Discretionary Management  

Access to data at point of sale is key

This article is part of
Investing in DFMs - October 2016

Access to data at point of sale is key

Provision of accurate performance data on discretionary fund managers (DFMs) has been patchy in the past, often failing to give a comprehensive picture of what investors can expect when selecting a DFM.

Asset Risk Consultants runs four private client indices (PCIs) that can provide some insight for advisers when turning to DFMs on behalf of their clients. These indices provide performance figures gathered from 63 private client discretionary investment managers, which is up from 50 investment houses in November 2015. 

Each of the four categories – Cautious, Balanced Asset, Steady Growth and Equity Risk – is named after its risk profile relative to equity markets.

More data is clearly becoming available, but James Goward, head of sales support at Rathbones, points out that the challenge for advisers is accessing performance figures at the point of sale.

He explains: “DFMs can provide all sorts of performance data once the client is on board, but it’s where you’re perhaps looking to introduce a client for the first time in that pre-sales stage and you want to understand the performance of a DFM. Advisers have only been able to rely on a DFM maintaining some sort of model portfolio as an example of what performance could look like. Or [by] providing existing client data based on portfolios that are run to a similar mandate that they’re looking for.”

DFMs can simply provide data from clients’ best-performing portfolios, which Mr Goward says is “not overly helpful to advisers, particularly when the regulator has insisted advisers should be more cognisant of things like price and performance in the past couple of years”.

Mr Goward adds: “Now the problem with price and performance is that they are relatively blunt measures in determining what we do. I think the regulator puts focus around those areas because of the increasing use of model portfolio services.” He insists comparing performance is helpful in choosing a DFM though, and suggests advisers are increasingly reliant on Asset Risk Consultants’ PCIs for peer analysis.

Nic Spicer, portfolio manager and head of research at PortfolioMetrix, believes most investment performance statistics should carry a “health warning”.

He explains: “The truth is that many investment portfolio ranges, particularly popular off-the-shelf risk-rated model portfolios, do not achieve good risk-return separation. 

“By this I mean there being a clear progression in terms of risk level across the range [from least risky to most risky] and commensurately higher returns being earned for each step up in risk across the range over time.”

Mr Spicer argues that focusing too much on individual portfolios rather than the range of all products, chasing high-performance returns, lack of diversification and weak investment processes can all lead to unsuitable results for clients. He adds this will have “costly implications for advisers when clients justifiably query the suitability of the investment selection”.

Investors should of course question an adviser if they are not satisfied with the performance of the DFM in relation to their chosen risk level.