Discretionary Management 

How to use DFMs without ruining the adviser-client relationship

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Taking care of outsourced clients

How to use DFMs without ruining the adviser-client relationship

The duty of care an adviser has towards their clients is important, so it is no wonder when it comes to outsourcing investment management advisers can be a little apprehensive.

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.

“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.”