Discretionary Management  

The technology needed to run a DIM

  • Describe the use of apps by discretionary investment managers
  • Identify some of the reporting rules required by the regulator
  • Explain the 10 per cent rule

Apart from ICAAP another stand-out area for DIM firms is the 10 per cent rule.

This rule states that where a DIM firm carries out discretionary management for a client, if the overall value of the portfolio depreciates by 10 per cent, and thereafter at multiples of 10 per cent compared to the beginning of each quarterly reporting period, the manager must inform the client by the close of business on the day the breach occurred.

If the breach occurred on a non-business day, the notification must take place on the next available day.

On the face of it this sounds simple, but it is complex.

Suppose the client has more than one portfolio, only one of which falls more than 10 per cent, and overall, between the portfolios, the fall is less than 10 per cent?

It is important that the back-office software is able to identify problems such as this in order for the DIM firm to be able to make the appropriate judgement call.

Another important consideration is call recording, not only in relation to clients but also in relation to placing orders with the firm’s designated brokers.

Implementing the right software will enable the retrieval of voice recordings which is important when disputes occur or when clarification is sought. 

One area where DIM firms may have a significant advantage in the area of technology is in the very latest platform developments. Technology firms are now looking to provide advisers with the capability of being platform providers.

This is not a white-labelling exercise, but rather a true initiative designed to make adviser firms a platform provider. The technology is new and could potentially help with significant cost savings both to the DIM firm and the client.

DIM firms score in that they will already hold the relevant permissions regarding custody of assets and controlling client money.

It is a new development, and is in its infancy, but this could be an area where DIM firms could use technology to further differentiate their services to clients through offering a higher-level service proposition.  

In summary, DIM firms need to have technology that is capable of supporting their service proposition, and providing the format to ensure that they are not only fully compliant, but are also able to meet the necessary reporting requirements for both clients and the Regulator. 

DIM firms should consider a solution that incorporates the following capabilities:

  • Access to high quality securities market and fund research from multiple providers
  • Access to a full range of investments, with the ability to execute listed securities trades in real time, capable of achieving optimal prices for investors
  • Robust reporting, (including Time Weighted Rate of Return and Money Weighted Return performance), that meets FCA requirements for DFM and 24/7 online access to holdings and transactions for Clients 
  • Access to a full range of funds, onshore and offshore, ETFs and Investment Trusts, with real time buy-and-sell, alleviating time out of the market
  • Investor Account Protection through a financially sound custodian with client monies being held in segregated nominee accounts
  • A CGT calculator to provide ‘what if’ scenarios to minimize Capital Gains Tax liabilities
  • Can identify the most appropriate time to re-balance client portfolios
  • Can help ensure that client portfolios and investments are meeting the firm’s PROD analysis
  • Can identify if the DIM firm’s investment propositions are performing in line with the respective benchmarks 
  • Can identify whether the investments made for each individual client are suitable and meet their tolerance to accept losses and their attitude to risk
  • Capable of holding all records of client discussions 
  • Can deliver the relevant MI to enable the speedy completion of returns and reports to the Regulator
  • Can deliver the necessary information to the firm’s PI Insurers in order to help obtain the best possible rate at the most reasonable rate
  • Can identify a client’s attitude to risk and allocate the most appropriate investments accordingly
  • Can identify possible changes in a client’s circumstances and accordingly make the necessary adjustments to their investment portfolio and their attitude to risk
  • A system which from a financial planning point of view enables the discretionary manager to create and review goal-based planning, cashflow modelling and risk profiling, and once complete move straight into researching the suitable products, platforms and portfolio of funds all within one tool. 

Software is essential in today’s advice world and major developments are taking place continuously.

It is imperative to take the time to find the best solution for your business and make it part of your due diligence process when partnering with other organisations. There are compliance and business support providers that can assist with the search and identification of the correct software solutions to meet the individual needs of a discretionary investment management firm.