Discretionary Management  

Taking care of outsourced clients

  • Describe what advisers' duty of care is when outsourcing investments.
  • Identify how to use DFMs without ruining client-adviser relationships and what the FCA expects.
  • List key questions to ask those running client investments.
CPD
Approx.60min
Taking care of outsourced clients

Introduction

There has been a growing trend among advisers to outsource client investments to a third party, whether this is a discretionary fund manager or managed portfolio service. 

According to the Rathbones report on the value of discretionary management, published last year, approximately 40 to 50 per cent of the industry already outsources to a DFM.

The rise in the use of outsourced investment solutions is meant to benefit both the adviser and their client.

From the adviser’s perspective, it means they can focus on financial planning in client meetings, rather than spending time selecting and then monitoring investment portfolios.

From the client’s point of view, their adviser will have more opportunity to consider their wider wealth planning needs, including pensions, tax and intergenerational planning.

But not all advisers are quite so eager to outsource this part of their job, often citing concerns about where the duty of care lies and how it might affect their relationship with individual clients.

Cost comes into the decision to outsource to a third party as well. Advisers have to weigh up the added value of outsourcing client investments, while at the same time justifying any additional fees, particularly now that regulation such as Mifid II has meant there is increased scrutiny on the actual costs to clients of investment solutions.

Choosing the right DFM or MPS in the first place is important if advisers are to feel confident they have ticked all the boxes when it comes to suitability and duty of care.

As Jim Wood-Smith, chief investment officer, private clients and head of research at Hawksmoor Investment Management points out: “When using a DFM, an adviser is placing tremendous trust in the investment manager to deliver what they have promised to a client.”

When outsourcing, advisers have to consider what is best for their clients, as well as for the business. 

Lawrence Cook, director of Thesis Asset Management, insists due diligence on DFMs is essential “before signing on the dotted line”.

He says: “However, as the outsourcing market matures, we are also seeing rising numbers of DFMs doing their own due diligence on advisers and their businesses.

“This is an important part of the process – after all, both parties need to be confident that the culture and risk-mapping processes of the DFM and adviser align well, won’t cause disruption and, most importantly, benefit the client.”

Mr Cook suggests this part of the process is an opportunity to cement a good working relationship from the outset between the adviser and DFM.

Ellie Duncan is features editor at FTAdviser and Financial Adviser

In this guide

CPD
Approx.60min

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. According to Mr Willis, advisers have realised making investment decisions has become what?

  2. Mr Russell lists four questions advisers should ask in meeting their duty of care towards clients when outsourcing. Which one of the below is not in his list?

  3. Mr Cook says: "Advisers have not always outsourced investments by choosing funds." True or false?

  4. Mr Gerstler explains most of his clients understand his expertise is what?

  5. According to Ms Bradley, the FCA paper is, to a large degree, what?

  6. Mr Knight says what will generate additional concern among advisers about outsourcing investments?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • Describe what advisers' duty of care is when outsourcing investments.
  • Identify how to use DFMs without ruining client-adviser relationships and what the FCA expects.
  • List key questions to ask those running client investments.

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