Operational burdens and obligations of discretionary permissions

This article is part of
Guide to MPS and outsourcing to a DFM

Operational burdens and obligations of discretionary permissions
(DS Stories/Pexels)

For an IFA who opts for an in-house discretionary solution, it means more responsibilities.

If a firm chooses to hold its own permissions, it will first need to make sure its advisers hold the relevant qualifications to offer a discretionary service. 

It can then apply for a variation of permissions from the Financial Conduct Authority. 

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For those prepared to undertake this activity, it can be quite an onerous process, involving submitting a detailed business plan and financial forecasts. 

Once approved, the firm will need to comply with additional capital adequacy and ongoing regulatory reporting requirements.

But for those who want to outsource, while it is meant to create efficiencies, it also requires a monitoring of the DFM programme.

Robert Vaudry, managing director of Copia Capital, says outsourcing to a DFM is more straightforward as it will already meet all the necessary regulatory requirements. 

“But to really reap the benefits, it’s important that you select the right partner,” he adds. “One that provides specialist investment management to reliably de-risk your investment activities without requiring high levels of operational input from you.”

Vaudry says advisers who outsource their centralised investment proposition to a DFM should see a clear reduction in time spent on monitoring, managing and reporting – and operational and business risk will also fall. 

He adds: “Whether you run your investments in-house or outsource to an external manager, you will remain responsible for designing your CIP, implementing it across the business, and the overall advice given to the clients. 

“However, outsourcing introduces an extra set of resources to the business, with clear cost savings to the advice firm as a result.”

Outsourcing to a DFM is a very effective route. Most DFMs are on at least one of the major platforms or have a direct option. 

Lewis Hamm, chief executive of O-IM, says the technology has improved in recent years so there is effective integration with both back office and client-facing technology. 

Additionally, Hamm says the effort for an adviser is in getting to know the investment managers and understanding the investment process. 

He adds: “While holding their own permissions may simplify the investment process, the overhead and associated cost of effectively running a discretionary portfolio is very unlikely to improve the client outcome.”


Among the factors advisers should consider when picking a DFM is proven pedigree, says Tony Lawrence, senior investment manager at 7IM.

“It is pretty easy for DFMs to launch a model portfolio service,” Lawrence adds. “If you compare it to, say, launching a multi-asset fund for example, this is much harder to do, as you typically need money to be invested from day one. You require a prospectus that is subject to regulatory approval, you possibly need to subsidise the running costs, and need to appoint various counterparties like fund accountants, transfer agents and a depositary.”