The market for discretionary fund managers is becoming more and more competitive, both for businesses offering model portfolios and those with more bespoke offerings.
At the start of March, within the space of one day we saw Quilter add 40 model portfolios to their MPS service, and perhaps more surprisingly, Octopus decided to close its own DFM service. Any adviser wanting to recommend a DFM will have a wide and evolving range of options to choose from.
Advisers have been using DFMs for a number of years, but over recent times this usage has increased. In part this reflects a successful advice sector.
Businesses have been growing and reaching the point where their investment propositions can benefit from external help and expertise. It is also perhaps fair to say that the wide range of options to choose from has led to an overall improvement in quality – there are many well established DFMs with good reputations, solely focussed on managing client money safely and effectively.
This focus point is important. It allows advice companies to focus on their own strengths: financial planning. It is also, perhaps, the reason for Octopus, a large successful group with their focus elsewhere, to exit the market.
If an advice business is considering working with a DFM it is likely to be a big step. Entrusting the reputation of the company, and more importantly, their client’s financial lives with a third party is not something to be taken lightly. One of the most important aspects of selecting a DFM partner is to be clear on what the drivers are for outsourcing.
Regulation and expertise
We find it tends to come down to two main reasons.
Firstly, we are increasingly hearing that centralised investment portfolios are becoming more and more difficult for businesses to manage. As a business grows in size, adding more clients and more advisers, there is a danger that the CIP ends up with an ever-increasing number of portfolios.
This is especially the case if you run portfolios on an advisory basis and need to obtain individual client authorisations each and every time the portfolio is rebalanced or changed. With clients responding to authorisation requests at different times, and sometimes not at all, this requirement inevitably results in the creation of multiple versions of the same model. This in turn increases the operational pain of reporting on and monitoring the portfolios.
Mifid II has made this problem even harder, with increased requirements for reporting and disclosure. Now, as well as obtaining investor authorisations, businesses must also make a personalised suitability assessment and issue pre/post-trade cost and charges disclosures. For many businesses, especially larger ones, the requirements of Mifid II have made their CIP almost unmanageable.
Secondly, there is the question of expertise. As advice firms become more confident in their own proposition, we are seeing an increased trend for a clear delineation of roles, designed to give clients an improved overall outcome.
The financial adviser remains in overall control, with responsibility for the client relationship and suitability, adding value through financial and tax planning activities. The investment manager focuses on managing the client’s money in line with the agreed mandate from the adviser, drawing on its greater access to specialist research and resources.
This division of responsibilities plays to the strengths of each party and delivers a compelling, cost-effective proposition to the client. It removes the significant additional internal overheads required when managing portfolios within the advice business and can also help manage any key person risks, with investment decisions taken in conjunction with the external partner, rather than solely in-house.
Ensuring the right partner
However, to successfully address these common issues, selecting the right investment partner is vital. One which supports and adds value to the adviser/client relationship and delivers cost efficiencies as well as the best outcomes for the end-investor. A large part of this will come down to the strength of the relationship with the DFM.
Access to key people, especially investment managers and senior management, is key to retaining a dialogue with those you are entrusting to deliver on your client’s goals and aspirations. Your investment partner should be an extension of your internal team, so cultural alignment and strong working relationships are crucial.
Quality of communications is also hugely important. This not only covers the availability and accessibility of relevant staff, but also extends to client-facing reporting and documentation. A critical area to get right is client disclosure and agreements, setting out the basis of the new arrangement. Whether you are working on reliance on others or agent as client basis, it is important that the client understands who is responsible for their financial advice, suitability and investment management. Your investment partner should be able to help with this.
All of these issues serve to demonstrate how any provider who wants to enter this market will need to commit to working in partnership with advice businesses.
This is not about being a product provider, a DFM is more often an extension of the advice company, managing client money with complete alignment to the advice company's beliefs and requirements.
As the market becomes more and more competitive, the standard of services on offer to advisers, and the outcomes being generated for their clients should continue to improve. Competition driving all parties to continuously improve, all for the benefit of the end client.
Robert Vaudry is managing director of Copia Capital
