Running advisory models and outsourcing to discretionary fund managers are common practices, but more advice companies are adopting a DIY approach.
Figures suggest the share of businesses that run discretionary models is small, but growing. One in five members of the Personal Finance Society (22 per cent) said their financial advice business held discretionary permissions, according to a survey of 278 members last year, up from 15 per cent in 2020.
Advisory management can mean more engagement with clients, while oft-cited benefits of outsourcing to a DFM include enabling advisers to focus more on financial planning and their client relationships.
But obtaining discretionary permissions can bring benefits, too.
Haydn Brooks, a director at Lathe & Co, which received its DFM permissions last autumn, says the business can now be more proactive if there is geopolitical tension, a manager changes their style or a team leaves an investment house.
This was not the case before, as Brooks recalls when the business had its own portfolios that it constructed in 2018 alongside an investment consultancy. “We were running them on an advisory-only basis for two years, which was quite a cumbersome process.
“Every time you want to make a change to the portfolio, if you want to rebalance, you need to get written permission from clients, which wouldn’t have been a problem if we looked after a dozen clients.
“But as a business we look after more than that, so it started to be a bit of a pain if we wanted to make any changes. So it naturally led to getting our permissions.”
Indeed, Brooks describes rebalances that involved seeking written permission from 1,200 clients each time. “70 per cent of clients come back to you straight away, and then we ended up spending three months trying to chase 30 per cent of our clients for that authority.
“We ended up having a bit of client drift. There were a handful of clients who were in the old portfolios.”
The application process
John Long, head of discretionary investment management sales at Threesixty Services, a compliance and business support provider, likewise says that advice businesses should first consider their client base to assess whether they would benefit from access to an in-house discretionary investment management (DIM) service.
“Adviser firms that do decide they want to provide their own DIM service should then consider the corporate structure they want to adopt. Firms can either apply for a variation of permissions to the adviser firm’s existing regulatory permissions, or establish a new company to provide the service.
“If the new investment management service is purely for the use of the adviser firm’s own clients, then a variation of permissions may be the most logical way forward. If the plan is to market the service to the clients of other financial advisers, setting up a new company may make more sense.