR, but also as a way of advisers being able to demonstrate value-add.

However, DFMs and their model portfolios are often regarded as something of a black box where the internal workings are a bit of a mystery to advisers and investors, who just have to trust the DFM’s skill to deliver the desired outcome for the customer.

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While this opaqueness was once accepted as the necessary trade-off for securing expert independent fund management, the approach conflicts with the regulator’s increasing demands for transparency and makes selection of a suitable DFM very difficult.

To make an informed decision for their customers, advisers need to be able to compare portfolios effectively and understand the mix of assets, as well as the costs and the performance achieved.

Advisers also need to be able to explain the DFM’s portfolio to their clients and how this fits into their overall risk profile and financial plan.

A joint report last year by CWC Research and the Lang Cat found that around half the advisers surveyed felt the process of accessing data regarding the costs and make-up of DFM portfolios was either “hard” or “very hard”, preventing them from carrying out effective whole-of-market due diligence.

This tallies with our own adviser research, which found DFMs lagging some way behind investment platforms, fund groups and life and pensions providers in the provision of quality digital information.

The wealth management industry remains incredibly low-tech in terms of how it provides data to advisers and investors.

There is huge potential for DFMs to embrace digital solutions not only to provide greater transparency, but also differentiate their service from competitors. Technology can provide a distinct identity for a DFM, as well as enabling a better and clearer communication channel to provide advisers with crucial information to support recommendations.

Of course, the argument from many DFMs against transparency is that much of the data they work with is commercially sensitive.

But there are ways of using technology to be more open and enhance the customer experience – especially on costs, performance and portfolio holdings – without giving away too many trade secrets.

Regulation that will force DFMs to change their approach is on its way. New European requirements under Mifid II look set to require DFMs to disclose costs and charges from the start of 2017.

And it probably requires confirmation of suitability of funds for end-customers with whom they have no face-to-face relationship.

In addition, the FCA’s Smarter Consumer Communications initiative is seeking improvements in the way all financial services companies communicate information to their customers.

DFMs need to think seriously about how they can provide information that fits with their need for confidentiality, while giving advisers access to data that fulfils their due diligence requirements, as well as their need to clearly explain recommendations to their end-clients.