Hamm adds: “The adviser can pick the best solution for their client from the approximately 100 DFMs who actively distribute their models via the major platforms.
“By not having discretionary permission an adviser’s primary focus is financial planning for their client versus the demanding responsibility of having discretionary permissions, eg investment selection, asset allocation, additional reporting and regulatory oversight.”
Tony Lawrence, senior investment manager at 7IM, says discretionary permissions also allow changes to be made without requiring consent from clients.
He adds: “Trying to manage portfolios on an advisory only basis is much more problematic when trying to make changes, often resulting in clients experiencing drift or having ‘stale’ portfolios and vast differences from client to client – a big issue when trying to deliver consistent client outcomes.
“Additionally, there are many other attractive features of outsourcing. The operational burden is vastly reduced, with the DFM taking on all the strain of updating the models, often across multiple platforms.
“The regulatory footprint for the adviser is also much reduced, with the DFM picking up the bulk of requirements for due diligence, record-keeping and governance around the selection of individual positions.”
Considerations
When it comes to picking a DFM, there are a variety of factors an adviser should consider.
It goes without saying that good service would come top of the list.
Morrow says the DFM should offer reliable access to investment outcomes, have good relationship management to support the adviser with their client relationships and provide great communications for both adviser and client – through both good and challenging markets.
They should have a clear philosophy and consistency of process and performance, meaning they have the ability to help advisers understand what the customer is paying for and whether it is of good value. Additionally, the DFM should be able to help advisers coach their clients to understand what will happen to their portfolios in volatile markets.
According to Vaudry, there are some further considerations an adviser needs to make when looking for a DFM:
- Is it whole of market? Not putting in their own funds?
- What is the business risk (B2B or B2C)?
- Does it operate a reliance on others or an agent as client model?
- Does it help advisers manage key people risk?
- Does it have strong fund manager knowledge?
- What risk management tools does it have?
- How does its pricing compare with DIY?
- Is the adviser’s custom provider platform-agnostic?
- What support does it provide for the continuity of the adviser business?
- Does it offer scale advantage in terms of institutional-level pricing and access?
Hamm says each client may be suited to a different DFM based on what is important to them.
For example, a client who wants an Aim portfolio to help manage their potential inheritance tax liability will need to find the DFM who can select individual companies, provide detailed insight into those companies but not charge an inordinate fee for it.
He adds: “Another client may feel strongly about ethical investments and the adviser will need to search out a DFM that best manages the risk of greenwashing and can meaningfully engage the client with that investment portfolio so the client is confident those ethical considerations are sufficiently met.”
