This advice is best provided when the adviser is truly independent so any conflicts of interest can be mitigated efficiently.
Although still a small number of businesses, more advisers are now considering and applying for discretionary permissions, which can potentially blur the line of independence that is so crucial.
The benefits of securing discretionary permissions for an IFA can largely be seen as operational and financial.
Without a doubt, advisory models can be more effectively managed when the client is not the decision-maker, which allows the adviser to manage rebalancing autonomously and prevent significant client drift.
Nevertheless, if a client could benefit from this operational element, the current discretionary fund management offering that exists in the market today is already broad enough to find an effective solution.
Effective DFMs engage and speak with the IFAs they work with to ensure client objectives are considered in the portfolio construction.An IFA who can now simply proceed without client instruction has not materially added value for that client but has increased their revenue from them.
The incentive for an adviser to secure discretionary permissions is then too commercial in nature and undermines the independence that is so fundamental.
An IFA who opts for an in-house discretionary solution as opposed to a DFM will need to spend significant time justifying that decision and that time is likely better spent on financial planning for their client.
It is not just an autonomous process that creates value for the client in respect of a DFM, it is also choice.
DFM solutions
Where an IFA does not have discretionary permissions, they can assess which DFM offers the solution that best aligns to their client needs.
Traditionally this has been aligned to a client’s risk profile and also their income requirements.
However, increasingly client needs can vary, from environmental, social and governance considerations, overall cost, liquidity needs and estate planning.
Given the complexity of creating investment solutions and the resource requirements that is needed to create them, the ability of an IFA to create such solutions is potentially a significant roadblock in achieving the best client outcomes.
Of course some IFAs can navigate this effectively, but it often involves outsourcing investment research to a third party.
This likely adds to the client cost but also lessens the impact of an IFA having discretionary permissions.
An IFA with a discretionary offering is unlikely to have the expertise to achieve benchmark-beating returns.An IFA can contribute to an investment committee but effective DFMs engage and speak with the IFAs they work with to ensure client objectives are considered in the portfolio construction and prevents a “purely academic” approach from being taken.
When O-IM was established our targeted role within the financial services industry was very intentionally defined to be an investment manager. Through the Financial Conduct Authority application process, the business plan was focused and dedicated to creating investment solutions for both the financial intermediary market and also private clients.
As not to blur any lines and to mitigate conflicts, financial planning was never envisioned in the business model.
Instead, there was a strong intent to develop relationships with like-minded IFAs where we could collaborate and find solutions for their clients together.
This intent seeks to use the discretionary permissions that O-IM secured for the benefit of the wider industry without the need for an IFA feeling it necessary to secure their own discretionary permissions and introduce a conflict they will struggle to manage.
Regulation
The UK benefits from one of the strongest regulatory regimes in the world and this ensures a high level of consumer protection.
The regulatory obligations for IFAs and DFMs are demanding from the moment a business seeks authorisation and then on an ongoing basis.
Due to this, IFAs who consider obtaining discretionary permissions need to determine if the revenue and operational benefits of securing those permissions can actually outweigh their regulatory obligations in respect of suitability, conflict management, treating clients fairly and working in the client’s best interest.
Fees erode client returns in absolute terms so it is incumbent on all IFAs and DFMs to ensure they provide value to clients.
An IFA with a discretionary offering is unlikely to have the expertise to achieve benchmark-beating returns and are also unlikely to have the scale to offer their service at a highly competitive rate.
Although discretionary permissions may simplify an advisory clients experience and diversify an IFAs revenue stream, the benefits for the end client is limited when considering what is available to them already.
Financial planning and investment management are services that many consumers benefit from to help secure their financial goals.
For the industry and the regulator, they both most ensure that client outcomes are the primary focus and conflict management is a key objective of achieving that goal.
IFAs with discretionary permissions is, in short, a conflict that clients do not need to be exposed to.
Lewis Hamm is co-founder and chief executive of O-IM
