How to use DFMs without ruining the adviser-client relationship

The outsourced model has many apparent benefits for advisers, such as freeing up the time they might have spent making investment decisions to instead spend on the financial planning aspect of their role. It might also allow advisers to grow their business, as it can enable them to take on more clients.

But a report by Rathbone Investment Management published in 2018 – the value of discretionary fund management – shows that those advisers who were not outsourcing to a DFM had several reasons for not doing so.

The survey of 100 advisers found 5 per cent of advisers who had not adopted a DFM had chosen not to out of fear it would “steal” their clients from them.

But Lawrence Cook, director of Thesis Asset Management, says advisers should not fear DFMs when they make the decision to outsource investments.

The client-adviser relationship will only become a problem for advisers if they stop communicating effectively with the client and leave it to the DFM.Lawrence Cook

“Advisers have always outsourced investments by choosing funds,” he points out.

“By bringing in a [DFM], advisers are just removing that administrative headache that comes with managing investments for clients on a large scale.”

Gary Teper, head of investment management at Charles Stanley, notes: “I think this is a fear of many [independent financial advisers]; that the client will see the value in the short-term performance of their portfolio, rather than the part of what the IFA is providing.”

Key Points

• Using a DFM removes an administrative headache for advisers.
• It is important to set out how communication between clients, advisers and DFMs should work.
• A financial adviser should act as the primary trusted professional.

So, is there any reason advisers might lose ownership of their clients by using these investment solutions?

Mr Cook says: “The client-adviser relationship will only become a problem for advisers if they stop communicating effectively with the client and leave it to the DFM. 

“They should not be surprised in this situation if the client begins to question their value and what their fees are paying for.”

Nature of the relationship

One way to overcome this is to set out from the start of the adviser-DFM relationship just how communication between the three parties will be conducted.

Jim Wood-Smith, chief investment officer, private clients and head of research at Hawksmoor Investment Management, asserts that the nature of the relationship should therefore be dictated by the adviser.

“If the adviser wishes [to have] a genuine tripartite relationship between them, the client and the DFM, then all should have regular and constructive three-way meetings,” he says. 

“If, on the other hand, the IFA wishes to keep the DFM at arm’s length, then the DFM is restricted in the ability to perform sufficient due diligence to ensure correct ongoing suitability.”

Mr Wood-Smith reiterates: “The nature of the relationship is clear: the IFA is responsible for the identification of the suitable investment mandate, [and] the DFM for ensuring that the portfolio performs according to the parameters of that mandate.”

The onus is on the adviser then to set out the terms of these client relationships.

A financial adviser should act as the “primary trusted professional” at the heart of the client relationship, with responsibility for all aspects of financial planning, according to Gillian Hepburn, UK intermediary solutions director at Schroders.

She explains: “If outsourcing client investments and using a discretionary investment manager, there are a range of solutions available in the market, including model portfolios on platforms where typically there is no contractual relationship between the investment manager and the client, leaving the adviser fully in control of the relationship.

“However, where a bespoke portfolio is required, the adviser should be in the driving seat and agree the nature of the relationship between themselves, their client and the investment manager at the outset – and, importantly, this should be communicated to the client. 

“The role of the DFM is then to manage the investments to the agreed risk mandate and financial planning requirements.”

Personal preference

From the point of view of the DFM or outsourced solution business, often they have little or no contact with the client and they will take their lead from the IFA.

Mr Teper explains: “We wholly aim to be an extension of the IFA’s offering and seek to be as involved or not with the underlying client. Many IFAs prefer that we have no contact and only send investment report updates to the IFA to maintain their relationship status. 

“Others, on the other hand, brand ourselves as a partnership and always dually communicate/meet with the client – thus the underlying client sees the pair adding value.” 

He suggests either option works and that, ultimately, it comes down to the adviser’s preference. 

“I think this is very much down to establishing a long-lasting, trusted relationship with a company and team of people that work for the IFA,” Mr Teper adds.

The idea of a partnership is something that Mr Cook observes has come about as the adviser-DFM relationship has evolved over the past few years.

“Advisers can now partner with DFMs to enhance their business and add value through a number of services,” he says. 

“This can include white labelling an investment proposition, meaning an adviser’s brand can actually flourish while still using an outsourced partner.”

For Mr Wood-Smith, the situation with model portfolio services is even simpler.

“We operate our MPS on an ‘adviser as client’ model and do not necessarily even know the identity of the underlying client,” he says. “The MPS should be transparent in its objectives of risk and return and provide the IFA with a convenient off-the-shelf outsourced solution.”

Flexibility

Joshua Gerstler, financial planner and company director at The Orchard Practice, explains the only DFM used by his company is a managed portfolio service.

“They do not contact our clients directly and notify us in advance if any communications are to be sent out,” he notes.

“Most of our clients understand that our expertise is life-centred financial planning and that the products/funds are only one tool to enable us to do that.”

He adds: “If we felt it was right for them to speak to a DFM directly then we would be more than happy to do this.”

Something that both the adviser and DFM, or MPS, should think about demonstrating is flexibility when it comes to approaching these relationships.

Mr Cook says: “We have had many cases where we are involved quite significantly in talking to the client about their investments, and others where the adviser takes this role. 

“More and more advisers are focusing on the areas where they can add value, particularly around financial planning. The advisers that will win out will be the ones that recognise this and lean on their outsourcing partners to provide the help and guidance clients desire.”

Ellie Duncan is features editor at FTAdviser and Financial Adviser