While advisers busily scrutinise platforms, discretionary fund managers (DFMs) have slipped under the radar - until now. Rebecca Jones shows you how to pull them over coals too.
The Financial Conduct Authority’s (FCA) most recent platform paper, published in April, put due diligence under the spotlight as it set out new, stricter rules for how advisers vet the platforms they use.
However, while 65% of advisers reportedly plan to carry out extra due diligence on their platforms, it seems that far fewer are planning to scrutinise their discretionary fund managers.
According to partner and head of UK IFA sales at Smith and Williamson Mickey Morrissey, this is set to change. “The emphasis in the last year or two has been on due diligence on platforms, but the area advisers need to move on to now is model portfolios and DFMs – it’s just growing pains and the more we can do to help the better,” he says.
Why portfolio performance isn't the only way to judge a DFM
Of course, that’s easy for Morrissey to say – for advisers still striving to meet the demands of the Retail Distribution Review (RDR), another checklist is likely to be as welcome as a hole in the head. However, keeping track of how your DFM is managing your clients’ money really is crucial and now, just over six months into RDR, could be a good time to take a fresh look.
Stability and growth
When assessing your DFM, the temptation is to start with, if not focus solely on, the performance of the portfolios the firm is running for your clients. However, Morrissey claims that assessing the structure of the firm itself should come first, beginning with its balance sheet as financial stability will always be key to the service any firm is able to provide.
Mark Polson, principal at Edinburgh-based consultancy the lang cat, also suggests honing in on cashflow and sources of business. He says: “You have to look at strength and ability to withstand changes, for example if the firm is getting a lot of business from one big network or advisory firm, what would happen if that stopped, would they go out of business?”
Polson also suggests looking at the number of model portfolios the firm is running, as a significant growth in assets under management could have an adverse effect on the service your DFM is able to provide you. He adds that the company’s management, as well as its staff turnover rate, are also important to assess, particularly if there have been any recent and significant changes.
Before moving on to performance, Clive Hale, partner at investment consultancy firm Albemarle Street Partners, suggests taking a fresh look at your DFM’s investment process.
He recommends assessing how the process has worked over the past six months, focusing on whether or not asset class weightings have proved successful. “You need to be on top of what’s actually gone on in the portfolio. If something’s gone against [the DFM’s] intentions they need to have fairly good reasons as to why,” he adds.
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