Discretionary investment management (DIM) is the regulator's new label for discretionary fund management (DFM). Acronym wars aside, what is the case for acquiring DIM capability - and should you bother?
There are only about 190 adviser firms in the UK with discretionary permissions, according to Threesixty head of client relationships Tony Bray.
The reason? "It's simply too difficult for many firms," Bray told delegates at a Raymond James conference in London.
"The perception is that acquiring DIM permissions is not that difficult, as advisers believe they already have an investment approach. But don't underestimate the amount of work needed behind the scenes."
The case for acquiring DIM capability...and how to do it
For those who make the effort they will be joining a select group, and one which Bray said are in demand.
"Increasingly solicitors acting as trustees will only deal with intermediaries with DIM permissions as they don't want to be responsible for investment decisions."
So what should advisers who want to offer DIM services do?
"You should consider creating a separate business," said Bray, "a DIM side and an advice side, each with entirely different processes. This opens opportunities to sell of the DIM side at a later date and continue with the advice side."
What will the DIM side of the business need?
Robust audit trails, including document evidence of fact finds, know your client, and asset allocation reasoning, said Bray.
Also a written investment philosophy which defines what type of investment you believe in.
Advisers will need appropriate authorisations to be able to alter investments, and must also have relevant experience in this area, which they may not have despite advising on investments previously.
"The FCA is now questioning whether advising experience is relevant," said Bray.
"It wants to know how many clients agreed with your investment recommendations. You may have to appoint an investment manager to sit on your investment committee temporarily to monitor what you're doing, which you would tell the FCA as part of your application to offer DIM services."
Capital adequacy is another consideration. Firms will need three months fixed overheads or £50,000, whichever is greater, said Bray.
Firms must also manage conflicts of interest. "There is nothing wrong with having conflicts of interest," said Bray, "- you would expect that clients you advise would choose your DIM - but you have to show you are managing this. Your DIM must be suitable and you must have document evidence to prove this. DIM may not be suitable for everyone."
What are the issues for DIM firms?
Financial reporting is one. "If there is debt in your firm's holding company that will affect your capital adequacy requirements, so often it is better to start off in a standalone company," said Bray.
Benchmarking is another. "The FCA has said the benchmark you choose must be ‘appropriate', basically relevant to the way you manage money," said Bray.
Charing must be explicit, and can't be bundled up with the cost of advice. The separate fee for the DIM service will be VAT-able.
There needs to be a strong culture of corporate governance. "There is a great impetus on this," said Bray," all the time you must demonstrate you are acting in the best interests of clients. You'll also need to document who has the power to say how funds are run."
What about suitability?
"A personal recommendation of a DIM service is not a recommendation of a retail investment product so has no impact technically in independence," said Bray.
"Your advice firm can remain independent but your DIM will be restricted.
"However it must be in the best interests of clients under COBS 2.1.1 so you must know under what circumstances it would be suitable and compare your offering with four or five other similar ones and document why yours is best, including on cost.
"You may want to be specific and say that you will not use any non-mainstream products for risk profiles one to five, for example."
Suitability of risk mandates is an area of concern for the regulator, said Bray.
"Risk mandates are not a number. They must relate to a client's individual circumstances. People in the same general risk profile may require different solutions, and may have a different capacity for loss requirement. The DIM service and the advice must be joined up, which will probably be easier if you have your own DIM."
So what is the key to setting up a successful DIM?
"You must be able to prove everything," counsels Bray.
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