Key questions to ask those running client investments

The Financial Conduct Authority has been considering whether advisers have a duty of care to their clients.

 So it may be unsurprising that advisers need to exercise substantial due diligence on the DFM they choose to manage their clients’ investments.

So what are the key questions advisers should ask those running their clients’ investments?

Several advisers said cost was the biggest question after Mifid II came into force at the beginning of last year. 

Mifid II 

Alex Shaw, director of Progeny Wealth, says: “What are the running costs likely to be for clients? This has always been a key consideration, but is even more relevant now given the Mifid II cost disclosure requirements.”

Mifid II came into force in January 2018 to increase transparency, particularly when it comes to investment fees and charges levied by advisers.

But it also includes requirements on making sure clients are advised to invest in appropriate products.

Danny Knight, head of UK group distribution at Quilter Investors, confirms: “Mifid II fundamentally changes the requirements relating to suitability – the need for advisers to provide suitability reports to clients pre-investment is key. Suitability, ultimately, needs to be at the centre of the entire investment process”

He adds: “From a manufacturer’s perspective, Mifid II has clear ‘product governance’ requirements, defining the characteristics and objectives of the identified target market – this is the key question that I would expect from advisers.”

Timing 

Joe Roxborough, chartered financial planner at Ascot Lloyd, identifies timing of investments as a crucial area advisers should enquire about.

“How does the manager deal with an unusual situation for a client? For instance, if an investor needs to cash in their investment rapidly, how quickly can the money be returned to them?” he asks. 

Paul Bullough, chartered financial planner at Quilter Private Client Advisers, highlights a few separate questions related to timing. 

He asks: “How frequently are the portfolio holdings traded? Rebalancing regularly accounts for movements in the market – without regular attention the portfolio is likely to increase in risk over time and could exceed acceptable levels. Is the manager genuinely trying to add value and how do they demonstrate this?”

Risk and return

Advisers might want to ask a number of questions related to the risk profile of the portfolios run by DFMs. 

Mr Bullough mentions the following as useful lines of questioning: 

• Is there a clear risk benchmark that directly relates to the client's risk profile?
• Is the portfolio appropriately forward-looking and in line with expected future requirements?
• Is the portfolio designed for financial planning with risk budgets and clear communication?
• How diverse is the portfolio and does it cover at least four asset classes?

Mr Shaw asks: “What risk mitigation measures do they have?

“We would need to see that their asset allocation was structured accurately – not just done on gut instinct – and what ongoing monitoring measures are being taken regarding rebalancing and performance management.”

Mr Knight says a slowdown in the global economy will generate additional concern among advisers outsourcing their clients’ investments. 

“It has been a relatively easy time for advisers to generate returns for clients and a period where conversations have been easy and without too many challenges,” he explains. “Going forward with global growth slowing, being later cycle and expected returns from asset classes being lower, managing client expectations both from a return and risk perspective are now even more important than ever.”

He adds: “In the decade since the financial crisis, returns have been easy to come by and clients have forgotten what volatility feels like and have also become complacent, with high expectations for returns.

Mr Knight cites recent Schroders research that predicted an average annual return of 13.2 per cent a year. 

But 2018 proved to be a tumultuous year for a number of assets, such as gold, as well as a number of benchmark indices, such as the US-based Nasdaq and S&P 500.

Additionally, the Schroders Global Investor 2018 study predicts annual returns of 9.9 per cent for investors over the next five years. 

This forecast is lower than Schroders predicted in 2017, which was 11.8 per cent.

Competitive advantage 

Advisers are also keen to know what makes DFMs unique in their offerings and how they differ from their competitors.

Mr Roxborough notes: “When comparing two very similar propositions, I like to ask what separates the manager from their competition.”   

He adds: “All managers can tell you about the size of their research team, awards gathered and diligence process – but I want to know what makes their offering different from anyone else.”

Mr Shaw asks: “How is their solution better than a well-diversified portfolio of low cost, systematically managed funds such as index funds?”

Jamie Farquhar, director of business development at Square Mile Investment Consulting and Research, lists a number of factors that advisers need to be wary of when choosing DFMs; namely, the level of independence attached to the company, the governance and oversight process, the reporting process, results construction process, and the company’s headcount.

“If a company can’t provide all this information, you should not be doing business with them,” he warns. 

Getting the relationship right

It is clear that advisers can ask a range of questions to DFMs and outsourced solutions providers to ensure they make the right decision for their clients. 

But how do advisers strike the optimal relationship with those running their clients’ investments?

Mr Shaw notes: “We would need a clear, long-term and readily available contact at the DFM that both the adviser and the client can speak with. We would not be able to hold a relationship with a faceless organisation.” 

Mr Bullough says: “It is important to respect the differing roles both the adviser and the DFM play in managing a client’s wealth.”

Saloni Sardana is a features writer at FTAdviser and Financial Adviser