How to evaluate a DFM from top to bottom

How to evaluate a DFM from top to bottom

On average, 20 per cent of advice firm assets are now in some kind of external discretionary portfolio service, according to a survey of advisers conducted in February and March of this year by Research in Finance.

The motivations to outsource investment are well understood. It may be due to a lack of in-house resource or expertise; it may have more to do with reducing risk within the business. Or it could simply be to allow more focus on the bigger financial planning picture.

Whatever the motivation, selecting the right discretionary fund manager for clients is a critical decision for the advice business and carries huge risk if it’s a bad choice.

RSMR has been providing qualitative DFM reviews and ratings for advisers since 2017, as a logical extension of our fund ratings that we’ve provided since 2006. When evaluating a DFM we start from the top and work our way down. It’s a lengthy process but necessary in order for us to consider rating a given firm.

It’s also a process that advisers should be aware of when considering choosing or changing their discretionary management provider, or discussing their provider with clients. So in this first of three articles, we break the process down and bring it to life, starting from the top. Below are some of the key questions to consider.


Corporate structure & key personnel


  • Ownership structure 

What is the history of the company, when was it first founded?

Is the company listed?

What is the free float?

Who is the ultimate parent and who are the major shareholders?

Listed companies will have a more rigorous reporting and disclosure regime than a private limited company, making it easier to access key financial information. They may also have better access to capital markets to secure funding. Private firms may have more skin in the game when it comes to ownership, as senior management may well include original founders and practitioners. Lack of outside shareholders may also make it easier for them to take a longer-term view.


  • Board structure & senior management

Whether listed or private, who are the people driving the company?

Board members’ bios; what’s their tenure with the firm, perhaps they’ve come up through the ranks, or come from a competitor?


  • Governance 

Is the firm practicing good corporate governance?

The boardroom sets the tone for the entire business and this is where the culture and values of the firm are shaped, which in turn influence the way the firm interacts with its stakeholders and the wider community.

Does the company have clear policies regarding ESG, and what commitments has it made in this respect?

How many non-execs are on the board and what is their background and experience?

What is the overall staff headcount and turnover rate? How has this increased/reduced over the years? Can they recruit and retain quality staff?

Now that we understand more about the ownership and management of the business, we turn our attention to their financial standing.