UK discretionary fund management options are wide and getting wider, so having the right due diligence in place is vital. The experts tell Laura Miller the best ways to research the market...
For advisers who decide to outsource their investment proposition to a discretionary fund manager (DFM), choosing the right one is becoming harder as the market embraces the two forces of growth and change.
After a flurry of recent launches from the likes of Thomas Miller Investments and Skandia, there are now about 183 DFM choices available to UK financial advisers.
These range from the high-end bespoke services all the way down to managed portfolios on a third-party platform which will deal with lower investment amounts.
Picking one or more solutions that are best for your clients from more than 180 different offerings requires a plan.
Due dilligence toolkit
Speaking at the latest Defaqto DFM conference, Tenet group regulatory director Gill Davidson proposed a "due diligence toolkit".
The DFM selection criteria Tenet applies are: financial strength and size; experience and track record; investment process; charges; service and accessibility.
"You need a very logical process," she told delegates. "At Tenet, if the firm doesn't pass the financial strength test the due diligence doesn't continue."
Investec Wealth & Investment head of intermediary services Mark Stevens, who also spoke at the conference, gave a slightly different list of factors to consider when assessing a DFM.
Some of these are, perhaps unsurprisingly, biased towards a larger provider like Investec, though interestingly there is quite a lot of overlap with Davidson's criteria.
Stevens' list breaks down as follows:
Size: some clients may be put off by either a firm that is too big or too small but I think you need a decent size firm in order to pay for things like IT and research.
Service: this must meet the needs of the client, and answer questions like are the fund managers accessible?
Brand: brand values are important, these are what give clients reassurance.
Reputation: what is the service quality? What is the quality of performance?
Resource: this is needed to pay for areas such as IT capabilities and research.
Research: this is crucial.
Stevens' last point, research, refers to a DFM's ability to research the fund market, however it is research of the DFM market that is probably the biggest task IFAs choosing to outsource have to face.
"Choosing an outsourced partner is advisers' responsibility, so they must keep up with what's going on in the market place," Defaqto wealth management consultant Matt Ward told delegates at the firm's conference.
"By keeping abreast of the DFM market you can see where there are changes on cost, for example."
Defaqto offers advisers a paid-for DFM comparison service, so it is in its interests to talk up the benefits of research, but Ward's point does make sense; the Financial Conduct Authority expects advisers' DFM due diligence to be ongoing, not just a one-off event.
Once the right DFM is found, as Ward points out, the key is to "do regular reviews of your relationship and stay in control".
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