The use of discretionary fund managers (DFMs) or discretionary investment managers continues to be a topical issue for advisers. But the benefits of working with DFMs may not be apparent to some.
Perhaps a clue in the attraction of using a DFM is the trend towards some larger adviser groups acquiring their own discretionary permissions; presumably thus achieving some gain for their clients and the business.
With all the tools and data freely available to anyone who cares to look, it is not hard to find information to assist an adviser in coming up with some sensible asset allocation and portfolio choices. The challenge is in the implementation.
First, there is the discipline of ensuring the process of research, analysis and review remains consistent and robust. It must be timely, not just executed when it can be fitted in, otherwise it could breach internal policy and detract from client service.
Second, there are the changes that need to be made to portfolios, perhaps quarterly or half yearly, to ensure the risk tolerance of client products remains within appropriate parameters.
This is where the crux of advisory administration can become a real headache for the firm. Other than reverting to original allocation, client permission needs to be sought to make portfolio changes.
Even the most efficient of administrators cannot hope to predict when several hundred clients will respond – even if 90 per cent do so, what about the remaining 10 per cent?
For the 90 per cent that do respond, the adviser needs to decide whether to wait until they have all responded before implementing changes so that they are all treated the same, and whether this would be fair to the ones that responded quickly.
If the adviser delays they might have missed the investment opportunity that was driving the decision to make changes in the first place.
The 10 per cent that don’t respond now have portfolios that are drifting from the adviser recommendation. This might not be a disaster in the short term, but over time it can lead to significant risk issues.
If you think about lower-risk clients who have a lot of fixed interest, imagine a scenario where prices fall quickly with central banks spooking the market and inflation climbing rapidly. A significant drop in value for these clients is the opposite of the low volatility targeted by their risk profile.
In these scenarios, the adviser is taking responsibility for the investment decisions and will therefore be held accountable by the client. This makes sense for those advisers that want to be ‘investment advisers’. But many wish to focus on the strategic planning with clients and hold an investment manager accountable, as well as freeing up key resources for other revenue-generating activities.
It is not surprising then that advisers who really enjoy the planning would rather leave things they can’t control – investment markets – to someone else they can hold accountable.