An adviser is looking to ensure the DFM is a good fit for them and the client.
The requirements of each adviser firm will be slightly different, but Gareth Johnson, head of managed investment services at Brewin Dolphin, recommends using the following as a checklist:
1) Is there local support for the adviser firm? 2) How financially sound is their DFM partner? 3) Is there absolute clarity over client ownership within the relationship? 4) Does the DFM have access to the right tax wrappers for the client’s needs? 5) Is there transparency over portfolio content? Specifically Mr Johnson says in model portfolios, can you see exactly what is held in the models or is it slightly opaque? 6) Is the process robust and repeatable? Is there a consistent, disciplined investment process? Ideally, Mr Johnson says you would want the same process underpinning all solutions from the DFM, so in use in both bespoke and model portfolios. 7) Is the investment process transparent? Are DFMs using their own funds, or do they use whole of market? |
Mark Rockliffe, head of intermediary sales at Heartwood Investment Management, says an adviser should look for a DFM to strengthen, empower and deliver intelligence tools to them through a range of services.
He says quarterly client reporting and ongoing access to investment professionals are core services, as well as providing support with client meetings, events and training.
Mr Rockliffe says more sophisticated tools may also be available to enhance the client experience, such as those projecting the range of returns a client can expect and risk management applications.
For example, Mr Rockliffe says the risk tool may show a portfolio’s performance during periods of heightened volatility and the magnitude of drawdown.
Mark Barrington, director of the managed funds service at Waverton, says good quality DFMs will be delighted to complete detailed due diligence material and meet with the adviser to discuss their requirements.
As well as initial selection, Mr Barrington says advisers should look to make sure a DFM understands it is also vital to maintain a close on-going working relationship so, for example, both are fully aware of changes in their respective businesses.
Given the need for a relationship to be established, Guy Stephens, managing director of Rowan Dartington Signature, says meeting company representatives is important and examining the investment process and performance is vital.
An adviser should look for a DFM to strengthen, empower and deliver intelligence tools to them Mark RockliffeHe adds the financial backing and stability of the DFM is also a factor.
Mr Stephens says: “Cost should not be the primary factor but unfortunately often is.
“The smaller the firm, then potentially the more limited the resources available, the more rudimentary the internal compliance controls and the less sustainable the performance - but this does not always follow.
“Many advisers have a panel of DFMs that are selected for different applications, such as for smaller client portfolios, bespoke portfolios or alternative strategies.
“Having five of the same big-brand DFMs is not going to offer a broad spread of solutions and similarly, relying too much on one individual in a particular DFM is not a good idea as he/she may retire or change employer and then the adviser is faced with a big headache.”
Another thing due diligence should address is ownership of the client – ensuring an adviser is confident their client remains their client is vital to a good ongoing relationship with a DFM.
Robin Beer, head of intermediaries division at Brewin Dolphin, says his company structures their terms of business so that the financial adviser is the legal client and acts as an ‘agent’ for their underlying client.
Mr Beer says this puts the adviser at the centre of the relationship and in full control of all aspect of the relationship.
Rowan Dartington Signature’s Mr Stephens says advisers should not have to fear a DFM poaching their clients so long as the client relationship is explicitly laid out and agreed.
He says the discretionary agreement should ideally say that the primary relationship rests with the adviser and that all communications, outside of regulatory reporting, should be channelled through the adviser.
In addition, Mr Stephens says the DFM should say in that agreement that they will not seek to offer any services that the adviser currently offers their clients.
Mr Stephens says: “This will give the adviser total confidence that if anything untoward should happen, then the contract has been breached and he has redress.
“Advisers should ask the DFM two questions, ‘If a client contacts you directly, am I copied into all correspondence?
“What do you do if a client asks to come to you directly and remove me as the adviser from the relationship?’
“In the latter case, this should be refused and the adviser alerted immediately that he could be about to lose a client.”
Nick Holmes, managing director of Brooks Macdonald Asset Management, says there is always an element of trust required when an adviser introduces their client to another firm.
Mr Holmes says the risk that the DFM could poach the client is greater where the DFM itself is providing competing services, rather than specialising in the management of the portfolio.
He adds that advisers should be wary of passing full responsibility for assessing suitability to the DFM, as this represents greater risk as it necessitates a more direct relationship between the DFM and the client.
