There are numerous examples of advisers reaching the point where the make-up of their advisory proposition is limiting their scalability. Given that growth is a key objective for most firms, it makes sense to look closer at this area.
Increasingly, directors of successful independent financial adviser firms are saying that supporting their own portfolios can take around a month of their time every year. This is paired with a great deal of time and input from other members of staff and the time spent by clients responding to portfolio recommendations.
Firms can have great processes in place when developing portfolios for clients, but even then a range of clients can end up with portfolios that are not in line with what they should have had from the outset. This can be due either to slow responses from the client on potential portfolio changes or requests being ignored completely.
With that in mind, if you factor in a lack of scalability limiting business growth and inconsistent delivery for clients, it is not surprising that many financial advisers are left feeling that they need an alternative solution.
Those firms that have significant scale, appetite and technical skills may consider acquiring their own discretionary permissions. In general, this may solve the portfolio implementation challenges but can also introduce others.
| APPOINTING A DFM |
Questions to ask Wellian Investment Solutions suggests advisers should ask the following questions when they are selecting a discretionary fund manager to use: • What is the DFM’s investment process and how do they manage risk? • What experience does the investment team have with navigating negative market conditions? • What is their fee structure? • Will the service be delivered by a sole investment manager or a bigger team? • What ongoing support/service will be included? |
Most importantly, by taking on such responsibility, the firm could become conflicted, which can produce many dilemmas. For example, if the portfolio’s performance were to falter, should the financial adviser step down in favour of a better alternative? Does it increase the risk of the adviser falling foul of shoehorning? Does this feel like an independent business working totally on behalf of clients?
Therefore, for many advisory businesses the answer can often be found in selecting a discretionary fund manager (DFM). By outsourcing to a DFM, the firm can support the financial adviser in delivering the appropriate investment solution to clients either through a wrap or directly with the DFM.
If, over time, the financial adviser becomes dissatisfied with the DFM an alternative can be appointed, leaving the adviser free to act in the best interests of clients and the business.
This move to using DFMs tends to work best when the owners of the business are objectively and emotionally ready to relinquish the control to a third party. If the investment director still wants to do the minutiae of portfolio management, it is important for that firm to reflect and consider whether it is ready to make that step.
From experience, the financial advisers who have confidence in their role as financial planners are the ones most likely to enjoy working with a DFM.
And it goes without saying that those financial advisers who want to grow their business should focus on consistent client outcomes.
Lawrence Cook is director of marketing and business development at Thesis
